Analysts, Fundamentals, Denial and the Wal-Mart Indicator

January 4, 2006 at 12:02 pm by Will

The cat is out of the bag. Wal-Mart’s holiday sales numbers are coming in soft, and the press is running around like a chicken with its head cut off, frantically attaching reasons to the weak numbers, post-facto.

How did a simple Loosiana boy know in early December that Wal-Mart would have a disappointing holiday season when all the seven-digit analysts were predicting blowout sales?

As much as I’d like to claim some special insight or magical intuition, the truth is much simpler– I’ve just learned over the years to believe what I observe over what I’m told.

People say believe half of what you see,
Son, and none of what you hear…
I Heard It Through The Grapevine (Marvin Gaye)

Believing what you are told when it contradicts what you know to be true is a form of denial, the psychological phenomenon of overriding what we know with what we wish . It can sabotage our lives over and over, affecting everything from personal relationships to investment decisions. As for personal relationships, I can wear blinders and ignore the truth with the best of ‘em, but when it comes to the market and especially to so-called experts, I’ve been fortunate enough to have developed a highly-refined BS meter.

Watch the Fundamentals, Trade the Technicals

The “news” about Wal-Mart is a perfect example of why my trades are based on price and volume action (i.e. technicals) and never on so-called “fundamental research.” The blather that analysts generally put out is marketing, not research. Their job is to generate revenue for their firm, not to provide objective information to the investing public.

The only fundamental research that means anything is the research you do yourself. I don’t mean looking up the earnings estimates listed by the above hacks and calculating yourself a 12-month forward P/E. And I certainly don’t mean listening to what “they say” on TV. You may as well ask your magic 8-ball. I’m talking about thinking for yourself and noticing things like

  • K-Marts still have narrow, dirty aisles, half-empty shelves, no cashiers and look more like overpriced Goodwill stores than underpriced Targets

  • There’s a reason everyone calls it “Circuit Sh**ty”

  • The Jeep Commander is five years too late, trying to take market share in a market that doesn’t exist anymore

  • Rockport shoes cost twice as much as some others, but last more than twice as long. That’s value.

  • The lemmings who make one chain restaurant the “one to be seen at” today will all move like a group of Charlie Brown kids to the next one that comes out with a good ad campaign, and the earnings estimates for the first restaurant won’t be worth the pixels they’re printed on.

Keeping your eyes open can show you when the stories on the wires and the numbers regurgitated by the talking heads are simply an elaborate form of pump-and-dump. It gives you an edge. If you hear that a company is doing well, but you can walk around the place and see for yourself that it’s not, you’ve got some inside information.

What you do with that information is where technicals come in. You may know for a fact that there is a divergence between reality and expectations on a certain company, and that its stock will break strongly in the direction of reality at some point. Problem is, you have no idea when. You can join the “buy and hope” crowd, and you’ll eventually be right. But between now and then you could experience a significant drawdown (be sure to factor in the cost of treating the ulcers and hypertension this causes) and besides, your money’s all locked up. Having your money in purgatory is a cost that’s more difficult to quantify, but a cost nonetheless.

Hold your money. Watch the price. Watch the volume. Watch the trend. Focus on the basics– don’t get fooled by esoteric technical hoo-hah. When you see the volume drying up, the price noodling around, and then a trend reversal (not an approaching reversal, or you’ll get burned), wait patiently for the first minor pullback into that new trend, then trade the resumption of the trend, as an old buddy used to say, with great vigor!

Cheers and best of luck with your trading in the new year. :-)

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