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Fundamentals vs technical analysis, which is better?

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I met someone recently who told me he uses common sense when trading and investing.  On further discussion it seemed he was using fundamentals, sort of...  The one thing that struck me about this is that common sense seems quite absent in the markets, at least of late (and by that I mean the past 6 or 7 years and perhaps longer than that).  I'm not sure if there ever was good old days when investing in a company was all about a decent dividend return and some growth rather than pure speculation but now it is firmly the latter in my view.  How can fundamentals help decision making when you have the following to contend with:

  1. management share buybacks fueled by cheap loans to hit EPS targets and max bonuses rather than investing for growth
  2. commodity bull market underpined by China where data releases have to be treated with a large pinch of salt and who knows what is really happening in China anyway
  3. a surge in Chinese participation in the stock market, they are gamblers by nature...
  4. Tech bubble that dwarf the 2000 one, just check out the FANG or BAGLE companies (come commentators were trying to argue that Amazon was a good buy at a PE of 500!!!
  5. Central banks trying to drive an arbitary 2% inflation when wages are nowhere near growing sufficiently to sustain this and many have had a pay freeze for some years
  6. Central banks meddling with a supposedly free market with QE and zero interest rates or negative...

 

I'm sure there are many more issues to add to that list but you get the idea.  In such a situation the only thing I can use to make sense of it all is technical analysis.  Elliot Waves; Fibonacci lines; tramlines; momentum divergence etc applied across multiple markets paints a clear picture for me which is that the main stock markets are heading for a big fall, maybe an unprecedented one...  Commoditied have not yet hit bottom and are currently in a relief rally only.  When they turn down again (especially Oil) the whole house of cards will collapse.  The only sensible trading strategy is to use technical analysis to identify shorting opportunities (long on gold).

 

Interested to hear if anyone sees it differently and why.

 

Adrian

 

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HI,

 

very much agree with your general drift there. Central bankers show no sign of giving up trying to micromanage the macroeconomy in spite of 7 years of failure. But don't worry, they have got lots of tricks up their sleeve yet. BOE's Haldane going on about negative interest rates being best achieved by banning cash and converting to a digital monetary system, and Draghi actually using terms like 'helicopter money' as in not considering it (meaning they are).

 

But it is the fundamentals that give the markets the drive in a particular direction to new levels, it's the technicals that determine how price gets there.

 

 

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Agreed but my point is that using fundamentals to judge trading is not profitable because common sense doesn't prevail.  In the recent past bad news on the economy was good news for stocks because everyone thought it meant central bankers would interfer more, and they did.  But the common sense signal would have been, "economy not going well - stocks should go down" but they didn't.  Now maybe we are seeing traders get it, that things are out of whack and bad news is bad news again, unless central banks go crazy.  I don't think they have much left in the locker that wouldn't spook people as it happens.  Look at Japan225, which dropped like a stone when the BoJ announced negative interest rates.  Look at the Euro's response to Draghi last week, it shot up rather than down on interest rate reduction.  Granted it is likely to fall soon but still I get that from the technical analysis rather than fundamentals.

 

Take Oil for instance, the prevailing wisdom is that Oil is cheap, cheap, cheap but I bet it goes down to a new low before it gets into a bull market.  Fundamentals don't drive the market, sentiment does and technical analysis aims ti track sentiment, hence my point is forget about fundamentals and focus on technical analysis to assess sentiment and like price movement as a result.

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I know this: the more fundamentals you try to collect, understand and apply the more stupid that makes you feel. You can use the very same fundamentals for 2 different companies and 1 will be predictable and the other will go against all odds. At the end of the day you'll want to be another speculator trying to make something out of this mess. So technical analysis is what is left for us, the non market makers. And out of all that, a very simple crossing moving averages will do. The question is to what period will you go: daily, 4 hours or 5 minutes? 

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Both  technical and fundamental are equally useless in making money  i.e for timing trades.

 

I can give you hundreds of examples where they both fail , but that is time consuming.

A clear example is the bank of England's blunder in selling U K 's gold reserves  , later they would have got  £21bn more  , if they had waited.This was a fundamental decision.

 

When ECB   announced   lower future interest rates  recently  , a good  drive for stock markets highs , the  market fell 5  %.Another example of   illogical markets.

 

There are false breakouts , signals , chop outs trend failures  , set up failures and many other phsyhological issues  related to technical anylysis failures.

 

http://www.futuresmag.com/2013/04/23/everything-you-know-about-breakout-trading-wrong

 

"Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

 

http://www.cbsnews.com/news/is-technical-analysis-a-waste-of-time/

 

 

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There are a few points that we should keep in mind when thinking about so called fundamentals:

  1. First what is a fundamental really?  Economic data like how well the economy is growing or how much it is contracting; supply/demand data like retail sales or Oil stocks; Central bank monetary committee minutes (or actions!); company trading statements and reports etc?  All of it?  Really it depends what we are talking about and against which market and where in its natural cycle.
  2. Second, the market has copious analysts pouring over this stuff with reams of data to support their assessments all to predict what fundamentals will do and what they mean when they become apparent.  One reason why fundamentals often seem to provoke the reverse reaction to that which is logical (erm, whatever that means...) is that the analysts try to predict and run ahead of fundamentals to get an edge.  This is where the saying "buy the rumour, sell the fact" (or vice versa) comes from.
  3. Third, a lot of data and Central bank actions are politically motivated not free market actions.  For instance I would not trust any data coming out of a centrally controlled country like China.  Also the decision to sell Britain's gold was a political one not an economic one and certainly not a traders decision...  So what does that prove except that politicians shouldn't be in charge of this stuff.

That the stock markets have been fueled by central bank interference since early 2009 is now received wisdom.  The stock prices have run far ahead of the economy and now the economy, quite apart from catching up, looks likely to reverse and leave stock prices dangling.  Central Banks are trying to continue their failed policy of propping everything up but ultimately the market is free to make its own mind up and I believe Mr Market now smells a rat.  For years central bank interest rate drops and QE and even hints of drops and QE has fueled the rally but now the reverse is happening because what it really means is "*****e! After 6 years it's not working so lets ramp it up."  This is a prime example of Einstein's definition of insanity.  For 6 years bad news was good news for stocks but now bad news is becoming bad news again in the form of no confidence that the Fed et al know what they are doing or that the economy will catch up.  In that sense alone I agree with looking at fundamentals but my take is that they are so far behind the market, and going into reverse, the the mother of all crashes is imminent.

 

Is that fundamentals?  I don't know but fundamentally I thing if it looks like lemon and smells like a lemon then it must be a lemon.  And I think this lemon is rotten.  So until we have a major crash I think Fundamentals are a lemon and so is the market right now. 

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