Coresignal
February 11, 2022
Trend analysis is a strategy used in making future predictions based on historical data. It allows to compare data points over a given period of time and identify uptrends, downtrends, and stagnation.
If a trend is stable and steady over a period of time, it indicates consistency and invokes more certainty than a trend that is drastically changing positions. However, inconsistent trends might be more attractive to some investors who analyze certain external factors contributing to the radical trend changes. High risk usually involves chances of high rewards.
Investors and business managers use this information to make data-driven decisions and improve strategies.
Let’s find out more about trend analysis, its benefits, and real-life examples.
Types of trend analysis
Trend analysis is computed using numerical data. This information is usuallyhistorical data, either traditional data in the form of a company’s performance taken from its public financial statements oralternative data, such as the number of job postings of a competitor in the past five years. When adding numerical data to a chart, you will be able to identify three types of trends.
Upward trend (bull market)
An uptrend or an upward trend means that your data points are increasing. Based on what type of variable you are examining and your purpose, this could have different meanings.
For instance, you are a business owner looking at the price of raw materials required to produce bread, and you notice that the price is increasing. This information could help you make different predictions, such as increased costs for your business or the necessity of raising the prices for the final consumer.
At the same time, an investor looking at the share price of companyXwho noticed an upward trend might decide to buy the stock since the price is increasing. An upward movement in a stock’s price generally indicates a favorable condition, helping you to determine if the stock is a worthwhile investment.
Downward trend (bear market)
On the opposite side, a downward trend indicates the decreasing value of your variable. For example, if a company’s profit has a sharp decline, this may require investors to proceed with caution as the stock is risky since the price is going down. This also applies when other economic or financial variables have a downward trend.
When investorsresearch financial assets, trend analysis can be done on the asset’s historical data. If this price is decreasing, it indicates the presence of a bearish market. In other words, investment is not recommended because the prices could further decrease, leading to a loss.
Horizontal trend
Finally, the horizontal line indicates stagnation. In other words, the prices, or any other metrics, are not going up or down; rather, they are stagnant.
In practice, a flat trend might go up for one period, then pull a trend reversal, reaching a steady general direction overall. Making investment decisions based on horizontal trends is risky because you do not know what will happen. However, if you decide to go with it, a sophisticated revenue and cost analysis regarding the sales regions must be implemented to calculate the risks.
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Limitations
Identifying turning moments is a major issue in trend forecasting. Turning points are obvious in retrospect, but it can be difficult to identify whether they are simply deviations or the start of new trends at the time.
Long-term estimates require additional data, which may not always be available. Especially for a new business or product line. In any event, the further out one anticipates, the higher the risk of mistakes, because time inevitably introduces new variables.
As a result, it's crucial to examine your trend analysis data and take action only if you're confident in your market reading.
Key caveats of any trend analysis include recognition that prior trends do not always continue into the future. Also, short-term linear trends may actually be non-linear over longer periods, plus long-term linear trends may have short-term cycles. Finally, trend analyses are lousy at picking up black-swans or even slightly-grey-swans.
- John A. Kilpatrick, Ph.D. MAI, Greenfield Advisors
Benefits of trend analysis
Apart from being a straightforward investment analysis tool, trend analysis has several other benefits. Some of the main ones include:
- It is easy to compare the performance of two or more firms over the same period of time, so you can see how strong or weak a business is compared to another one in the same industry.
- Trend analysis can be used with a myriad of numerical data types, including traditional data (i.e., profit or expenses) and alternative data (website traffic, customer complaints, POS transactions, and many more).
- Data suggests you can use these long-term trends to identify actionable patterns. These patterns can afterward be used to make forecasts.
- You can use trend analysis to examine preliminary financial statements for inconsistencies and see whether certain adjustments must be implemented before releasing the statements to the public.
- Trend analysis allows you to examine the entire stock market to detect signs of potential trend changes for better or worse.
The core benefit of the trend analysis is that you can compare your incoming data with another firm's and measure your firm's performance in a realistic way. If you know the exact way to analyze the trend then you’ll be able to identify which direction your business is going.
