Best Thread How do technical traders fit into the greater scheme of things?

TheBramble said:

So you're saying that BHP is fundamentally unsound or at least, less fundamentally secure than they would have us believe? Yet since publishing its financials 8 weeks ago, it's moved form 55 to 85. (In fact only today looking a little toppy [very toppy actually] from a technical perspective.)

It's certainly been technically tradable since late September when it broke that major level at 70, but from a fundamental viewpoint (which you have) what is your current position and view?

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Bramble,

BHP, fundamentally, is overvalued.
That the price has continued to rise is common, especially in a bull phase.
That the price has far exceeded the underlying "intrinsic" values, places the stock firmly into the Quant and/or Technical camps with regards to current trading [unless selling a long position held from a previous cycle]

And therein lies the difference. Should BHP enter a bear market for [it's] stock, then on the way down there will be numerous "technical" support levels that will not hold, they may provide a "bounce", but, there will be no Fundamental buying support, thus they will fail.

Even with Fundamental buying, a support level may be broken, ultimately however the continued buying [and holding] through declines provide the Fundamental support base that will generate the next bull leg.

Resistance however is different, very few Fundamental based Funds will "Sell Short".
Chanos' Fund is one example of a Fundamentally based "Short Seller" who base their positions on overvaluations and or aggressive accounting.

Thus, in Bull markets, there is far less Fundamental based selling, than Fundamental based buying in Bear Markets.

Therefore, my opinion, on a Fundamental analysis is that BHP is hugely overvalued. I would not however "Short" BHP based on this analysis. But I certainly wouldn't be purchasing either.

jog on
d998

ducati998 said:

BHP, fundamentally, is overvalued.
That the price has continued to rise is common, especially in a bull phase.
That the price has far exceeded the underlying "intrinsic" values, places the stock firmly into the Quant and/or Technical camps with regards to current trading [unless selling a long position held from a previous cycle]

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Reminds me of when Ballmer, back in '00, said how ridiculously overpriced MSFT was.

Db

Wait patiently ducati. Your opportunity to short BHP will come as surely as my opportunity to short CSCO came after the 1990s tech bull. Never confuse an exponential with an S curve

Dividends are all very well but how are they being obtained? From the core business or from the sale of inflated property prices? Dividends must be covered at least twice by earnings, or I cross it off. Debt must, also, be looked at. It's not good enough to be happy about dividend growth if it is coming along with increased debt.

Split

ducati998 said:

BHP, fundamentally, is overvalued.

That the price has far exceeded the underlying "intrinsic" values, places the stock firmly into the Quant and/or Technical camps with regards to current trading [unless selling a long position held from a previous cycle]

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So fundamentals do not (or do not always if you prefer) drive the price.

Any selling of previous Long positions (fundamental) would be indistinguishable from any other basis for selling and would serve to dampen/reverse the rise, but there’s no evidence of selling of any real magnitude, obviously, or the stock wouldn’t have sustained the rise it has.

ducati998 said:

Thus, in Bull markets, there is far less Fundamental based selling, than Fundamental based buying in Bear Markets.

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Same is true of Technical trading in a Bull phase. In an up trend there is obviously more buying than selling as evidenced by the price and volume profile. And quite opposite (to Fundies) in a Bear phase, there are far less Techie traders buying than selling. But I sense we can get a potentially better picture of who might be selling to who and who is buying from whom.

ducati998 said:

Therefore, my opinion, on a Fundamental analysis is that BHP is hugely overvalued. I would not however "Short" BHP based on this analysis. But I certainly wouldn't be purchasing either.

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There’s the thing, the techies are quite happy to identify a short position any day now, and to take financial advantage of that should it occur, for as long as it occurs. May be just a ‘blip’ on the fundies radar, but so far, the fundies haven’t made any money on their current assessment, the techies have!

dbphoenix said:

If your timeframes are less than years, then fundamentals probably are […] noise.

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But doesn't the multi-year approach get dangerously close to the buy-and-hold strategy which has been demonstrably the worst thing you could have done over the past few decades?

I appreciate old money and big money is going to be far more into the long term than will the intraday boys & girls, but I’ve always viewed that as a year or three. Maybe that’s just my myopia. Perhaps it’s a cautious buy-and-hold then flat. Would you say there is a bias from the longer term fundamental players to only trade the longer Bull runs than get into any short selling on the Bear phases? Would you imagine they tend to just sit them out, flat?

Fundamental reassessment of BHP

And to get back to my drone on Price driving the Fundamentals, at what point, should BHP continue to out-perform prior fundamental assessments, will the fundies re-assess the company based on its increased capital growth and value, and then upgrade their opinions on this revised financial basis? QED?

TheBramble said:

...............So fundamentals do not (or do not always if you prefer) drive the price............

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Tony

I don't think you can draw that conclusion from Ducati's piece. He has exposed a smoke and mirrors element in BHP's numbers which has created the impression, if he is right, that the fundamentals are better than they really are.

