Matt Blackman

Stock Screen: Price Momentum + Fundamentals = Profits

Interesting analysis but Mark Barath misses one key point. Fundamentals lag price by at least three months and in some cases more, especially at key turning points. In other words, investors (or traders) who focus on the fundamentals and wait for them to give them an entry signal in the recovery or an exit signal in a slowdown will be severely punished.

Homebuilders are an excellent example. The following chart shows homebuilder stocks leading up to a peak in 2005 followed by a big breakdown. But as you see from the lower subgraph showing earnings growth, GPE (growth to PE) and EPS (earnings per share) did not show signs of real trouble until the price of the homebuilders index had been cut in half. (See Figure 5 tradesystemguru.com/co... ).

My research has consistently shown that while fundamentals provide useful confirmation in an uptrend (and weakening fundamentals confirmation of a bear market), price is the leading indicator and ignoring a price surge or breakdown while waiting for the fundamentals to tell you what to do can be an extremely costly practice.