- Larry Hart,The Stock Dork
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What are the tools used for trend analysis?
Preparation
In order to do trend analysis, you must decide on what segment, industry, or even asset you want to use. For example, you may want to look at the bond market.
Once you make this decision, you also need to determine the period. There is no consensus on the actual amount of time for the movement to be considered a trend.
As a result, this depends on the historical data available and your purposes.
Trend analysis tools
There are numerous management tools for trend analysis. One of the most basic ones is to simply plot the data points and visually establish the presence of a trend. For example, one of the most popular data plotting tools is Tableau which allows you to visualize the data through graphs, charts, and other models. Another option is to transform this data intomoving averagesthat will eliminate fluctuations for better trend identification.
As a result, you must have access to the following:
- Raw numerical data
- Access to analysis software
One of the most useful management tools for trend analysis is Google trends. It allows you to discover what people search for by entering a keyword into the search engine.
Trend analysis examples
Trend analysis that uses business information can be useful for both managers and stakeholders, including potential investors. For instance, you can perform a trend analysis using alternative data, such as website traffic for any given company.
The figure below shows the total website traffic in the last six months for company A, an online store that sells gifts. Data suggests an uptrend during the holiday season, reaching the peak on the 20th of December.
After the first half of January, there has been a relatively horizontal trend. In other words, if you had a competing gift store, you could compare your performance to this company. Although intuitive, this example of trend analysis helps you predict future results and performance or compare this company to a competitor’s activity.
One of the most common trend analysis strategies is when you are examining the share price of a financial asset to help with the decision-making process. For example, the figure below compares the share prices of two companies, X and Y, over one year.
Company X shows an overall uptrend over the past year with a small trend reversal in February. However, company Y had a horizontal trend for the first half months, after which it started to decrease.
Generally, investors are more cautious when there is a horizontal trend because it is difficult to forecast when the price will change its direction and whether it will be up or down. In this case, the share price has a steady decrease, which will result in a loss if added to your portfolio.
Trend analysis is only as good as the information you have available. And even if you believe to have the most accurate information available, statistical noise along with randomness will always be present to distort your results. Therefore, you have to be very objective about your results and not let your sentiments drive your decisions. Furthermore, you have to combine different analytical techniques since no one method will provide you the most accurate result.
Alex Williams, CTO ofFindThisBest
Company X’s increasing trend might help you predict future events and indicate that this stock is a great addition to an investor’s portfolio, especially if you have a long-term investment strategy.
However, other information should also be considered when performing a trend analysis, both related to the company itself and the overall market and the economy. Trend analysis is only one tool that investors can use to identify the profitability of a given asset.
Trend analysis using Coresignal's historical data
You can also perform trend analysis by leveraging our alternative data. For example, our historical headcount data allows you to see employee number changes over time in a specific company. In investing, it provides you with valuable insights into the company's growth and longevity.
In the figure above, you can see Tesla's headcount change from September 2018 to November 2021. From this graph, you can try to make sense of what happened during the transition from the end of 2019 to the beginning of 2020 that caused a drop in headcount.
Going further, you see that the employee number kept growing steadily and consistently. You can make a prediction that the trend will keep increasing at a steady rate unless the same thing that happened at the end of 2019 happens again.
As an investor, you would need to perform an analysis and figure out what caused the drop and whether the company has implemented prevention methods to keep that from happening again.
We offer historical data starting from 2018. The longer the time period, the more notable the trend. With 3-4 years of historical data, you can analyze if and how seasons, certain political events, and other ESG factors affect a company's performance.
Summary
In general, trend analysis is extremely valuable for investors and business owners. Considering the current data availability, the value of trend analysis is inseparable from data-driven decisions, especially while leveragingalternative data.
Alternative data allows you to perform a more in-depth analysis, in turn outsmarting a part of your competition that is not using external data to their advantage. Data-driven trend analysis is also a great way of anticipating future events that could enhance your investment intelligence and find better business opportunities.
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