close icon

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.

Stay informed with our newsletter

Latest Elliott Wave analysis on different topics delivered to you weekly.

Privacy policy
You may also like:

How to Recognize a Leading Diagonal Pattern

One of the first Elliott Wave patterns we devoted an entire lesson to was the ending diagonal. It is relatively easy to recognize and very important, because it is usually followed by a sudden trend reversal. But if there is an ending diagonal, there must be a leading diagonal, as well, right? Yes, there is…

Read More »

Elliott Wave: The Devil Is In the Details

Probably the strongest argument critics use against the Elliott Wave Principle is that traders could often come up with two or more sometimes equally probable scenarios for the market’s future direction. That is true. In an environment filled with uncertainty, it is not always easy to pick just one single count. In fact, we suggest you…

Read More »

The Mischievous Running Flat Correction

In “Expanding Flat and How to Avoid Its Traps” we examined probably the most common type of flat correction the markets could offer. It is easy to spot and relatively easy to trade. However, if you are constantly expecting the expanding variety, you are not going to be prepared for its exotic, but deceptive cousin…

Read More »

Why Waiting For Confirmation? A Tale Of Greed

Every trader with enough experience in the market usually comes to the conclusion, that he needs a system of rules to go by. Rules, which should not let him abandon his discipline and get emotional while trading. Every trading methodology has one such system, which tells you when to go in and out of the market.…

Read More »

When Does an Elliott Wave Setup Fail?

As a rule, you should never give up on a trade, if it still has the potential to develop in your favor. But how to determine, if a trade is no longer valid? Fundamental market analysis does not provide such information at all. Conventional technical analysis rarely gives you a concrete level for the protective stop. Only…

Read More »

How to recognize an unreliable support?

“The support level is an area below the current price, which has prevented it from falling further in the past. That is why we would usually expect prices to bounce up from it again, when this support level is reached in the future.” This is the short definition of a support level and how traders…

Read More »

How To Read A Corrective Combination

Corrections are movements against the larger trend. So, when the correction is over, the larger trend should resume. Those of you, who are familiar with the Elliott Wave Principle, know that there are three types of corrective patterns – zig-zags, flats and triangles. In our Elliott Wave Patterns lesson we have discussed all three of them. Usually,…

Read More »

More analyses