Bottom up or Top Down: Best way to do a market analysis

For Investors and Position Traders, which is better: bottom up or top down analysis?

Bottom up and Top down are two basic ways to analyze the market.

In Top down analysis, the big picture is examined first, slowly going down to stock identification.

Thus, the analysis starts at the very big picture, then moves down to smaller pictures / views.  The steps in top down could be:

1. Country economic outlook
2. Stock market response to country outlook
3. Sectors performance
4. Stocks in outperforming sectors

Bottoms up starts at the stock / company directly. If the technical / fundamental analysis of the company meets analyst parameters, the stock is selected for investing. Investors focus attention on a specific company rather than on sectors or the macro economic picture.

There is a lot to be said in favor of both approaches.

In stock markets, a bottoms up approach may be superior if technical analysis is used. There are opportunities in individual charts based on chart analysis even when the sector or the bigger economic picture is subdued. Charts also ensure that risk is managed carefully, therefore eliminating the need to get confirmation by sectors and macro.

When the macro and sectors are in favor, bigger price moves may emerge. Therefore, a view of sectors and macro is helpful.

Traders may first identify suitable chart patterns then check out the fundamentals including sector analysis. Often hidden gems emerge suddenly without any sector confirmation. It is wise for traders to start their analysis bottoms up.