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If you are a diehard fundamentalist like I once was, than this recent piece by Morgan Housel from Motley Fool really makes you think twice. In a column published this week Mr. Housel noted a few inconvenient facts about investing.
“1. Coca-Cola is fighting 12 consecutive years of soda consumption decline. Its stock is at an all-time high.
2. Tesla is changing the world, and orders for its new car are off the charts. Its stock is lower than it was 18 months ago.
3. Cigarette consumption has dropped 44% since 1981. Altria stock is up 71,000% since 1981.
4. WalMart net income has tripled since 2000. Its stock has lost 1.5% since 2000.
5. Apple has earned almost a quarter trillion dollars of profit since 2012. Its stock has barely budged.
6. Amazon’s profits round to zero since 2012. Its stock has tripled.
7. 2009 was one of the worst years for the economy in a century. The market rose 27%.
8. 2015 was a good year for the economy. The market rose 1%.
9. Brazil’s economy is a disaster. Its stock market is flat over the last two years.”
To which I can add my own little tidbit.
The US economy is leading G-3 in growth, rates and monetary bias and yet the US dollar is down more than 1200 pips against the yen and 800 pips against the euro this year.
So much for the forecasting power of fundamentals.
But technicals are of course no better. How many failed Head and Shoulders, how many failed moving average breakouts, how many busted Fibonacci retrace patterns have you seen in your life? And if Elliot Wave was so great, name me one, just one money manager that runs a $1 billion dollar book using that technical philosophy alone. I will wait another hundred years and you still won’t be able to provide me with an example.
Technicals are just a shade better than astrology in their ability to predict anything with accuracy.
The reason both disciplines fail so miserably is that context is everything. Investing is not logical -- it’s psychological and once you understand that you can make much more intelligent decisions.
While in and of themselves fundamentals and technicals are often worse than worthless, taken together they can become trading magic because they can provide that most elusive and valuable property of the markets -- context.
The classic good trade is often described as one where technicals and fundamentals confirm each other -- and that is indeed a good set up. But such combinations are rare, precisely because markets are forward discounting mechanisms and reasons for the rally or the selloff are rarely evident at the time of occurrence
Instead my favorite setup is when the fundamentals go one way and technicals do not confirm the move. This week’s action in USD/JPY is a prime example. The data from US Retails Sales was horrid and the change of posture to dovishness from Lockhart one of Fed’s most hawkish stalwarts should have been good for 100 point sell off in the pair. But the pair did not budge, instead it rallied in face of all this negative news. When price action runs counter to the prevailing narrative -- pay attention. That is often a great signal for a move against the consensus view. That is when you often get the best possible glimpse of “context” in action.
So next time someone tells you that they only trade on techincals or that they have never looked at chart in their life -- run the other way from those people -- because those type of traders have basically completely misunderstood the game that they are trying to play.