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Fundamentals and The Death Cross: Confusion Always

Need a refresher about the fundamental mindset? From Trend Following:

There are two basic theories that are used to trade in the markets. The first theory is fundamental analysis. It is the study of external factors that affect the supply and demand of a particular market. Fundamental analysis uses factors such as weather, government policy, domestic and foreign political and economic events, price-earnings ratios, and balance sheets to make buy and sell decisions. By monitoring “fundamentals” for a particular market, one can supposedly predict a change in market direction before that change has been reflected in the price of the market with the belief that you can then make money from that knowledge. The vast majority of Wall Street uses fundamental analysis alone. They are the academics, brokers, and analysts who spoke highly of the new economy during the dot-com craze. These same Wall Street players brought millions of players into the real estate and credit bubbles of 2008. Millions bought into their rosy fundamental projections and rode bubbles straight up with no clue how to exit when those bubbles finally burst. Consider an exchange between a questioner and then President Bush at a press conference:

Q: “I wanted to ask you [Mr. President], I’m a financial advisor here in Fredericksburg [Virginia], and I wanted to ask you what your thoughts are on the market going forward… and if any of your policies would make any difference?”

The President: “No (laughter), I’m not going to answer your question. If I were an investor, I would be looking at the basic fundamentals of the economy. Early on in my Presidency, somebody asked me about the stock market, and I thought I was a financial genius, and it was a mistake (laughter). The fundamentals of this nation are strong. One of the interesting developments has been the role of exports in overall GDP growth. When you open up markets for goods and services, and we’re treated fairly, we can compete just about with anybody, anywhere. And exports have been an integral part, at least of the 3rd quarter growth. But far be it for me—I apologize—for not being in the position to answer your question. But I don’t think you want your President opining on whether the Dow Jones is going to—(laughter)—be going up or down.”

Now, consider a recent email exchange with a Trend Following Radio listener that expands out in a better direction:

Listener: Honestly, my entire career has changed because of your podcast now that I think about it b/c it was my first exposure to trend following. A couple years ago I listened to your podcast for the first time and didn’t like it, too closed minded. Then I listened again… and again. My mind gradually continued to open and expand.

Covel: Thanks for the nice words.

Listener: Great interview with Campbell Harvey. Definitely have him on again sometime. Hearing about your trip to China was also great as we are in the middle of working on an opportunity over there.


Listener: I agree with your comments on your death cross podcast that Cliff’s tweets seemed a bit odd… But then again, I don’t understand what he is talking about with at least half of his tweets. It indeed is a bit hard for people to understand that trend following is different than predictive technical analysis. I cringe when people ask me “so what are your indicators telling you”. You’ve done a good job at attempting to articulate it. Keep it up. I’m no different than you, I just looked at the data when I came across trend following. Then when I started adding it to a traditional portfolio and found a couple good managers like Chesapeake and Longboard it was a no brainer. I guess for some that’s not enough. That’s fine with me.

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Posted in Holy Grails, Psychology, Trading 101, Trend Following
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