“Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction.”
— Albert Einstein
2 July 2011
Perusing the commentary available early this morning I came across an excellent piece by Doug Short at DShort.com. While certainly more fundamental than I use in my own trading, Doug makes a very credible argument regarding the equity market’s current overvaluation using something called the Q ratio…(yeah…me neither)…
After lots of mathematical machinations, Doug suggests the US equity market is currently overvalued to the tune of 48-61%.
Hmmm… The equity market is currently overvalued by 50% or more.
Now given that I have my own misgivings about this next upleg based on the charts, I’m struck by any well reasoned fundamental analysis that suggests the renewed bull fever may be a bit pre-mature. Nevertheless, I came away from the article wondering, “How is one to trade that information?”
To be fair, Doug didn’t suggest a trade in the article.
In fact, he took pains to point out the fact that the information is less useful to those with shorter time horizons. Then again, from what I can tell (having read all of one article by him) Doug is a practical fellow and as such, knows that while the information is significant it is also nebulous (will the pattern of the past reassert leading us to roll over here?) and suffers from data lag of at least 3 months.
What is my fairly extended (for a blog post) point here?
Just this… There’s outstanding fundamental (even though complicated) analysis done by some very talented folks all around. Pick your medium… The Wall Street Journal, Stocktwits, TheStreet, Barron’s, Reddit, SeekingAlpha, etc. I continue to be amazed at the variety, depth and breadth of fundamental information available to independent traders and investors. And yet, with all of this great work, there remains one inescapable fact… One truth, that run as you will, each person seeking to profit from such work MUST, ultimately, come to his or her market and deal with the realities therein.
In my own analysis, I see reasons to be long here…and I see just as many (if not more) reasons to look for a good short entry. As a trained attorney I find myself in this position quite often (capable of seeing and arguing the merits of all sides equally). As a result, I’m happy that my trading decisions bypass this dichotomy and go straight to the heart of the matter…
Price. More specifically, price action.
If you’ve followed my work for more than 10 minutes, you know that I believe in the veracity of price action. It’s the result of thousands of forces and feelings being expressed in a singular way. It’s 1 of 3 simple answers to a never ending question.
Knowing which to say… and, more important, when to say it, changed my trading results for the better.
And it will do the same for you and your account.
This post was originally published 2 July 2011
Updated 2 January 2017