By David Russell, Global Head of Market Strategy, TradeStation
Volatility may be an everyday occurrence in global markets, while it can make life difficult for traders to decisively determine where stock prices are headed. But active traders who look beyond fundamental analysis by working within a framework, can often quickly understand any business, in any sector. Going outside traditional comfort zones can help traders unravel the mystery as to what’s moving prices that may be a route to profitable trades. Here’s why.
For active traders, price action reigns supreme. Whether trading on momentum or dissecting chart patterns, the “why” behind stock movement often takes a backseat to the fact it is moving at all. But here’s the kicker: understanding the major forces behind those moves – like economics and market fundamentals – can be a game-changer. Breaking down the drivers underlying price swings can offer a new perspective and an extra edge, morphing chaos into structured opportunity. It’s another potential tool in the arsenal that can help lead to more informed trades.
Using a playbook to identify stocks that are signaling a breakout provides an unemotional mindset for active traders to help decide whether a trade is good or bad. This eliminates some of the need to pore over analysts’ reports and time-consuming research that, in many situations, can be overwhelming and might limit how quickly a trader can react.
Instead, active traders working against a roadmap are often better positioned to act on sudden changes in sentiment toward individual stocks or the overall market. One could liken this mindset to how triaging takes place in the ER to quickly decide which patients need the most immediate help. Traders who adopt a framework can quickly wrap their heads around understanding what is needed to make trading decisions.
So what does this framework look like?
Here are seven catalysts that can help give traders a head start. Let’s call this framework ‘The Catalyzers.’
- Volumes. These may be expressed in units, orders or bookings, and are important measures of the amount of business being done.
- Margins. Are a company’s margins rising or falling? Margins are correlated with changes in volumes, while changing products – part of business transformation outlined below – can also improve profitability. Margins are affected either by a company increasing prices or reducing its cost base. Companies that can increase margins can usually see their share prices rise.
- Macro events. What’s happening with the economy, interest rates and commodity prices are events outside the control of companies, but may impact an entire sector, either positively or negatively. For example, as markets now anticipate further rate cuts, companies in consumer related stocks may benefit. Active traders can pivot quickly and potentially take advantage of macro events.
- Strategic developments. Actions such as potential mergers or acquisitions, stock splits, dividends and stock buybacks are board-led decisions aimed at improving capital efficiency, but they don’t change the business model or deal with the strategy of the business.
- Investor rotation. Big ticket developments such as interest rate cycles, or market moving events such as the rapid rise of Generative Artificial Intelligence (GenAI), may signal a reordering of investors’ priorities.
- Business transformation. As businesses mature, there’s frequently a necessity to adjust business in the pursuit of increased revenues. This might include new products, strategies or customer segments that can lead to higher margins or volumes.
- Balance sheet/Credit. Leverage can have a material impact on the outlook for companies. Heavily indebted companies tend to be more volatile, and a shift in sentiment can affect its ability to rollover debt. Meanwhile balance sheets may contain pointers that can drive share prices, such as a sudden change in asset values. Other issues include interest rate changes, divestitures and moves by management to raise capital. Individually or together these factors can influence stock prices.
Let’s take a look at some recent examples of the system in action.
Volumes
GenAI has led to a surge in investor appetite for tech stocks. NVIDIA has become a sales growth machine and a bellwether for the AI sector. Since early 2023, the chipmaker’s GPU quarterly revenues have stunned markets, achieving a blistering 265% year-on-year growth in the fourth quarter of last year. That capped increases of 206% and 101% in the two preceding quarters, and the growth story has continued this year. With its stock price up around 3000% since 2019, NVIDIA is a prime example of how changes in volumes can propel stock prices.
Margins
Meta has cut around 13% of its workforce during the last year. The tech giant is engaged in an ongoing round of belt-tightening that with the reduction in headcount, has substantially boosted profits. For example, Meta’s net income more than tripled to $14 billion, or $5.33 per share, from $4.65 billion, or $1.76 per share, a year earlier when it reported its Q4 2023 earnings in February of this year. Taken together Meta’s actions saw profits rise faster than revenues as a result of the cost cutting measures. The surge in profits also led Meta to declare a dividend and signal that it would be buying back more stock, a strategic development which is discussed below.
Macroeconomic events
The Federal Reserve cut interest rates for the first time in four years in September and is signaling another 50 basis points could take place this year. Rising interest rates led to a bear market in 2022, but lower inflation has since improved the macro rate outlook, allowing the stock market to recover. This clearly demonstrates how the macro environment can impact stock prices. Additionally, interest rates are a proxy for sentiment surrounding small caps and gold prices. With expectations that the Fed will continue to reduce rates into 2025, and the looming U.S. presidential election in November, these are potentially market-moving developments that could transcend individual companies. A spike in oil prices could also be a major event that may impact stock markets.
Strategic developments
Kellanova (K), a leading company in global snacking, international cereals and noodles, North American plant-based foods and frozen breakfast foods, recently agreed to be acquired by Mars, Incorporated, for a total consideration of $35.9 billion. Kellanova shareholders will receive $83.50 per share in cash, which represents a 33% premium to the stock’s closing price as of August 2, 2024. This acquisition was made possible by Kellanova’s prior spinoff, which unlocked value and breathed new life into what was considered ‘dead money.’ For active traders, the transaction could present some interesting trading opportunities.
Business transformation
Walmart reported strong sales and beat estimates in its latest quarterly earnings report. Of note was a 21% year-on-year increase in e-commerce revenues and is an example of a business undergoing transformation. Walmart is embracing tech in a big way, including the use of generative AI. Using Large Language Models (LLMs), Walmart was able to create or improve 850 million data sets – a task that would have required 100 times the current headcount to analyze everything from shelf trends to customer buying habits. With Amazon in its sights, Walmart is overhauling its business model.
With so much noise in financial markets, understanding what’s moving prices can help traders evaluate stocks in sectors that they may not usually consider. Using the ‘triage’ methodology alleviates some of the need for detailed analysis, potentially helping active traders to quickly determine a plan that might be a pathway to higher returns.
