Debating Investment and Trading Approaches - Fundamentals vs. Technicals

Debating Investment and Trading Approaches - Fundamentals versus Technicals

Market participants follow different trading and investing approaches, but price action results from compiling all the strategies. An asset’s price moves higher when buyers are more aggressive than sellers and lower when selling overwhelms buying. Many technical traders and investors argue that supply and demand fundamentals are useless. At the same time, the fundamentalists believe that their analysis and conclusions lead to price trends that cause technicians to change course.

“Human sacrifice, technicians and fundamentalists living together”

A quote from Ghostbusters- the 1984 blockbuster movie. I began a chapter on technicals and fundamentals in my 2013 book, published by McGraw Hill, with this quote and went on to cite a 2008 Forbes article. The author, James T. Holter, wrote:

“All right, so maybe Dr. Peter Venkman (a.k.a. Bill Murray) didn’t foretell exactly that in the 1984 movie Ghostbusters, but such a proclamation would have been just as ominous…Over the years, the relationship between technicians and fundamentalists, who examine supply and demand data to forecast futures prices, has been just as strained as that of felines and canines, with both often derisively attacking the others’ approach. Technicians call fundamentals “funny” mentals. Fundamentalists refer to technical analysis as “voodoo science.”

Holter goes on to describe that with respect to both forms of market analysis, the sum is much greater than the two parts individually. Fundamental and technical analysis in concert, create a more vivid and robust picture of the price structure of a market and are a far more effective investment and trading tool.

Fundamentals measure supply and demand

• In stocks, fundamentals involve pouring over balance sheets, earnings, and macroeconomic data.
• In commodities, production cost and the elasticity of supply and demand are critical fundamental factors.
• Fundamentalists look to establish if an asset is cheap or expensive in the current environment.

Technicals follow price cycles

• A price chart is the technicians’ tool.
• Technicians follow trends higher and lower, positioning accordingly.
• Price momentum and strength can suggest if a trend is running out of steam and a reversal is on the horizon or has already occurred.

Fundamentals can identify market tops or bottoms

• Expert fundamentalists look for under or overvalued assets to establish long or short positions.
• Warren Buffett, a leading fundamental investor, has had decades of success by understanding earnings potentials and identifying opportunities where current market trends ignore fundamental strength.
• Jim Chanos, a successful short seller, has identified overvalued assets and established short positions. Recent victories include DraftKings (DKNG) and Coinbase (COIN). Chanos gained notoriety by shorting Enron long before the company went bankrupt.

Technicians rarely buy lows or sell highs

• Technicians believe the trend is your friend until it bends.
• Trend-following often involves being long at the top of a market and short at the bottom.
• Market prices can rise or fall to illogical, irrational, and illogical levels before they reverse.

A combination can offer the most enlightened approach

• There is nothing wrong with identifying with technicians or fundamentalists.
• A mistake can be ignoring or underestimating the other approach.
• Flexibility, planning, discipline, and respect are critical for market success. Ego and hubris lead market participants to ignore technical or fundamental changes.
• Embrace technicals, as they are a real-time indicator of a market’s sentiment.
• Embrace fundamentals, as they are critical for future earnings and price trends.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!