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THE LIMITATIONS OF FUNDAMENTAL ANALYSIS:

|Includes: HP Inc. (HPQ)

Look at HP, the new Hewlett Packard entity. It is giving a new BUY SIGNAL.

Here is the first of an exchange that I will be developing and expanding. It is in response to a post in which I challenged readers to spend less time studying obscure numbers presented and mispresented by companies whose goal was largely subterfuge (annual reports) and learn to develop a new way of seeing, developing their right brains and their ability to see visually.

One reader responded: "Yeah, why waste time analyzing numbers, when you can squint at squiggly lines and just "see" the future! Voodoo trumps analysis every time!"

Here is my response to him:

Actually, all those 'squiggly lines' are also numbers. The question is: do you want to analyze numbers that interpret stock market action directly or numbers that analyze a business but do not directly analyze the stock market?

Business fundamentals DO analyze the business; but they do not analyze the stock market. There is no direct causal connection between a stock's fundamental progress and the behavior of that company's stock.

Think about that. I will write it again: THERE IS NO DIRECT CAUSAL CONNECTION BETWEEN A STOCK'S FUNDAMENTAL PROGRESS AND THE BEHAVIOR OF THAT COMPANY'S STOCK. Companies with growing earnings or with superior cash flow (whichever yardstick you like to use) TEND to have appreciating stocks. But this is not a law -- it is a tendency. Some stocks rally; some stocks sink, even with growing earnings or any kind of fundamental 'progress'. You are betting on tendencies, but not on real numerical descriptons of stock market behaviors.

My numbers analyze stock market behaviors directly. You see, fundamental analysis is the voodoo science. Because a company's fundamentals and its stock price are not connected causally. Investor's bet tendencies only, assuming and defending a causal connection that is not there. A company with bad earnings might go through the roof because of a take-over bid -- but fundamentals will show only a floundering company. They will never predict take-over movement.

But my numbers (those 'squiggly lines' you laugh at) will show accumulation of shares, whatever the fundamentals show.

My voodoo analysis describes and investigates stock performance; the essential understanding is that stock performance includes or reflects everything known or thought -- rumors too -- about the company. And also emotions of investors, either in accumulation or in distribution.

Markets are not rational. Understanding everything rational about the company will not guarantee one success -- BECAUSE markets are not simply rational adding machines. Markets are emotional also.

My voodoo numbers (and the squiggly lines they generate) include the emotional and the fundamental data, inherently, because the stock price reacts to both the fundamental data (Known and anticipated) and the emotional reaction of investors.

So, which numbers are really a form of voodoo -- those numbers which analyze a stock's performance or those numbers which only analyze a business and make secondary assumptions about what this will mean to the company stock?

The second is one major step removed from the business of stock market performance, ASSUMING a strong business will always or at least generally result in stock gains. But what about those times it does not?

But WHEN will this company's stock respond to underlying fundamental strength? Your fundamental analysis excludes timing issues. A strong company can sit in a trading range for 3 years before it moves. And then when do you sell? What fundamental data tells an investor when to sell -- and does it do this before or after the market has already taken the lead to the downside?

Any knowledge that excludes 'timing' or provides no provision for the timing of trades is an incomplete knowledge, or religious dogma, at best.

MJC, CGTS

Disclosure: I am/we are long HPQ.