I get a lot of questions regarding my posts on investment fundamentals. I think the consensus believes I don’t care about fundamental data. The fact is that can’t be further from the truth. My problem with fundamentals and why I don’t use them solely is that they do not provide buy or sell signals. In my process, technical information must first trigger a signal and then be confirmed by fundamental data. For example if a stock is breaking out of a bullish pattern, if the fundamentals don’t confirm the breakout, there is little need to commit investment capital since without it, the probability of a long-term successful investment decreases. In the short term (such as when day trading, scalping or short term swing trading), all bets are off and fundamental confirmation is worthless.
For the record, I do watch fundamental data which is why I am posting this next chart.
As you can see we have now reached the second highest level of the price-to-sales ratio of the SP500 stock index over the past 25 years. The only time in which the ratio was higher was at the end of the internet bubble in 2000. Notice how that prior peak in the ratio took 2 years to eventually resolve to the downside. The fact is in today’s market, on virtually every (fundamental and technical) metric I watch, not just the price-to-sales ratio, the US stock market is way over-stretched. But until technicals (price data) provides a sell signal, we need to not fight the trend and accept the fact the markets can continue get even more stretched. At tops and bottoms fundamentals mean little, emotions and feelings drive the markets, not common sense.