{"id":223314,"date":"2025-05-02T13:04:42","date_gmt":"2025-05-02T17:04:42","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=223314"},"modified":"2025-05-05T03:47:32","modified_gmt":"2025-05-05T07:47:32","slug":"when-momentum-rules-fundamentals-are-optional","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/when-momentum-rules-fundamentals-are-optional\/","title":{"rendered":"When Momentum Rules, Fundamentals are Optional"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">I\u2019ve been asked several times recently about why stocks can be recovering so nicely even as recession concerns lurk.&nbsp; The answer is a simple, but counterintuitive one: fundamentals don\u2019t really matter when momentum rules.&nbsp; Price action, not the underlying justification for those prices, is all that\u2019s important.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Remember, financial assets are somewhat unique.&nbsp; For almost any goods or services, demand shrinks as prices rise, and vice versa.&nbsp; With stocks and tradeable commodities, that relationship is flipped upside down.&nbsp; It\u2019s quite normal to see demand for financial assets rise when prices rise.&nbsp; No one wants to miss the opportunity for profits, so That of course can create a self-fulfilling feedback loop \u2013 prices rise because demand increases, then demand increases simply because the prices are rising.&nbsp; The common way of describing the real-world effect of this cycle on stock prices is \u201cmomentum\u201d.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We\u2019ve all heard the term, \u201cthe trend is your friend.\u201d&nbsp; That\u2019s another way of describing the powerful effect of this phenomenon.&nbsp; It can be relatively easy, and quite profitable, to identify trends and follow them.&nbsp; This can be on an intraday or longer-term basis.&nbsp; Frankly, it doesn\u2019t matter if you know what your desired horizon is.&nbsp; Traders follow short-term trends, investors follow longer ones.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another adage, however, is \u201cmarkets can remain irrational longer than you can remain solvent.\u201d&nbsp; That\u2019s a way of describing a situation when momentum gets out of control.&nbsp; Fundamentals do eventually matter, but the price action can continue without regard to them for long periods of time.&nbsp; In theory, markets are constantly interpreting all available information to find a stable fair values.&nbsp; In reality, they are subject to a wide range of motivations and opinions that might have little to do with that noble search.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">When momentum and sentiment are strongly positive, traders can overlook almost anything.&nbsp; We\u2019ve seen very charitable responses to corporate earnings in recent weeks.&nbsp; In any normal quarter, a company that withdraws guidance gets punished, and punished hard.&nbsp; Instead, because of the tariff-induced uncertainty, companies are frequently doing so without consequence.&nbsp; They are saying that they don\u2019t have enough information to allow investors to make intelligent valuation decisions about their stocks, yet in many cases, investors don\u2019t care.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">From a macroeconomic view, today\u2019s numbers have changed investor perceptions about the need for Federal Reserve intervention.\u00a0 Looking at both the <a href=\"https:\/\/forecasttrader.interactivebrokers.com\/eventtrader\/#\/market-details?id=658663572%7C20250507%7C3.875&amp;detail=contract_details\" target=\"_blank\" rel=\"noreferrer noopener\">IBKR Forecast Trader<\/a> and the <a href=\"https:\/\/www.cmegroup.com\/markets\/interest-rates\/cme-fedwatch-tool.html\" target=\"_blank\" rel=\"noreferrer noopener\">CME FedWatch<\/a>, we have priced out nearly a full rate cut by the end of the year, three instead of four.\u00a0 That\u2019s certainly not bad news, as we have often stated our preference for a stronger economy rather than one that is sick enough to require aggressive rate cuts.\u00a0 But remember, it\u2019s not as though the markets have been reeling recently from recession fears.\u00a0 When we\u2019re in a situation when good news is good, and bad news is either good or easily ignored, then it is another sign that momentum is in charge.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As we\u2019ve noted, trend following can be perhaps the simplest way to achieve trading profits.&nbsp; But it is important to remember that blindly following trends can become treacherous.&nbsp; Trends can change abruptly and unpredictably.&nbsp; There\u2019s nothing wrong with playing along with momentum, but when the price action gets stretched \u2013 and a nine-day streak often represents the maximum length of a short-term trend \u2013 it is important to use risk discipline like stops or hedges.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>I\u2019ve been asked several times recently about why stocks can be recovering so nicely even as recession concerns lurk.\u00a0 The answer is a simple, but counterintuitive one: fundamentals don\u2019t really matter when momentum rules.\u00a0 Price action, not the underlying justification for those prices, is all that\u2019s important.<\/p>\n","protected":false},"author":4,"featured_media":223317,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[14700,18,6,8,9,26,3],"tags":[18996,18713,5550,19342,6068],"contributors-categories":[13576],"class_list":["post-223314","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-market-insights","category-macro","category-north-america","category-region","category-securities","category-text-articles","category-traders-insight","tag-fed-rate-expectations","tag-market-psychology","tag-momentum-trading","tag-risk-discipline","tag-trend-following-strategy","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 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He has held numerous roles in the organization since joining Timber Hill, IBKR\u2019s predecessor, in 1995 as Equity Risk Manager and an options market maker. He developed and implemented automated trading strategies for stocks and options before moving into his current role. Steve has guest authored several columns in Barron\u2019s and made numerous live on Bloomberg TV and Radio, CNBC, Yahoo Finance, Fox Business, and several other media outlets in North America, Asia, Australia, and the Middle East in addition to being quoted frequently in print and electronic media. Prior to joining Interactive Brokers, Sosnick held senior trading roles at Morgan Stanley, Lehman Brothers, and Salomon Brothers, where he completed the firm\u2019s famed training program.","sameAs":["https:\/\/ibkr.com"],"url":"https:\/\/www.interactivebrokers.com\/campus\/author\/steve-sosnick\/"}]}},"jetpack_featured_media_url":"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/market-momentum-featured-img.jpg","_links":{"self":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts\/223314","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/comments?post=223314"}],"version-history":[{"count":0,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts\/223314\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/media\/223317"}],"wp:attachment":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/media?parent=223314"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/categories?post=223314"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/tags?post=223314"},{"taxonomy":"contributors-categories","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/contributors-categories?post=223314"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}