I would still argue that it is those "false" fundamentals, together with an expectation (unrealistic or not) that they will get better and better, that has driven the price.

good trading

jon

dbphoenix said:

If you're not using fundamentals to select your instrument, they'd be irrelevant to your trading, though not to your results.

Db

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yes, you are right. sorry i was being silly, and didnt explain what is for me "fundamentals"

fundamentals is not a news announcement. for me, fundamentals is a story. it is a story that you can read in the set of economic data that define the way we arrive to a particular economic situation, and by seeing how new economic data becomes available, then the "fundamental story" keeps unfolding going forward.

so, for example, if you trade currencies, the fundamental story has been about the causes of dollar weakness for the reasons we all know. the monthly trend in the dollar shows this.

However, as with any story, the story has topics. Regarding topics, an example is the Sup-prime case and the credit squeeze, in which we saw how "risk" became the topic, not something that changed the fundamental picture, yet it had sufficient strenght to make players think that the story could significantly change tack. we can see that on a daily chart.

as such, no, i dont pay attention to fundamentals, but i am very aware of the topic if i trade a 4 hr chart. the topic will typically print the swings that give me setups. but, no, i dont base my trades on "topics"

having said that, it is the news announcements (overall, the small pieces of new economic data that will feed the story) that i consider as a factor that can make or break a trade.

so, to conclude, you are right, in my timeframe, that results depend on fundamentals if you define fundamentals as "news announcements." if the definition of fundamentals is what i describe above, then, my results have no correlation whatsoever with fundamentals.

TheBramble said:

Do you believe the trend exists because of the fundamentals or that the fundamentals mirror the trend?

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I'ld say that it could be both. Trends may drive fundamentals, fundamentals may drive trends. I believe however that fundamentals nor technicals drive the price. At least if we're talking traders.

The price is essentially driven by supply and demand. Not supply and demand from traders, but of end users buying or selling the assets from a utilitarion view. People, companies that buy or sell because they need the use, lost the use or perhaps produced the asset. You may very well plead that this is fundamental, but it's not trading. It's using, investing, doing business.

To me traders, fundamental and technical, are serviceproviders to those endusers. Traders make the market efficient so the enduser will get a fair price. Traders look at all kind of patterns, technical and fundamental, that may indicate mispricings. They take on positions based on perceived mispricings and thus 'arbitrage' those perceived mispricings away. Fundamental trading and technical trading are pretty much the same side of the coin. In the long run however fundamentals will be more important. Two assets with the same expected return and the same risk should end up at the same price. This can't be achieved by mere technical trading.

grtnx
Wilco

TheBramble said:

Do you believe the trend exists because of the fundamentals or that the fundamentals mirror the trend?

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I agree with the "fundamentals create the trend" camp except as follows:

1. We haven't been clear about what fundamentals might be. Fundamentals don't have to be the underlying facts. BHP's story (the lie) is the fundamental driving the stock up. The resource boom story in Aus (China & India will go up forever and they need our stuff) is the industry driver. The internet story (new economy, its different this time, learn live & play) was the fundamental driver for internet stocks. So the real fundamental driver is peoples response to the story of the company and the stories surrounding the company.

2. If our average trades are less than a week long then we don't have to know the fundamentals. In fact because the effects of the fundamentals are expressed in price and volume we don't ever have to know the fundamentals. Its nice to know them because there is a satisfaction in being knowledgeable. It also just might improve our trading.

3. If, like me, your average trades are measures in single digit minutes then although fundamentals might drive the day they are not driving this move (bias up or down I will concede to dbPhoenix although on a daily basis this could be a retracement of that move). My move is driven by things like larger players efforts to position well rather than the overall move of the day ( I am their noise )

Here is a share that I have spotted as a growth company

Vislink


EPS 2003 was .97; 2007 forecast 6.9 Growth over 4 years 7 times.

Div. Growth 0ver same period (0.20p - 1.10p) 5.5 times

Forecast growth for next results 23.4%

Dividend covered br earnings 5,6 times; Net gearing -27; ROC 63%

Cap. 106 million.

Capitalisation doesn't mean so much to me as does growth .


Aug 26

Tim Trotter, Chairman of Vislink said:
'The Group has achieved a record half year operating profit. The order flow has
continued to improve into the second half and we have made our first investment
to create a Technical Services business in the US market. The Board is
encouraged by current trading and continues to look forward to the rest of the
year with confidence.'


However, the chart says differently. They say TA tells all. Well, I don't know about that, maybe there is a recession coming but, at present, I see nothing wrong with this company.

Would I buy it? No, because the chart doesn't look good, although I could be looking at a bottom right now, it might be a continuation, mightn't it? For long term I would want more confirmation. I think it will change, though, sooner or later. When it does,I might.

This is not a recommendation, it is an example of how I invest. I never buy a company with poor figures and I try to use TA to get me in at the right price.

So, what is leading what, here? FA or TA? FA got me interested in the share, in the beginning.

