5 June 2013
It was really ironic that this was thrown at me again last week. The same old argument...
Ironic because, unbeknown to them, the Dollar/Rand was in the process of validating my medium term forecast issued back in January 2013. To a tee.
But more on that later. This was was the argument thrown at me last week. Twice in fact:-
“The problem with your analysis is that it is looking purely at the technicals, but it doesn’t take into account the underlying fundamentals, news and data that is being released into the market.”
Now, on face value, this looks like a valid argument, but actually, with respect, this is a COMPLETE MYTH!.
But I can understand where they are coming from – this was a belief I held myself for many years before understanding what actually moves markets.
Back in 2003/2004 (a couple of years after the Rand had been strengthening following the crazy spike up to 13.85), fundamentals were screaming out...
....that the country could not survive with a Rand below 8.30 to the Dollar,
....that exporters and local manufacturers were being crippled –
Our own in-depth analysis had shown this very clearly (see our Rand Report July 2004).
Fundamentally, the writing was on the wall.
This had gone too far, and we firmly believed a turn was imminent – it only needed a trigger to see a reversal.
“Ah,” we said, in mid-2003, “just wait until the next Quarterly Bulletin is released, showing the Current Account had turned negative, and by record levels. Then all the hot money will run, and the Rand will weaken.”
Sure enough 2nd Quarter 2003 data showed a sharp deterioration to record a deficit of R34bn – the worst in history. And it continued to deteriorate throughout 2004.
But did the market care?
No, despite all this, all the bad fundamentals, the damage to the export sector, manufacturing and the economy, it continued to grind stronger and stronger, month after month.
And with every bit of bad news of various fundamentals, we thought “OK, this will surely trigger a reversal, and put some rationality into the market.”
...like a triple dose of red cooldrink to an overtired, hyperactive kid.
On it went, defying all rational common sense and fundamental reasoning, finally only running out of steam at 5.60 at the end of December 2004 after a 3 year party of note.
It took us a long time and plenty of school fees to realize what the market is – and what it is not.
Economists like to think so, but what they fail to understand is that economic data, news and fundamentals are all telling us what persons have already done....
.
It is all about history - whether the data is one quarter old, one month old or one week old.
By the time this news is released, most may still be negative… BUT they may have turned positive.
The news release doesn’t tell you anything about how persons are feeling or acting right now
Or what they are likely to do.
All it is telling you is how most persons had acted – some time in the past.
Yet economists and most persons exposed to the Rand continue to see the market as a reflection of economic data, flooding themselves with as much news and economic data as possible to help them see where it is heading today, this week, next month, next year.
And, amongst this plethora of information, there is conflicting data (such as the current record high stock prices yet virtually no growth). And not only that, but for any data release, there are always conflicting interpretations.
For instance, is an increase in PPI or CPI good or bad?
- Well, it is good, because it shows there is a healthy demand in the economy.
- But it is bad, because it erodes wealth and spending power, and will prompt an increase in interest rates.
OK, but is an increase in interest rates good or bad?
- Is it good, because it will attract foreign capital flows and promote savings?
- Or is it bad, because it will reduce spending and throttle business and credit?
As you can see, for each of these questions, there is a positive and a negative answer, depending on your focus.
This being so, how in the world can a fundamental analyst absorb all this data and then decide what the market is going to do based on how everyone is likely to react?
It is like driving down the road looking in your rearview mirror,
and reacting swiftly to that huge pothole you have suddenly seen appearing – some 200 meters back...
Swerving or braking sharply now won’t help if you missed it, and certainly won’t help if your tyre is already shredded and your rim buckled and bent.
So if the market is not a reflection of economic data, what is it?
Well, let’s go back for a second to the example of the bad GDP release. This is telling us what the sum total of persons in the economy faired.
What they did do. Or did not do.
Now, what made those person do what they did back then?
Their emotions. Their sentiment.
We all tend to make decisions emotionally – and then rationalize them afterwards with logic.
BUT, it takes time for this to take effect in an economy, and evidence itself in good or bad news and data releases.
For instance, if I am a business owner and am bearish, and am looking to scale down, it will take time to retrench, or reduce operations. And these changes will reflect in future data releases.
But, by contrast, the market picks up this change in mass sentiment immediately – as and when it happens. It has no lag effect in it. If persons are negative, they will sell, if they are positive, they will buy.
every second of every day – to an accuracy of 4 decimal places.
What we are looking at when we see a price chart of the Rand (or any other financial market) is a near-perfect reflection of the underlying mass sentiment, the human psychology driving that market – at that very point in time (not a month or quarter later as with news or data releases).
This is so critical to understanding the markets.
What we have learnt, firmly believe - and have proved - is that:
- The markets reflect in real time this mass human sentiment as it flow from one extreme to the other, from hope and greed to fear and despair, and back again.
- Just as history repeats itself – because we all tend to do the same things in similar circumstances – so these patterns of human behaviour and emotion repeat themselves in smaller and larger time frames.
Through knowing this, and by being able to see how similar patterns played out in the past, we can not only pick up a change in sentiment very early on, but we can also have a high degree of certainty as to where a current pattern is likely to complete, based on how such a wave of sentiment has played out in the past to its point of exhaustion or extreme.
Just as we did with the current move of the Rand, which we predicted using our pattern matching technology (not fundamentals) way back in mid-January 2013 – just 2 weeks after the market had bottomed out at 8.4110.
As you can see from the chart below, our clients were given an early heads up that a) the market had likely bottomed out at 8.4110 and b) it was likely to rise into the 9.50 to 10.30 area over the next few months before completing this pattern.
And, this is exactly what happened, with the Rand making a high of 10.2830 on the last day of May 2013.
This is what understanding what actually moves the markets can do for you.
Instead of having a data overload and trying to filter it, understand it, and guess what effect it will have going forward – like so many economists, market experts and financial news reports attempt to do – we have the market itself telling us what it is doing, and what it is most likely to do going forward – as accurately interpreted by our forecasting technology.
And yes, it has fully taken into account – some weeks or months ago – the effect of today’s news headlines and data releases.
Understand the debunking of this myth, and you understand what 95% of persons don’t.
You will not only see the market in a new light, but free yourself from information overload, reduce your stress levels, and allow yourself to focus on your core business with greater confidence and certainty.
To get the latest forecasts on the Dollar/Rand, Euro/Rand or Pound/Rand subscribe risk-free here now for a full 60 days.
