The theory of fundamental market analysis operates on a simple premise: Bullish outside factors cause a rise in a market's price. And bearish factors trigger declines.
In reality, however, the story often doesn't go as planned. Take, for example, the history of sugar prices over the last year. First, there was the mass hysteria surrounding "Peak Sugar" in late 2009. At the time, sugar prices were orbiting their highest level in 28 years. And, according to the mainstream experts, a critical shortfall in cane crops was set to keep the market's bullish fire alive. Here, the following news item from December 17, 2009, set the scene:
"Sugar futures set a record peak with investor appetite fed by supply concerns that have created global deficits. Soft commodities have the added impetus of a classic supply-induced rally. We know there will be a global deficit in sugar so the fundamentals are very, very bullish." (Associated Press)
YET-- from its late December 2009 high, the sugar market turned down in a violent 50% selloff before reclaiming the upside in September 2010. By then, the supposedly bullish "global deficit" fears were missing from mainstream analysis. On the contrary, the focus shifted to how "excess supply" was now supposed to keep prices depressed:
"Stock prices of sugar producers have crashed since January. The sugar sector is facing a downward price cycle... given the expectaiton of excess sugar supply." (Economic Times, September 1, 2010)
But again, defying the bearish supply call, sugar prices took to the upside in early September 2010 to embark on the powerful uptrend that continues to this day.
When you rely strictly on "fundamentals," you're simply extrapolating today's trend into tomorrow. You have no way of knowing when that trend may change; in fact, you don't expect it to change. EWI's chief commodity analyst and Futures Junctures Service editor Jeffrey Kennedy, on the other hand, stayed in front of both turns in sugar -- by focusing on the market's internal Elliott wave patterns. Here, the following archive of Jeffrey's analysis stands in stark contrast to the trend-extrapolating blunders described above:
- January 25, 2010, Daily Futures Junctures: "The upcoming market top should set the stage for a large and time consuming fall."
AND --
- September 2010 Monthly Futures Junctures: "The internal subdivisions of the price moves argue for additional strength in the months to come. In fact, I wouldn't be surprised to see strength in many of the softs markets to persist."