When Fundamental Analysis Just Doesn’t Make Sense

I'm pretty sure everyone here uses, in some capicity, fundamentals to trade. But what we also have an issue with is always using the fundamentals when we really shouldn't, because they don't make sense! Zachary Scheidt, from ZachStocks.com, has come to show us a little about when the fundamentals don't make sense.

He'll be responding to comments and would like to hear a horror story!


There are times in just about every job where things just don’t line up in a logical manner.  Equity markets have their own way of turning fundamental arguments upside down and confounding even the most studious trader.  There are times when bad economic news turns out to be good news for markets (usually because it leads to easing regulations) or when positive news is met by selling.

At ZachStocks.com, we attempt to find logic in the prices and patterns of growth stocks, and offer trading ideas from both the long and the short side.  The blog covers many of the fundamental factors which drive these stocks higher and lower, but sometimes this fundamental analysis just doesn’t cut it.  Markets trade as much on investor psychology as they do on cold hard facts.

Back in early March, ZachStocks noted how Citigroup had the potential to ignite a sharp rally based on short sellers covering positions.  Citigroup found its strength based on a statement by management which could largely be considered nonsense.  The CEO came out and stated that this was turning out to be a “good year” for the bank… this despite the fact that investors had lost 70% of their investment and the bank had been forced to take billions in stimulus dollars in order to stay in business.

Below is a chart of the S&P at the time the Citigroup article was written:

At this point the fundamentals just give us much information to trade with.  But the technical metrics actually provided some great insight.  Here are the key points that led to our bullish call:
•    Short interest is high – Short sellers had been adding to positions as the expectations were for a complete financial collapse.  Profits had created an extra bold (and leveraged) base of short sellers who were primed to be hurt quickly by any market strength
•    Oversold Position – The market was oversold from both a long and a short-term perspective.  From a logical perspective, this leads us to believe that every trader who might want to sell has already sold.  There could be little additional information which would lead a trader to finally throw up his hands and bail out.  That information had already hit the market
•    Rallying off Bad News – Positive news from a discredited Wall Street CEO could hardly be considered good news.  In fact, the statement actually drew attention and rage that a manager would make such an arrogant statement during a horrible financial crisis.  The fact that the market rallied off this news was certainly a clue.
•    Volume speaks… well Volumes! – Pardon the pun but it really is true.  On March 10, the market traded sharply higher and the volume (or number of shares traded) was significantly above average.  This told us that big, smart (using the term loosely) investors were putting billions of dollars to work.  When trading, you want to make sure you are on the same side as the gorillas as they push and bully the market up or down.

In the days and weeks following Citigroup’s announcement, we laid out some attractive long ideas which worked quite well.  ZachStocks trades included LDK Solar (which rallied 113% since the article was posted), Clearwire Corporation (current gains of 31%), Netease.com Inc. (current gains of 29%) not to mention Blackstone Group which was discussed just before the rally ignited and has shown gains of 116%.

These positions were entered due to an analysis of the fundamental situation for each company.  But the trading gains would not have been possible without an accurate technical view of the overall market.  Speaking of the overall market, here is a picture of the S&P just two months after our technical buy signal:

So when investing it is paramount to understand the fundamentals of what you are buying.  Fundamental analysis will keep you in the right names that have the best chance of offering above average gains (from both a long and a short approach).  But in order to understand when to trade these opportunities, a trading approach must make use of proper technical signals which lead to healthy profits with much less risk.

In an age of turbulence and uncertainty, risk management is paramount and can make the difference between rags and riches.  Always have proper loss controls in place and understand the vehicles you are investing in.  If you are looking for trading ideas please pay us a visit at ZachStocks.com.

Zachary Scheidt


11 thoughts on “When Fundamental Analysis Just Doesn’t Make Sense

  1. This is an excellent article especially if the call as suggested was made and I have no reason to disput it. There is no doubt but that there was a sector rotation from sentiment to value investing where those stocks were beaten up too much in relation to the efforts and spending to establish a stake for practical survival. It's called the Obama hope for sutvival. Sooner or later we'll see in the near term another rotation when the market wakes up from the Obama pill and that will be a reaction to reality concerning the true state of enconomic affairs facing the nation.

  2. I am glad to see that INO is now offering its forum to third parties. Wonder if they 'd be willing to disclose the fee Zachs paid to get on here. Another thing I find truly amazing is 90% of traders lose money, yet everyone you talk to is the other 10%. No one is ever willing to admit they lost a dime. My guess is that is because of psychology as well. People focus on wins, not losses. And fundamentals do work. Look at the dot coms as a nice example. Sure people made a ton in there while the idiots were day-trading in their underwear, but at the end of the day, the fundamentals ruled. I know, I know.. all of YOU guys were out long before that happened.. It was everyone ELSE that lost.. What a joke.

