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What Is Fundamentally Wrong With Fundamentals?

Can you guess which country has the best-performing global stock market so far in 2015? Germany? Japan? USA? Nope. The Business Insider came up with the “surprising” answer yesterday. It is Russia. Yes, Russia – a country in a state of war, whose currency has been suffering terribly against the US dollar and the euro. If we add Russia’s dependency on oil exports to the equation we get a pretty pessimistic picture. So, it turns out Russia has the best-performing stock market, despite all these extremely negative fundamentals. In “How The Euro Was (not) Saved” we showed you how Financial Times got it all wrong about EURUSD in May 2014. Now Russia’s MICEX is puzzling Business Insider. What is going on? There must be something wrong either with the markets or the fundamentals, don’t you think? Well, we have all heard that “the market is always right”, so it must be the fundamentals.
what is wrong with fundamentals
Technical analysts often hear that their analyses are flawed, because they are not supported by the fundamentals. Elliott Wave analysts hear that all the time as well. But let’s examine Russia’s MICEX stock market index. On March 13th, 2014, we published “You Do Not Have To Wait For Crimea”. Here is an excerpt from this article: “…we will be expecting the uptrend to resume and to go above 1900 in the long term. We will now use the opportunity to warn you, that the fundamentals are likely to be suggesting an endless bear market and the conflict will probably be at its worst. Prices should start rising despite all that.” The chart below shows how the forecast looked like back then. It was based only on the Elliott Wave Principle, ignoring all the fundamentals.
micex ignoring fundamentals
As visible, the Elliott Wave analysis suggested for a strong bullish reversal soon, because the whole decline since the 2011 top was nothing more than a natural (A)-(B)-(C) correction, with a triangle in wave (B). And we know that corrections are supposed to be fully retraced, when the larger trend resumes. We could not know how long the war was going to last, what sanctions the European Union was going to force on Russia or what the rating agencies were going to do with Russia’s credit ratings. But we did not need to know all this, because the chart was pretty clear and a chart is all an Elliott Wave analyst needs. Now, almost a year later, Russia’s MICEX looks like this:
micex 24.2.15 ignoring fundamentals
As you can see, the market agreed with the Elliott Wave forecast and moved strongly to the upside, regardless of the extremely negative fundamental outlook. So, does an Elliott Wave count have to agree with the fundamentals, in order to be taken seriously? It looks like the answer is ‘no’. In fact, MICEX gave us an excellent example of an accurate forecast, which ignored the fundamentals completely. If we were to ignore the technical picture and trust the fundamentals, we would have missed this whole 650-point rally. So, it turns out that the fundamentals would cause you to miss opportunities and make all the wrong decisions. It almost sounds like blasphemy, but this is just one among many other examples leading to this conclusion. What is so terribly wrong with fundamentals then?

The problem is people believe the logic that the market follows the fundamentals, while, in fact, the exact opposite is true. The market leads, the fundamentals follow. That is why fundamental analysts have never predicted a reversal. They simply project old data into the future as if the current trend will last forever. But the market has its own rules. It does not care about the fundamental, economic or geopolitical outlook. MICEX reached close to 1850 last week. It seems that taking out the tops of 2008 and 2011 is only a matter of time. Meanwhile, fundamental analysts warn investors not to fall in love with the Russian stock market, because “its fundamentals are still weak”. How long will it take for the fundamental picture to catch up with the market we cannot know. But, as demonstrated, we should not worry about it. It is irrelevant.



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