Whether fundamental analysis or technical analysis should be employed to predict stock returns is a longstanding debate in the literature. Incorporating a regime-switching mechanism, we establish a hybrid model with non-uniform weightings on each type of analysis to examine the debate. Our empirical results are consistent with the following notions. First, stock investors should give more weight to fundamental analysis for firms with incremental information involved in accounting reporting. Second, stock investors care more about the intrinsic value of firms obtained with fundamental analysis when encountering information asymmetry or uncertainty. Third, the weight given to fundamental analysis should be increased for stocks with unusual volatility in prices. However, when the market is crashing, fundamental analysis might become invalid, and thus the weighting given to fundamental analysis should be decreased. For technical analysis, the reverse of these arguments holds true. The results are robust to alternative measures of the variables.
