How Markets React to Fundamentals

Freely traded markets, such as those for stocks, futures, and options, don't always interpret fundamental news in a straight forward manner.

Today, for example, ZachStocks had a post about Burger King. BKC just reported its earnings, and it greatly exceeded management's forecast.

You might expect that the stock would rise. Instead, the stock went down sharply. Zach gives the explanation that, because their predictions were so far off, BKC management lost credibility with investors.

Another example of "funny"mentals is the presidential stock market effect I wrote about on Wednesday.

While the conventional wisdom is that democrats are bad for business, the stock market does better when a democrat wins.

Investors already expect the worst from the democrat, so there is no downside, only the upside. This is reversed for the republican candidate.

This is what makes trying to time the market based on fundamental information very tricky. Not only do you need accurate, timely information, but you have to "out think" other market participants.

Like chess, you have to think many moves ahead, and try to piece together a puzzle based not only on what has just happened, but how other players will react to the news, what action will they take, etc.

This is why I only use fundamental information for two things: to choose good, solid stocks and (to a lesser extent) to see if they are reasonably priced.

Then, I buy my initial positions in the stocks, and then turn over the trading of the stocks to my mathematical formula which I write about in my book Stock Trading Riches.

My formula gets me to buy low and sell high based on pure, objective mathematics - not by trying to guess what people are thinking.