    1. hey mr Angry. Fundamentals don't work. If anything proves this it is the Dot.com bust that you quote, most of the Fundamentals of these companys where terrible. I remember wired magazine claiming it was a new paragigm. The only thing that drove these pigs up was mass psychology.
      Also prior to the recent Sub prime mortgage mess if you look at the fundamentals of the economy there was nothing to suggest a change was coming. If you looked at the Sentiment index or if you study Elliot wave you would have seen a different picture altogether.
      As to your statement about losing money ALL traders lose money.
      As stated in my previous post i have traded for over 10 years both for myself and for hedge funds. However the secret is to stop losing.Again this comes down to psychology.

  3. As an investor turned trader, I have to agree all the way. The markets remind me of hysterical children most days. In fact, this kind of makes it more predictable than normal, though perhaps not as mindlessly predictable as the long rise preceding the fall. It is all psychology indeed, always was. I couldn't ever take my GM stock and demand a drill press from them in exchange, though by being both long and short it several times in the recent period, I made enough to buy a new Camaro from them, and I can't wait to see it in a few days.

    For me, this is like being in a war. Both scary and boring at the same time, hurry up and wait. I am winning most of the battles, and seem to be winning the war (up 35% this year), but not by fundamental analysis, although I do that too -- I prefer to do trades in things that are sound, and that will go in the desired direction if I get "stuck" or fail to pay attention to a closing point. I get another chance that way.

    But indeed, there are many companies with "to die for" balance sheets that aren't doing all that well since the last "bottom" on March 9, but there are also some that are. I mainly trade equities in commodity related companies (oil, metals, etc) and many of them would have been excellent buy and hold stocks since about that March date. But with my investor hat on, that's not a "hold" that's simply a slightly longer than normal duration "trade". And indeed I've done better than they have done by swing trading them, rather than holding them all that time.

    Motion is your friend, and these recent events are the opportunity of a lifetime.
    So, find the motion and be on the right side of it!

    Best of luck to all! And you knew you were supposed to do all you could to make that luck, right? Homework is more needed than ever to be good at this.


  4. I can predict the past with absolute certainty. Give us a trade that you think will be profitable within 5-7 days. Specify a buy point, sell stop, sell target. After that I might even get interested.

    1. Ah yes, another one who wants to get rich quick.. And of course, he expects someone to provide this information free of charge. Do you work for free, Steve?
      Didn't think so.

      1. Will,
        I guess the answer is, Yes, I do work for free. I trade my own money and no one else's. I have losing trades every week. I have winning trades every week. Get rich quick? I'm 62. It's a little late for that. I'll add that I can get better information than this on Twitter, for free, everyday. I'll even give you some examples:
        @steenbab, @hamzeianalytics, @stevenplace, @annemarie2006, @alphatrends, @CTGFutures, and the list goes on and on. I apologize for the inconvenience. I'll also add that the trading videos on INO.com are well worth money. Larry Williams, Jake Berstein....you can't get much better than that. I'm just in the wrong place. I sincerely hope I did not offend anyone.

  5. No Comments yet so i will start with my 10Cents worth.
    Fundamental analysis does not work. There said it. It appears to work during strong bull markets, but only appears to. The only thing that drives markets is sentiment. I have been a professional trader for over 10 years and have seen nothing to contradict this.I kind of get a rye smile imagining fundamental traders pulling out their hair to see what is happening, ignoring (mostly) investor mass psychology. It is said that over 90% of traders lose money. I beleive it. Most invest for the long term using fundamental drivers.

    1. Yeah, Steve. I get what you mean. That must be why traders sell when earnings reports don't meet expectations. I myself ascribe to Bill O'neil's teachings and he founded Investor's. Listen to the market and only buy the best companies. Zacks tells me which are those best companies. That is what Zachary was saying. I must admit he is one of the few at Zacks that trade that way. Steve Reitmeister at Zacks pays no attention to the technicals. He pays no attention to bases. That is one of the reasons I'm not in his trading group any longer. It's also the reason I finally made some money this week on this rally. I have only been trading for 16 months but what I have learned that suits me best is learn all you can about trading and the market and make your own calls. When someone says it isn't a buy and hold market anymore pay no attention or you will miss out on quite a few commodities that have gained well over 200% since the November low and are still going up.

    2. I get a pumpernickel smile. It's wry NOT rye, unless you are talking corned beef.

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