Fundamental, Technical, Or Both by Markos Katsanos
An Unlikely Marriage
Forecasting models tend to rely either on fundamental
or technical analysis to select stocks. Is one superior to
the other? Find out here.
Fundamental and technical analysis methods
offer radically different approaches to market
forecasting. Although they both observe equities,
fundamental analysts study underlying factors
driving the market, while technical analysts focus
on the market itself.
The fundamental approach canít be used for shortterm
trading because it lacks a timing factor. No matter
how good your fundamental model is, it wonít tell
you when to buy or sell. You will still need something
to help you time your entries & exits.
It is no coincidence that most fund managers fail to
beat their benchmark index. According to data from
Standard & Poorís (S&P) annual fund performance
scorecard, about 84% of US actively managed stock
funds in 2011 and 66% in 2012 underperformed the
S&P indexes representing the market segment they
invest in. Interestingly, as time periods get longer,
more funds underperform.
Why have the professional money managers done
so poorly? While a few successful fund managers ó including George Sorosí Quantum hedge fund ó have started using technical analysis (according
to The Economist), many fund managers still rely on
fundamental analysis for their stock picking. This also
implies something for our technical trading systems.
Since trading is a zero-sum game, the various funds
that lose money must be supplying an inexhaustible
supply of profits to anyone who uses a different or
opposite approach to their system.
According to my personal research in designing and backtesting technical systems and other ideas, I
have come to the conclusion that a transaction timing
model based on technical conditions can consistently
outperform any passive investment scheme. I havenít,
however, seen any backtesting performance data on
systems using fundamental criteria. This led me to
design such a system, backtest it, and compare the
results to a technical system. I am also going to investigate
the viability of combining both approaches
in a hybrid system.