Robert Pretcher’s definitions and observations regarding fundamental analysis

Robert Pretcher’s definitions and observations regarding fundamental analysis are the following:

1. “First let’s define ‘technical’ versus ‘fundamental’ data…technical data is that which is generated by the action of the market under study.”

2. “The main problem with fundamental analysis is that its indicators are removed from the market itself. The analyst assumes causality between external events and market movements, a concept which is almost certainly false. But, just as important, and less recognized, is that fundamental analysis almost always requires a forecast of the fundamental data itself before conclusions about the market are drawn. The analyst is then forced to take a second step in coming to a conclusion about how those forecasted events will affect the markets! Technicians only have one step to take, which gives them an edge right off the bat. Their main advantage is that they don’t have to forecast their indicators.”

3. “What’s worse, even the fundamentalists’ second step is probably a process built on quicksand.… The most common application of fundamental analysis is estimating companies’ earnings for both the current year and next year, and recommending stocks on that basis.… And the record on that basis alone is very poor, as Barron’s pointed out in a June 4 article, which showed that earnings estimates averaged 18% error in the 30 DJIA stocks for any year already completed and 54% error for the year ahead. The weakest link, however, is the assumption that correct earnings estimates are a basis for choosing stock market winners. According to a table in the same Barron’s article, a purchase of the 10 DJIA stocks with the best earnings estimates would have produced a 10-year cumulative gain of 40.5%, while choosing the 10 DJIA with the worst earnings estimates would have produced a whopping 142.50% gain.”

Quoted from the book “Technical Analysis of Stock Trends by Edward & Magee” 

Link: http://is.gd/qwSmO6 (Amazon, India)