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Random ThoughtsIt’s times like these when I dust off my copy of Laymans. Here are the words of wisdom that I found: “Obviously, a trend following methodology requires the market to trend. Yes, the trend is your friend, but only until it ends. Sharp reversals from established trends can and do occur. During these times you will experience a drawdown. Hopefully though, you will get stopped out at only modest losses on your positions and a new trend will emerge in the opposite direction, creating new opportunities. Choppy markets are detrimental to the methodology.
The good news is, after getting chewed up a bit, the market will present fewer and fewer setups. It is self regulating. If the market remains trendless for extended periods, you will likely find yourself completely shut out and patiently waiting for the next opportunity. This of course, is provided that you are disciplined enough not to try to make something happen when opportunity does not exist.
There are no perfect methodologies that will lead to eternal profitability without losses along the way. If there were, someone would have exploited this and there would no longer be a market. As imperfect as my methodology is, it is the best thing I have found after two decades of searching. Markets will trend. In the 1600s it was tulips in the Netherlands and rice in Japan…. And, they will trend in the future. Prices will rise and fall.”
Good stuff if I say so myself. It appears that now is one of those times that we need to wait patiently. Just like you can’t catch a tan when there is no sun, you can’t catch a trend where there is none.
Some seem to think that they can shift gears from a trending methodology to a contra-trend methodology and then back again. If you can, God bless you. I certainly can’t. From my own experience and observing many others, trying to be all things in all markets will leave you perpetually out of phase. Conditions change. You’re much better off sticking to one thing. When conditions aren’t conducive, just wait. Again, conditions change.
To The Markets
I guess I should add “eventually” to the aforementioned “conditions change.” They haven’t changed much in the Ps (S&P 500) lately. They are pretty much where they were way back in November.
Since the big blue arrow is pointing sideways, now’s the time to be patient. This doesn’t mean that you shouldn’t keep looking for opportunities. It means that you need to be picky in your stock picking.
One thing that I’m watching carefully is the Bowtie moving averages. We have daily sell signals in the Rusty (IWM) and Quack (Nasdaq). The moving averages are a little sloppy in the Ps but if you look at a 2-day chart the signal is a little clearer. I’ll be watching the weekly (i.e. 5-day) chart like a hawk. As you can see, there were weekly signals in every major bull and bear markets over the past couple of decades.
As usual though, take things one day at a time. It’ll take some time for the weekly moving averages to catch up. Hopefully—a word you have to be careful with in this business—the longer-term trend will persist and the market will have to die another day.
Where The Sun Hasn’t Shined
Automotive, Hardware, Software, Durables, The Semis, Financials, Internet, and plenty others have rolled over with many forming Bowties looking poised to make a new leg lower.
Metals & Mining and the Transports remain in solid downtrends.
Bonds which have been stabilizing have turned back down and look like they will test their old lows. As I preach, it’s not the absolute rates that’s bothersome but rather the delta in rates that will spook the markets.
A Break In The Clouds?
Retail came back with a vengeance on Friday.
Ditto for Health Services, Insurance, and Foods.
Leisure broke out to new highs.
I’m not sure that we can begin a bull market just on those sectors but it is good to see a glimmer of hope.
So What Do We Do?
It’s very dangerous to label yourself as a bull or a bear. This forces you to stick with your convictions even when the market begins doing the opposite. Do pay attention and do take things one day at a time. Right now, there’s only a few areas that are coming back nicely. The rest look dubious. At best, the market is stuck in a sideways range. And again, as a trend follower, you need to be selective while the big blue arrow points sideways. It’s okay to sit on your hands. If the longer-term uptrend resumes, then any leftover longs will go back to work. If things continue to deteriorate, you’ll end up flat and possibly even net short. No need to make any big picture predictions. Just follow. Sometimes that means waiting for a trend to follow.
Best of luck with your trading today!
Dave
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