How does the market model incorporate fundamental data, including valuations?
FUNDAMENTAL DATA CAN SHOW SIGNS OF STRESS
When market participants believe recession odds are increasing, they become more concerned about future bond defaults. Concerns about increasing defaults tend to reduce demand for riskier, higher-yielding bonds and increase demand for safer, lower-yielding U.S. government bonds. The CCM Market Model tracks numerous forms of hard data from the credit and bond markets that provide additional insight into the odds of a significant and painful stock market decline. In many historical instances, stress shows up in the data associated with credit and bonds prior to observable deterioration in data associated with the stock market. The model also tracks other forms of fundamental data, such as home sales and the unemployment rate, allowing us to monitor the health of the U.S. economy and better assess investment risk versus potential reward.
MARKETS ARE AWARE OF ALL FUNDAMENTALS, including valuations
The CCM Market Model monitors market profiles, which reflect the net aggregate opinion of all market participants. The net aggregate opinion of all market participants, current trends, and current data incorporate every conceivable piece of fundamental data, including valuations, on every conceivable timeframe.
There is nothing we can think of in the “well, what about this” realm that markets have not considered, including the odds of an almost-infinite number of “what if” scenarios or events. Markets move based on the net aggregate opinion of all participants:
Weighted Bearish Views + Weighted Bullish Views = Net Aggregate Opinion
Since every trade has a buyer and a seller, prices are set by conviction:
Weighted Bullish Conviction + Weighted Bearish Conviction = Net Aggregate Conviction
There is not a single piece of fundamental data that has not been considered by the market, which means all of the fundamental data (good and bad) is captured in the charts and hard data tracked by the CCM Market Model.
Let’s assume the only factor driving markets was valuations. Since valuations are highly subjective based on individual perspectives and biases, the same equation applies:
Weighted Bullish Views + Weighted Bearish Views = Net View Of Valuations
When the net aggregate opinion of all market participants is bullish, the result is bullish trends. When the net aggregate opinion of all market participants is mixed or neutral, the result is sideways consolidation, ranges, or indecisive markets. When the net aggregate opinion of all market participants is bearish, the result is downtrends.
In short, the charts reflect all past fundamentals, present fundamentals, and anticipated future fundamentals on countless time horizons.