There is an epic fight between the two major types of investors, which may determine whether the bull market can go on.

Raymond James explained how value investors, who strictly study fundamentals, and technical analysts, who only look at charts, see the world differently right now.

Market “battle lines are generally formed between those who practice more value-based fundamental analysis and those who practice price-based technical analysis,” strategist Andrew Adams wrote in a note to clients Monday. “Both disciplines can obviously be used together, but most people in this business probably do lean either more one way or the other, hence the friendly friction between the two schools of thought.”

Adams said fundamental value investors generally follow the philosophy of Columbia Business School professors Benjamin Graham and David Dodd, who wrote “Security Analysis” in 1934. He noted how Warren Buffett is the most famous “Graham & Dodd” believer.

These investors “treated stocks as the businesses they represented, and they endeavored to uncover situations where the price of shares in a company diverged from the true intrinsic value of its business,” he wrote.

On the flip side, the traders that focus on stock charts to predict price movements look up to Robert Edwards and John Magee, who wrote “Technical Analysis of Stock Trends” in 1948.

Technicians “believe that stocks are just pieces of paper and the prices paid for them at any given time are the true ‘values’ of the companies,” Adams said.

They “argue that the fundamentals don’t make you any money unless the market agrees with your assessment of those fundamentals, and even if one’s fundamental opinion is correct and the price moves to the intrinsic value, it will be reflected in the charts anyway so the technically inclined can take advantage of the move as well,” he added.

S&P 500 one-year chart

Source: FactSet

The S&P 500 closed Friday 2.6 percent below its all-time high reached on Aug. 8.

Adams noted how the chart followers believe the current market uptrend “remains intact,” while the value investors have “intensified their warnings” in recent weeks over the potential of a market correction.

“The Edwards & Magee crowd have most certainly won out over the last year, as the stock market has largely traded higher despite consistent calls from the Graham & Dodd contingent that the aggregate value of companies does not justify the current price level,” Adams wrote.
“Other than an overheated market pausing to cool off, little has changed from just a couple weeks ago.”