Technical and Fundamental Approaches to evaluate performance: Market Behaviors with Hidden Markov Models in the French Market

Balancing technical and fundamental strategies is crucial for optimizing returns. This study introduces an innovative methodology to quantify the combination of these approaches and their impact on returns across different periods in the French market. We used a Hidden Markov Model to assess the importance of each strategy in explaining the returns of companies of varying sizes. Our analysis focuses on how each strategy's explanatory power shifts during the stable and crisis periods in the French market. Our findings provide new insights into fundamentalist and chartist behaviors, particularly their impact on returns during distinct market phases. Fundamentalist strategies have been found to be more effective in crisis periods, such as the COVID-19 pandemic and the Russia-Ukraine conflict, while chartist strategies outperform in stable conditions. Larger companies show greater resilience to fundamentalist strategies, whereas medium and small firms are affected more by information asymmetry and market uncertainty. Momentum is significant for all company sizes, but technical strategies underperform when return fluctuations are difficult to predict. A balanced strategy, whose effectiveness varies by period according to the Hidden Markov Model (HMM), better explains the return generation. These insights are valuable for investors, financial analysts, and portfolio managers seeking to adopt strategies based on market conditions and company size.