“The market is not a spreadsheet—it’s an ever-evolving battlefield of liquidity, positioning, and momentum. Adapt or be left behind.”

Fundamental analysis assumes price follows value, anchoring asset prices to measurable economic factors like earnings, interest rates, and supply-demand imbalances. But what if markets don’t price fundamentals at all? What if prices are instead driven by the ever-shifting perceptions, positioning, and impact of traders reacting to an evolving world?

In this post we challenge the notion of fundamental determinism and explore why Outlier Hunters focus on price behavior over economic models.

The Illusion of Fundamental Predictability

Fundamental analysis is the backbone of traditional investing. Analysts scour earnings reports, GDP data, interest rate forecasts, and inflation numbers, believing that markets will ultimately price assets in line with these variables. The logic seems sound:

• If earnings rise, stock prices should go up.
• If interest rates rise, bonds should fall.
• If oil supply drops, prices should surge.

But history tells us that these expected outcomes often fail to materialize—or when they do, it’s in ways that are impossible to time profitably.

Markets frequently decouple from fundamental expectations:

• The 2020 pandemic crash and rally saw stocks collapse on economic devastation but rebound long before fundamentals improved.
• The Dot-Com Bubble sent companies with little revenue soaring while traditional “value” stocks stagnated.
• The 2024 Cocoa Surge defied fundamental explanations—momentum, positioning, and liquidity dynamics fueled the trend.

The reality? Markets don’t price fundamentals directly. They price traders’ expectations about fundamentals—and those expectations shift unpredictably.

Markets are Reflexive, Not Rational

The belief that fundamentals drive prices assumes markets behave like rational information-processing machines, efficiently digesting data and adjusting prices accordingly.

However, markets are not rational calculators—they are reflexive ecosystems where participants influence price based on their own biases, fears, and positioning constraints.

This concept—Reflexivity, coined by George Soros—argues that:

• Markets don’t just reflect reality; they shape it.
• Fundamentals influence prices, but prices also influence fundamentals.
• Traders’ actions and expectations become self-reinforcing feedback loops.

A classic example is the 2008 housing crisis. Rising home prices fueled speculation, leading banks to lower lending standards. More lending led to even higher home prices, reinforcing the belief that real estate was “fundamentally strong.” When the cycle collapsed, it wasn’t due to a shift in fundamentals but a breakdown in market perception and positioning.

Markets behave more like adaptive organisms than mechanical models—adapting to flows of capital, changing liquidity, and self-reinforcing cycles of momentum and fear.

The Fragility of Economic Models

Traditional models attempt to predict price movements by assuming:

• Markets are efficient.
• Investors are rational.
• Prices reflect intrinsic value.

But the real market environment violates these assumptions.

1. Fundamentals Change Over Time

   • A company with strong earnings today can be obsolete in five years (Nokia, Kodak).
   • A low-debt government can become a credit risk overnight (Greece, 2011).
   • Models rely on static relationships, but markets evolve unpredictably.

2. Liquidity and Positioning Matter More Than Value

   • The Yen’s collapse in 2022 showed that fundamentals suggested Japan’s currency was cheap, yet macro funds betting on this thesis were liquidated before it played out.
   • GameStop’s surge in 2021 had nothing to do with fundamentals and everything to do with positioning and a short squeeze.

3. Models Assume Stability—Markets Are Chaotic

   • Most models assume a normal distribution of price movements, but real markets exhibit fat tails.
   • Extreme events—crashes, bubbles, liquidity shocks—happen far more frequently than models predict.

A prime example is the original Black-Scholes model used in options pricing. It assumes volatility is constant and that markets follow a normal distribution. In reality, volatility clusters, and outliers (like 1987’s Black Monday) break the model entirely.

The more rigid a model, the more fragile it becomes when applied to real-world markets.

If Fundamentals Don’t Drive Price, What Does?

The answer: Trader impact.

Markets move because traders act—liquidity, positioning, and momentum drive price more than fundamentals ever could.

Key Market Drivers That Fundamentals Ignore

1. Trend Persistence & Herd Behavior

   • When prices rise, traders chase trends, reinforcing movement beyond what fundamentals justify.
   • Bitcoin’s rise in 2017 and 2020 saw fundamental narratives emerge only after the move was already well underway.

2. Forced Liquidations & Squeezes

   • A fundamentally weak stock can skyrocket if enough short-sellers are forced to cover.
   • GameStop’s short squeeze was dictated by positioning, not intrinsic value.

3. Liquidity Shocks & Market Structure

   • Large institutions moving money create outsized impacts.
   • Central bank interventions shift asset prices instantly, regardless of fundamentals.

4. The Role of Noise Traders & Non-Rational Participants

   • Retail traders, passive flows, and algorithmic liquidity skew price action away from fundamental anchors.
   • Tesla’s 2020 stock surge was driven more by speculation than by earnings models.

The Outlier Hunting Perspective: Follow Price, Not Predictions

If fundamental models are unreliable, how do Outlier Hunters approach markets?

• Price is the ultimate truth. If markets are trending, it doesn’t matter whether they “should” based on economic data.
• Positioning matters more than valuation. A mispriced asset can stay mispriced indefinitely if traders are trapped on the wrong side.
• Focus on adaptability, not forecasts. The best traders don’t predict—they react to what the market gives them.

Key Takeaways for Outlier Hunters

1. Price leads, fundamentals follow.

   • Don’t try to predict where price “should” go—let the market show you where it’s going.

2. Fundamentals don’t trigger trends—traders do.

   • Market movements are dictated by liquidity, positioning, and momentum more than earnings reports.

3. Outliers drive returns.

   • Large, unexpected moves—not small, incremental price shifts—are what matter most.

4. Ignore the noise.

   • Economic forecasts, valuation models, and GDP estimates are narratives, not signals.

 

The Market is a Moving Target

Markets don’t follow economic models; they follow trader impact, liquidity flows, and self-reinforcing feedback loops.

Fundamental analysis isn’t useless—it’s just incomplete.

The best traders don’t rely on models to predict the future. Instead, they observe price action and react to change.

Outlier Hunters don’t predict—they adapt. They ride the waves of liquidity and momentum, while others cling to the illusion of stability.

“Markets don’t price value—they price perception. And perception is always shifting.”