Technical analysis is seductive. Charts that look like they're about to explode upwards, indicators flashing green – it's easy to get caught up in the excitement. TipRanks’ Technical Analysis Screener produce “Strong Buy” signals, as do most others. At the moment, News Corporation (NWSA), Micron Technology (MU), and United Airlines (UAL) are all lighting up green on our dashboard. Before you jump in, remember this: charts don't vote, regulations do.
Think of it like this: you're planning a road trip based solely on the GPS's suggested route. On paper, it seems ideal – shortest distance, lowest traffic. But what if there's a bridge out? What if they need to quickly reroute around a sudden road closure for a political protest? The GPS doesn't know that. Nor does technical analysis, unless you consciously insert that data in the stream.
Ignoring Political, Regulatory Landmines?
That's the problem. Technical analysis is backward-looking. That’s awesome for recognizing current patterns, but it’s not helpful at all for understanding the upcoming future. In today’s environment, the future is more than ever being determined by political and regulatory forces. Here’s what’s wrong with these “Strong Buys” that make them so weak.
News Corporation (NWSA) is a media behemoth. At first glance, a “Strong Buy” signal sounds enticing. Consider this: the media landscape is under intense scrutiny. As we all know, anti-trust regulators are sharpening their knives, particularly when it comes to companies wielding an 800lb market share gorilla.
Media Monopoly, Antitrust Threat Lurks?
Could it allow a future administration — or perhaps this one — to declare that News Corp’s holdings have become excessively concentrated? Might they be able to mandate a divestiture of assets, tanking the stock price, chart movement notwithstanding. Imagine this – the mere legal existence of the company in its current form could be at stake. And what about data privacy? Increased regulation on data collection and usage could severely impact News Corp's digital advertising revenue, the very engine that's supposed to be driving growth.
Don't just look at the moving averages. Look at the political tea leaves.
Otherwise, one of the semiconductor giants Micron Technology (MU) currently provides a “Strong Buy” signal. How much of that signal is just derived from a wishful thinking outlook? The chip industry is a geopolitical battleground. In addition, Micron is quite dependent on the Chinese market.
U.S. - China Trade War Risk
What happens if export controls tighten further? What if China simply responds by giving the preference to its own chip-makers? Next thing you know, that “Strong Buy” recommendation becomes a “Sell Now.” Rethink everything you know about RSI. Add to this the constant threat of intellectual property theft and forced technology transfer that hangs over any company doing business in China. These are not technical indicators; these are real world threats.
United Airlines (UAL) rounds out the list. Airlines are famous for being the first to die when fuel prices spike, or in an economic recession — and… regulations. This “Strong Buy” signal could just be a function of pent-up travel demand. What of the increasing pressure to do something about climate change?
Carbon Tax Clouds Airline's Upside?
The entire world is moving toward carbon taxes and higher environmental standards. How will these impact UAL's profitability? Or will they be made to spend exorbitantly to transition to cleaner tech, cutting into their profits. And what about international travel policies? A rapid escalation in geopolitical conflict could create massive obstacles to some international routes and passenger flows which would send UAL stock plummeting.
I’m not arguing against technical analysis, it can be a valuable tool but it’s only part of the equation. It’s akin to looking at a weather report that only tells you the current temperature. It totally ignores key information such as wind speed, humidity and the incoming hurricane. Especially in this tumultuous, ever-changing world you need to be aware of the regulatory environment.
Regulation Impact on UAL Carbon Tax Increased operating costs, reduced profitability Fuel Efficiency Standards Capital expenditures for new aircraft International Travel Restrictions Reduced passenger numbers, disrupted routes
Do Your Own Due Diligence, Seriously
Don't blindly follow "Strong Buy" signals. Dig deeper. Understand the political risks. Read the regulatory filings. Ask yourself: what are the unintended consequences of these policies, and how will they impact these companies?
The great market truism is, “You get paid for what you can see that others can’t.” Don’t allow regulatory risk to be your Achilles’ heel. And yet, perhaps this is the most important indicator of them all.
The market rewards those who see what others miss. Don't let regulatory risk be your blind spot. It might just be the most important indicator of all.
