Trader Tips: The Case For Fundamental Analysis

Back in the 1990’s many analysts and pundits used fundamental analysis as a way and means of determining if a stock was worthy of purchase. They would use the company’s earnings and measures such as P/E ratios, ROI, cost of sales, etc. to decide if the equity was a “diamond in the rough” or a dog.

Then a curious thing happened. We had the dotcom meltdown, 9/11, various scandals with some major firms (Enron, MCI, etc.) and the data used for fundamental analysis became questionable as the information came from the companies themselves.

Fast forward to today. Many traders became disenchanted with equities, options, etc. and now trade the futures market where they do not have the issue with malfeasance, scandals, etc. I’m one of those traders. However the built-in prejudice with fundamentals remains. All too often I hear traders stating fundamentals are too difficult to determine or another favorite one is “I trade what I see.” Of course you do and you should but to say that fundamentals play no part or are misleading or too difficult is simply not true.

In the futures market we don’t need to be concerned with earnings that can sometimes be misleading or incorrect. Nor do we need to be concerned with scandals or malfeasance. Has anyone ever heard of a gold scandal? I haven’t. I believe there is a general misconception regarding fundamentals and how they pertain to the futures market. It’s my objective to hopefully clear that up. Fundamentals are the roadmap for the futures market.

WHAT ABOUT THE CHARTS?

Does technical analysis play a role? Of course it does. No skillful trader would enter a position without knowing what they want to get out of it nor would they enter a trade without their indicators in the right setup. Fundamentals and technicals both play a role.

Fundamentals for the strategic or global view and technicals for the tactical or “how to.” Viewed another way Fundamentals determine what kind of market this is. Is it a market that has the potential to grow or gain today? Technicals determine “ok I know it’s a positive market and has the potential to gain; now how will I play it”? “What kind of setup do I need to see before I pull the trigger”? 

Case-in-point on Wednesday, September 4 we determined that the market was poised for an upside move. We do this by analyzing other futures instruments to make that determination. Yes, you read that correctly other futures instruments which mean this data has no chance of malfeasance or error. In any case, early on in the session it didn’t look like the markets were going to gain, in fact they fell following the heels of the European exchanges. We came to this conclusion because our rules of market correlation say that if the U.S. dollar and bonds are both correlated and are trading lower then the indices will advance. The net result was the Dow gained 97 points and the other indices advanced as well.

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Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation.

4 Comments

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NickMastrandrea: Carley, your absolutely correct. Fundamentals is only part of the story. Fundamentals without technical analysis makes no sense either. It's like pulling the trigger without knowing where to aim...
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Visitor - Carley Garner: Thanks for the thoughts Nick; you make some good points. I agree that the futures markets offer some relief from human error and deception. However, all markets (even futures) are subject to erroneous price moves at the hands of human emotion, and even greed (think the Hunt brothers and silver). Accordingly, I believe that fundamentals are only part of the story. We like to look at seasonals, the CFTC's COT Report and of course the chart to corroborate market fundamentals.
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NickMastrandrea: Hi Brian, the funds you mention are strictly that: funds. This article was written for the day or trend trader who makes their own trading decisions.
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Visitor - Brian: There are some MF Global and Peregrine customers who might beg to differ on the lack of scandals and malfeasance in futures.
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