It’s often said that markets are voting machines in the short run and weighing machines in the long run. It’s meant to signify that speculators have a short term view while investors have a long term view and investors push the overall direction of the market. This principle only holds true if the investors with a long term view have more capital in the markets than short term speculators. When the majority of capital is invested for the longer term then markets trend in the direction of that investment and the fundamentals that investors use to make their investment decisions drive the market. If speculators have the majority of capital in the markets then the markets do not trend and money jumps from market to market following the latest trend, hot idea or event (BREXIT, US Election, FED announcement, etc.). It is at this point that fundamentals become funnymentals. Funnymentals is a term often used by technical analysts to mock long term investors and highlight that capital markets are just auctions where price and volume are really the only factors at play.

The technical analysts are 100% correct, the capital markets are just auctions where the price and supply and demands of bids drives the market. How else could the price of oil, cotton, coffee, etc. change without news events, report releases or acts of nature? When capital markets are working and investors/producers have the majority of capital the underlying business fundamentals of producers will influence the market. I believe this principle has broken down completely. There is too much money in the market speculating so that weighing machine is overpowered by the voting machine volatility is commonplace. The measures of volatility betray the impact on investors as when tight ranges are followed by large shocks and then a return to a tight range investors are reluctant to believe the shock is over for longer and longer periods and thus markets become more dominated by speculators and fundamentals stay funnymentals.

I want to state that speculation is not a bad thing. Speculators are critical for markets to function but they need to be the minority of capital at work in the market or the markets just become a casino. A casino is a place to have fun, try your luck and use the laws of probability and risk management over time to win, fundamentals have no place in a casino.

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