Sir John Templeton wasn’t your typical Wall Street money manager.
His Templeton Growth Fund averaged a 14.5% return for 38 years, crushing the major indices. Every $10,000 invested in that fund in 1954 was worth well over $7 million by 2005.
What set him apart was the fact he never had a forecasting system, an ability to get out before a big market crash, or any other hard-to-replicate strategy.
His secret was simple. He would buy at points of max pessimism and wait.
He’d often say, “If you want to have a better performance than the crowd, you must do things differently from the crowd.” The best example was in 1939. Europe was just about decimated. So, Templeton bought every European stock trading below $1.00 a share and made a fortune.
In short, he was extremely successful. And he only used fundamental analysis, as we do.
But we can take it one step further.
While we can always spot max pessimism with fundamental analysis, we can also spot it by watching for excessively oversold – and overbought – momentum. To do so, we can look at Williams’ %R (W%R), relative strength (RSI) and money flow (MFI) for example.
Williams % Range (W%R)
When Williams moves to or above its -80, it’s an indication the asset is oversold. When it moves to or above the -20-line, it’s overbought. However, we never want to rely on a single indicator as a pivot signal, so we begin to confirm with RSI and Money Flow.
Relative Strength (RSI)
We can use RSI to confirm other indicators above. When RSI moves to or above the 80-line, we have an overbought condition. When RSI moves to or below the 20-line, we have an oversold condition. It confirmed what Williams was telling us.
Money Flow (MFI)
Money flow is another oscillator that uses price and volume to measure the strength of buying and selling pressure. We can also use MFI to confirm the other four momentum indicators above. When MFI moves to or above its 80-line, we have an overbought condition. When MFI moves to or below its 20-line, we have an oversold situation.
Each confirms the others perfectly and highlights how overbought or oversold a trade is becoming. When it comes to traders, too many of them trade on fear, which causes them to be irrational. When irrational fears (or greed) get out of hand, these three indicators above have a great track record of telling us.
Look at AT&T (T), for example.
In November 2017, it became one of the most hated stocks on the market. At the same time, though, it was succumbing to bouts of max pessimism after plunging from $39 to $32.50.
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Look at what happened as RSI dipped under 30 in late October 2017, as MACD plunged, and as Williams’ %R fell below its 20-line. It began to indicate an excessively oversold situation that would give way to a rally from $32.50 to $34.68 in the stock.
If we then look at a one-year chart of AT&T, we see similar patterns.
While MACD never got as low as it did in November 2017, dips still confirmed oversold moves in RSI and Williams’ %R, which gave way to rallies. We can see that in September 2017 and in July 2017 for example.
Even if you only rely on fundamental analysis, it’s always a good idea to watch the technical pivot points as well. You may just give yourself a needed leg-up in the markets.
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