Alternative Data: The best of technicals & fundamentals

For years we in the financial media business have split types of market analysis and traders into two large camps: fundamental and technical. Fundamental traders would look at basic meat and potato supply and demand fundamentals and perhaps some proprietary insights to come up with their market outlook, while technical traders would look at market charts to determine patterns and momentum based on price data. 

Until relatively recently, those of us covering futures and alternative investments had followed the technical traders more closely as the world of equities was skeptical regarding technical analysis. There was a great tradition of the bold stock picker, and some nerd rummaging over price and volume charts didn’t fit the mold.

As the wider trading world began to embrace algorithmic trading based on a technical study of market data, another phenomenon was going on: an explosion of new sources of data. This was due to social media platforms and inexpensive access to various types of scientific data. 

Good data was essential to both groups’ ability to make successful calls on market direction. But equity traders began to take notice of successful algorithmic traders as have other industries, and governments. Big data is a 21st Century movement not tied to trading or markets. Facebook collects and sells reams of data to businesses keen to be able to target potential customers. 

The newest evolution in trading is tying together the technology built and used to analyze trading data, with the exponential growth in varied types of data. We explore the fascinating world of alternative data in this issue (see “Fishing With Alternative Data,” page 26). 

Chris Randle and the folks at C2 Capital Management help us break down the trend of alternative data, its uses and implications (see “Alternative Data: A new source of alpha,” page 28). 

What is interesting about what alternative data innovators are doing is that they are marrying the best of the technical and fundamental disciplines. As someone who has analyzed successful traders of all stripes, the biggest red flag to me were those traders who insisted that only one way could lead to success. Advances in computing allowed technicians to crunch millions of data points to finds trends in price data. Now, data entrepreneurs are able to tap huge and more complex datasets of what traditionally could be called fundamental data, and apply those quantitative techniques to predict market movements. 

It is a new field for traders to explore. It is comparable to a sales team finding millions of new leads, instead of hitting the same old leads. Edges born of looking over the same data tend to shrink, they get arbitraged out. These new datasets are huge and relatively untapped. 

Not everyone building systems based on alternative data will be a success, but those early edges discovered will likely be larger and more profitable, just as were the first edges created by systematic trading entrepreneurs several decades ago.