Technicals over fundamentals

Technicals refers to data based on price and volume: patterns, momentum, fund flows, sentiment, demand versus supply and measures of aggregate market breadth.

Fundamentals is a reference to asset valuations built on company financials, macroeconomic analysis and geopolitical context, designed to determine intrinsic value. An important distinction is that intrinsic value and market value are not usually the same thing.

The conventional wisdom is that technicals drive short-term price action while fundamentals define longer-term potential. That’s the part worth examining. Because the current technicals-over-fundamentals experience has not been a short-term condition. It has dominated for quite a while now.

Momentum, historically one of the top performing market factors, helps explain why it has endured. But it doesn’t explain why this has lasted so long.

None of this happened in isolation. It built. It persisted because it was working. You could see it evolve in real time. Equities have recently come off their highs, but only marginally, despite a steady drumbeat of uncertainty that would normally matter more.

Cheap funding over a prolonged period made almost any asset look workable. The expectations, priced in well ahead of proof, that AI will meaningfully boost productivity added another layer. Pro-business policy support helped reinforce it all.

Investors, conditioned across multiple crises dating back to the global financial crisis, learned to stay invested and to buy dips. It paid them well, so they kept doing it. Central banks and governments reinforced that behaviour by repeatedly stepping in to support stressed markets. Whether they can still afford to do that, and whether anyone should count on it, is an open question.

Passive investing

Alongside that, a broad and genuine fear of missing out took hold. Passive investing — by definition indifferent to fundamentals — became a dominant force. A growing share of capital now moves without asking what something is worth. It works well in a rising market, where most assets perform, but it’s unproven in a selective one — something fixed income investors learned painfully over the last 10 years.

Many participants began treating the market as a casino rather than an investment vehicle. And the persistent belief that there is no alternative (sometimes referred to as TINA), remained intact. Individually, those forces come and go. Together, they compound. What started as short term became medium term and now looks structural.

A colleague of mine said recently that this is a market “priced for an outcome that does not include a recession.” Those few words say a lot.

Note that this investor behaviour is not limited to equities. All investable asset boats have risen with this tide, including cryptocurrencies, bonds, music royalties, gold and most others. This is not a sector story. It’s a regime.

The DNA of that regime is visible in valuations. Good and bad assets have risen and converged in ways fundamentals wouldn’t support. The spread between comparable credits and comparable companies has narrowed as though the difference between them stopped mattering. It hasn’t.

Think of it as a Coke and a Pepsi trading at the same valuation. That wouldn’t survive fundamental scrutiny. Those compressions will reverse when the tone changes. When it does, it will feel like a big deal.

Fundamentals will reassert

You won’t find predictions here. But accepting the regime means accepting what follows when the forces supporting it weaken — which they will.

A market priced for an outcome that does not include a recession will react when that assumption is challenged. Fundamentals will reassert. Assets will be repriced by a different set of filters, carried more by cash flows than optimism. Differentiation will return, likely quickly, among assets, sectors and countries that didn’t seem to change at all.

The risk isn’t just that prices fall. It’s that the differences between assets start to matter again, quickly.

Accepting that framework shifted how we’re operating. It allowed us to stay invested, more cautiously, in a way that would have been difficult if we had simply concluded that assets were too expensive to own.

It improved how we navigated elevated volatility and the high-impact headlines traders refer to as tape bombs. And it gave us a way to participate in a market that compresses differences between assets, while knowing those differences will matter again.

It also shifted how we’re thinking about risk. When expensive assets may or may not stay that way, quality and liquidity move up the priority list. So does downside protection, lower correlation and return stability.

We haven’t abandoned fundamentals or ignored technicals. We’ve accepted which one is leading, for now, and positioned accordingly.

That framework isn’t proprietary. Technicals over fundamentals is an observation, not a strategy. And it’s available to anyone willing to name it. The forces that built this regime are not permanent. Cheap funding doesn’t last. Policy support has limits. Most people lose at the casino. And there are indeed real alternatives, if you’re not greedy.

Make a plan for now — and for when the inertia subsides.

Because this only works while current behaviour holds. When that changes, the differences between assets and between investors will show up quickly.

Name the regime. Respect it. But don’t assume it lasts.​​​​​​​​​​​​​​​​

Kevin Foley is managing director, institutional accounts, at Canadian asset manager YTM Capital. He serves on several foundation boards and investment committees.