Erratic Markets

Recently, I was asked the following question: Do you trade strictly by technical analysis or do you still try to watch the fundamentals as well?

For years I have differentiated between chart and technical analysis. Please allow me the courtesy of calling what I use as primarily 'chart' analysis, secondarily at times, technical analysis and when I think it is appropriate I throw in a bit of fundamental analysis. It is becoming more and more likely that the fundamental analyst may be destined for a lesser role than in the past. Increasingly, the large traders who once engaged in fundamental analysis are engaging in synthetic transactions based upon financial information. Financial trading today, far exceeds commodity trading, and seems to be ever increasing in that direction. For example, consider that a majority of business relationships are contractually linked to government indices like the Consumer Price Index (CPI). Labor contracts often link wage escalations to the CPI. Social Security payments are linked to the CPI. Commercial Real Estate leases are linked to the CPI. Cost of living increases and a variety of benefit programs often have CPI links. Is it any wonder that so many people hold their breath whenever the Federal Reserve Chairman belches?

However, there is a lot more to it than mere linkage and hot air from the Federal Reserve. The Federal Reserve and the government both fool around with the way the CPI calculation is made. The same is true for most of the major financial reports. It is because there are so many reports from so many bureaus and agencies, that it becomes almost impossible to perform fundamental analysis.

If one looks to the government reports on agricultural products, energy reserves, or mining production, it is no better. Producers lie to the government about inventories, intentions, and conditions. The farmer tells the government agent that he intends to plant corn, when all along he really intends to plant Soybeans. The rancher lies about his intentions to take his herds to the market. The natural gas companies lie about their ability to bring gas on line. Oil companies lie about their production and their reserves, and so it goes. Since reports are the major factor in most markets today, it is no wonder the markets behave so erratically. No one knows what to believe anymore.