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One of the first important points to keep in mind about fundamentals is that they are changing constantly. What you read in the Wall Street Journal or a magazine or a newsletter regarding market fundamentals can be outdated tomorrow or by next week.
Also remember that many of the numbers released in government or other reports and regarded as fundamentals are based on estimates. Even the most thorough government effort to get precise figures usually comes down to official estimates and educated guesses. Whether they are factually correct or not, they are the numbers that economists and traders have to deal with, and you will have to accept them for what they are even if you skeptical about their accuracy.
Not only do the numbers change constantly with each new report or update but market conditions also are always changing. A given number that may be bullish in one set of circumstances may draw a much different reaction in other circumstances. That is because the market may have gotten used to what was considered a bullish figure originally and now accepts the number as a “normal” figure or because the demand situation has changed for the same amount of supply.
Equally as important as the actual estimates are traders’ perception of them based on their expectations. Traders may expect to see a certain fundamental number in a report and set prices accordingly. For example, if traders expect a crop report to show a bullish number, they may bid up prices ahead of the report. Then by the time the report is released with that number, the bullishness may have been exhausted, and a report that might have been considered bullish gets a bearish price response instead. That’s the “buy the rumor, sell the fact” reaction discussed in the tutorial on basic trading concepts.
There are a couple of other points that should be made about fundamentals in general:
Because of the nature of fundamentals and the difficulty in getting accurate information and then interpreting it correctly, many traders have turned to technical analysis addresses, the study of price action that incorporates all of the fundamental factors affecting prices. Price is the composite reflection of every news event and/or other fundamental known to all traders.
Also remember that many of the numbers released in government or other reports and regarded as fundamentals are based on estimates. Even the most thorough government effort to get precise figures usually comes down to official estimates and educated guesses. Whether they are factually correct or not, they are the numbers that economists and traders have to deal with, and you will have to accept them for what they are even if you skeptical about their accuracy.
Not only do the numbers change constantly with each new report or update but market conditions also are always changing. A given number that may be bullish in one set of circumstances may draw a much different reaction in other circumstances. That is because the market may have gotten used to what was considered a bullish figure originally and now accepts the number as a “normal” figure or because the demand situation has changed for the same amount of supply.
Equally as important as the actual estimates are traders’ perception of them based on their expectations. Traders may expect to see a certain fundamental number in a report and set prices accordingly. For example, if traders expect a crop report to show a bullish number, they may bid up prices ahead of the report. Then by the time the report is released with that number, the bullishness may have been exhausted, and a report that might have been considered bullish gets a bearish price response instead. That’s the “buy the rumor, sell the fact” reaction discussed in the tutorial on basic trading concepts.
There are a couple of other points that should be made about fundamentals in general:
- Demand is not the same as consumption. What is consumed is one thing; what is the demand for the available supply is quite another.
- You may be exactly right about a fundamental but your timing may be off. For example, maybe you have the final corn production figure pegged exactly in August but the market isn’t in tune with that number. You may just be too early.
- Any number of events can cause fundamental surprises overnight. Weather, natural disasters, political disruptions or many other events may change the whole complexion of a market, and you always need to take into account the possibility of such sudden shifts in the outlook.
Because of the nature of fundamentals and the difficulty in getting accurate information and then interpreting it correctly, many traders have turned to technical analysis addresses, the study of price action that incorporates all of the fundamental factors affecting prices. Price is the composite reflection of every news event and/or other fundamental known to all traders.