I don't think that this is a good share to trade on a day to day basis. Those are in the FT100.

Split

Bramble

So fundamentals do not (or do not always if you prefer) drive the price.

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Agreed. Fundamentals have a greater importance in situations where the security is undervalued. Some of the reasons for this are as follows;

*The price cannot fall below zero, thus, the absolute downside is limited.
*In theory, there is no upper price limit.
*Undervalued securities have higher carry returns via dividends
*Provide a positive edge. [US Markets have over time, trended higher]
*Random events [future] have less impact on the downside when negative, when the price is undervalued, and greater upside potential when positive.

Any selling of previous Long positions (fundamental) would be indistinguishable from any other basis for selling and would serve to dampen/reverse the rise, but there’s no evidence of selling of any real magnitude, obviously, or the stock wouldn’t have sustained the rise it has.

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Not necessarily, there are various ways to distinguish volume;

*13D filings
*Institutional holdings data
*Time & Sales data
*Financial Statements

But I sense we can get a potentially better picture of who might be selling to who and who is buying from whom.

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Indeed, see previous.

There’s the thing, the techies are quite happy to identify a short position any day now, and to take financial advantage of that should it occur, for as long as it occurs. May be just a ‘blip’ on the fundies radar, but so far, the fundies haven’t made any money on their current assessment, the techies have!

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Disagree for the following reasons;

*Fundamental analysis is analysis not a strategy [although it can also be a strategy]
*Conversely there are a number of strategies that can seek to monetize the "Fundamental" analysis that do not involve any technical analysis of the market price.

Would you say there is a bias from the longer term fundamental players to only trade the longer Bull runs than get into any short selling on the Bear phases? Would you imagine they tend to just sit them out, flat?

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Definitely not. The divergence in analysis techniques is not manifested within market [or lack of] activity, rather, the risk management strategies employed.

jog on
d998

Ducatti, please. Buying undervalued securities is the name of the game. I'm not in it for any other reason.

Or am I missing a fundamental?

Split

Splitlink said:

Ducatti, please. Buying undervalued securities is the name of the game. I'm not in it for any other reason.

Or am I missing a fundamental?

Split

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Split

There are many strategies, all different that result from a Fundamental undervaluation. In no particular order;

*Standard buy & hold undervaluation [sell when reaching fair value or overvaluation]
*Capital Structure undervaluation {Capital Structure Arbitrage}
*Risk Arbitrage [Risk Adjusted]
*Statistical Arbitrage


jog on
d998

And of course on the 20'th anniversary of the "87 crash, superstition.

Yes, it's a superstition but if everyone sells on the day...... I admit that I'm holding back because of it and the damned index keeps going up.

Split

Though this thread has cooled off, I found the following article (excerpted) to be pertinent and worth posting:

At a recent New York conference, investor Jim Chanos noted a couple of anomalies that, in all likelihood, are a direct function of quant trading. They highlight a disconnect between stocks and their underlying fundamentals that only a computer could love.

It turns out there are two -- and for all I know, more -- closed-end mutual funds that own mundane large-cap S&P-oriented stocks: the Cornerstone Total Return Fund (CRF) and the Cornerstone Strategic Value Fund (CLM). Inexplicably, these funds trade at premiums of better than 50% to net asset value. At one point this year, they traded at premiums far higher.

The connection to the quant universe is that Renaissance Technologies, among the biggest quant hedge funds and certainly a very successful one, is the fourth-largest shareholder in both Cornerstone funds.

You have to scratch your head and ask: What is a quant fund doing paying a huge premium for an easily replicated portfolio?

The only logical answer would be that the stock-price characteristics have behaved in a way that makes Renaissance's computer -- which was obviously programmed by someone -- think these funds are a good thing to buy, regardless of the fact that their valuation is beyond absurd. (As an aside, I'm amazed the proprietors of this fund have not sold some shares at that huge premium for the benefit of their shareholders. But that's another topic.)

Meanwhile, a well-placed friend in the quant world pointed out that on any given day, 50% to 70% of stock trading is probably done using a quant strategy of some form. He suggested that folks should think about stocks as financial instruments, looking at volatility, correlation to other stocks, membership in an index and other such characteristics that pertain only to price action.

That's what the computer-driven models at quantitative funds do, setting aside the fundamental questions of what a company actually makes or does and what that business is really worth.

If all that is the case, it explains why, at the margin, the market seems to have become more of a commodity than it has been in the past.

Obviously, no group of operators can change the market's ultimate direction. But they certainly can distort it for a time.

My friend believes we're getting closer and closer to a moment when quants no longer rule daily trading, as their universe is losing participants that underperform. The ones that remain are desperate, trying feverishly to chase what's working. He contends that the higher the market goes and the faster it rallies, the more certain and ugly the collapse will be.


Complete article may be found at: http://articles.moneycentral.msn.co...les/MarketHackersRunningOutOfAmmo.aspx?page=1