Why does the Stock Market not follow the economy or the company's fundamentals?

We all probably have encountered this question during our stock trading plays and had became victims of NEWS channels expressing how large the economy is growing, how company ABC has doubled its revenue, or its exact reverse of bad news. We traded accordingly and then BOOM! the market went the exact opposite direction. 

You will often get the advice or blame yourself that it is because you lacked further research on the company. Or maybe, you will do some DaVinci Code level correlation trying to find and map the incident to any NEWS that could have made the market swing that way and confirm anything you find as "the fact" which you discovered too late. And don't get me started on people bragging in public groups and forums about their "lucky" trade and stating that its because they knew about Fact-X which only a few like them know, yet they hide to the public the rest of the reds in their portfolio.

I will not give you the same BS and admit that the stock market has never been nice to me! I have tried the PSE, US Stocks and Forex and I have incurred losses mostly applying the same techniques known by the majority. I have learned a lot from free online resources just like the majority and is part of that +90% losing rate of the majority[1]. So here is my learning regarding to that... "If you do what the majority does, don't expect to produce something different!" or in the case of Einstein...

Wait! did he just say more than 90% of the traders lose??? Yes that is so true and you should be aware of that! The reason you win in the stock market mostly is not because the company you invested in grew, but because someone lost the opportunity of earning to you! and the more you earn means the more people you managed to grab these opportunities from! That is what's known to the 10% of the players who work around that knowledge and are potentially the cause most of the manipulations. But don't worry, the answer to the question above is NOT a plain boring answer called "manipulation". If you are interested to know how rigged the Philippine Stocks Exchange is, please check this article.

Now if you've seen our site The MyPinoy Network, you will notice that it does not utilize the same tools used in the market. This is our way of "doing something different" and not following the tools and techniques of the 90%. It uses a bot/processor called ASTRA (Automated Stock Trading Report Analyzer) which dissects the day to day trends and tries to make a more "xensible" (with an x) way of understanding a particular stock trend. It is however never gonna be designed to analyze fundamentals like P/E Ratio, ROI, EPS, etc. It does not believe in fundamentals... at all! Its not that we (who are working on the project) do not value fundamentals... its just that ASTRA is made to be skeptic about it or even see it as senseless. To make it easier, lets just say ASTRA is a technical trader!

Battle of two Schools

There are basically 2 conflicting school of thought who play the stock market. Those who use fundamentals and those who use technical analysis. Fundamentalists look into the strength of a company and the market environment before making a decision. A technical trader however is like that guy who just sits on the bench, looking at the foot traffic all day observing where the people buy their stuffs and determine which business is trending or dying. To simplify, the Fundamentalists are investor while the Technical Analysts are traders. Since fundamentalists knows more on the internals (at least based on the company's prospectus and quarterly data) and the direction of the economy, then that means the market should easily be predicted by them and they will be most of the time correct! then why is that not the case recently?

So are fundamentals dead? Ok let me explain it this way... one of the most surprising documentary that changed my view on the stock market is Betting on Zero (NETFLIX) which I will recommend to anyone. It is a documentary of famous Short Sell Activist Bill Ackman exposing how Multilevel Marketing "Herbalife" does not really have sound fundamentals and it is living off at the expense of its new members (Pyramiding). All this however failed to bear fruit as Carl Ichan uses his endless supply of wealth to keep the company afloat just to prove that Bill Ackman whom he hates would fail and be humiliated. This proves one truth! fundamentals are useless and a company's survival and strength are just as strong as whoever is "investing" or "manipulating" its numbers. Amazon is losing money in its shipping and cheap price products selling at a lost? no problem! once it kills all those small businesses that are losing market share, Amazon will be the lone survivor! also it gets fund from its other money generating business (AWS CLOUD)! but like I said, we will not use that simple explanation.

So where is the market correlated then if its not "Fundamentals"? Its very simple really, remember we explained the two school of thought? The market is like Yin and Yang, supply and demand, bulls and bears, fundamentalist vs technical traders. Each one force competes to get the best deal or "correct" price. But is this mix always 50-50 balanced? no its not unless we call on Thanos right?


Why it works before? well... because there are less traders! and by traders I mean technical analysts. The stock market used to be "A rich man's game" remember? Rich men with strong education usually use "logic" as a deciding factor. WHAT??? So are you saying the technical traders are stupid??? No! of course not! The technical traders work on a different aspect of intelligence... successful fundamentalist use their I.Q. as their strength, successful technical traders use E.Q. as their strength. 

Now imagine a new stock market game, the players are composed of 9 fundamentalists and 1 technical trader... which kind of trades do you think will happen mostly in the market? Fundamentally sound trades of course! here comes the new millennia and everyone has access to the stock market! fundamentals are too tedious to learn and perform than just sitting on a bench, watch where people go and just "follow the market"... now let's play a new game! this time, a market where there is only 1 fundamentalist and 9 technical traders... you might yell after losing how screwed and emotionally driven the game is but you are right! Just like any political and conflict based game-boards I have played, the fun and diversity is made by the player mix! when you play against emotionally driven people, the game becomes emotional and political as well. When I play with logical and calculating people, the same game becomes a battle of wits.



The stock market is no different and the conflicting market force just proves what kind of people are inside specific markets. So what player mix is in the PSE? it is definitely emotions driven and is why technical analysis is for us, the only way to really play the game. Also, not insulting the Philippine based companies, but with our global image for corruption, lack of process, standards and adherence to the law... continuous violations with no real punishments, scandalous global incidents such as AMLA violations, environmental destruction, questionable affiliations, trade relations and more... can one truly trust what these companies show in their quarterly report figures? I mean seriously? even we as Filipinos ourselves basically know most of these companies are not really a reflection of how they try so desperately to "market" themselves to be.

References:
[1]Shocking But True: 90% People Lose Money In Stocks - Research & Ranking