Posted on 01/05/2017 7:17:47 AM PST by SeekAndFind
The trend is your friend. How many times have you heard that saying? HOW MANY?
It’s a deeper philosophical question. You get to believe only one of the following, not both:
1) The market trends
2) The market is mean reverting
So which is it?
The answer might surprise you
It is both, but it depends on the time frame.
This is the sort of thing the scientists and eggheads at places like Renaissance Technologies have studied to no end.
They would write academic papers on it, except that trading on this knowledge is a lot more profitable than writing an academic paper.
But in my experience, in the short term (seconds and minutes), markets mean-revert, but in the long term, they trend.
Now, let’s just say right from the beginning that nobody here should care about what markets do in the short term, because computers are better at trading in the short term than you are.
If you are day trading something like the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT), you are doomed in about 14 different ways.
So in the long term, markets trend. A question: Do you think this chart is trending?
It looks like it is trending strongly.
So why are so many people betting that it is going to go down?
A few reasons:
Remember, the goal isn’t to be right, the goal is to make money.
Am I bullish on stocks?
I guess. I actually don’t have strong feelings about it. But the trend is higher. And it’s not only higher, it’s relentlessly higher.
And if you look at this from a fundamental standpoint, something big and important happened a month ago that will have effects on financial markets for years.
Not sure it is the best idea to bet against the trend just one month into it.
People are pointing to sentiment—everyone is supposedly max bullish.
Well, everyone was max bullish during the dot-com bubble, and stocks still went higher nonetheless. For four years.
Like with the bond market—we are just a few clicks away from having irrefutable evidence that the downtrend in yields has been broken.
When that happens, you can only trade bonds from the short side, not the long side.
I often get accused of oversimplifying things. Some concepts in finance are complicated and should remain that way. But when it comes to money management, if it ain’t simple, it can’t be good.
The trend is your friend.
It was about nine years ago that I learned, as a trader, that I didn’t have to like a trade to be in it. That was the first time that I started using my head instead of my heart. I started buying things that I didn’t like, but bought them anyway because the chart was going up.
This money management lesson hereby concludes. For more info, please go back and read the old Market Wizards books.
Witnessing a massive shift
Ray Dalio recently wrote on how profound of a political shift has just occurred—here is the quote that just punches you right between the eyes:
“Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do as her books pretty well capture the mindset. This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do profit makers (emphasis mine). It wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power. The shift from the past administration to this administration will probably be even more significant than the 1979–82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan, and Helmut Kohl came to power.”
He goes on to say that the impact of the Trump administration will be bigger than what eggheads like me are calculating from tax and spending changes, because it could “ignite animal spirits and attract productive capital.” There is a lot more in the post, which you can read here.
Kind of puts our earlier discussion about trend following into perspective. So far, since the election, we’ve seen:
1) Stocks up
2) Bonds down
3) Banks up
4) Energy up
5) Utilities/REITs down
6) Dollar stronger
Go and read the Ray Dalio LinkedIn post and tell me if you think 1), 2), 3), 4), 5), and 6) are going to turn around and go the other way. The Trump administration hasn’t even started yet!
In fact, I think the only risk to these Trump trades is Trump himself. The guy is known to change his mind. Like, he one day just decides that Richard Cordray isn’t such a bad guy and the Consumer Financial Protection Bureau (CFPB) does good work. Or he changes his mind on taxes. Or whatever.
So the challenge here is to think about what is priced in and what’s not.
Lots of people think that the entire four years of Trump have been fully priced into financial markets, one month after the election. With stocks up 3–4% or so. With 10-year note yields up 1%. That is absurd.
Here are two ways to make a fool of yourself with the Trump trade:
Please note that I have a lot more conviction on 2)-6) than I do on 1).
Here’s one more tip before I go. If you’re smart, like I suspect a lot of my 10th Man readers are, you’re going to overthink this. Don’t be smart. Be dumb. Trump good. Buy stocks. Sell bonds. Simple as that.
I suggest waiting for another interest rate hike or two. We’ll see whether this is a TINA market, or a real bull, when that happens.
The market is going to do well under Trump. Very well, I predict. The question will be which segments will do well.
RE: I suggest waiting for another interest rate hike or two. We’ll see whether this is a TINA market, or a real bull, when that happens.
For those who don’t know — T.I.N.A — THERE IS NO ALTERNATIVE.
Think of a portfolio manager who is charged with earning a return for investors and can assume a moderate amount of risk. Let’s suppose he’s been running a portfolio of 25% US stocks, 25% international stocks and 50% fixed income (I can’t tell you how many portfolios have looked like this in real life for the last few years). Now assume he reads a bunch of research and news and concludes that the market is due for a ten to twenty percent sell-off. And so he sells half his stocks, putting a quarter of his portfolio into wealth-destroying money market funds.
Days go by. Weeks. In the end, he buys back into the stock market again – maybe even buying some of his old positions back at slightly higher prices.
Why does he do this?
T.I.N.A. – There Is No Alternative.
The alternative he has is to own aburdly-priced bonds, buy highly volatile commodities, or go into less-liquid assets like real estate or private equity. In other words, for most PMs there is no alternative.
Thomas Woods has a quote to the effect that every time the consensus is that the business cycle is finally beat a recession/crash/depression happens soon thereafter.
As usual, I hear about how great the market is, but the rest of the economy is really having a hard time. It is such an incredible disconnect. Like my friend in 1999 talking about how great his portfolio was, until around March of 2000, when pretty much everything he made got wiped out, the market trend is up until it isn’t.
The key is to not be in it when it decides to stop being up. You can get out too soon and it will cost you. Or you can get out too late and it will REALLY cost you.
I think the Trump affect is real. I also think it is pure “faith based” and not based on tangibles. It will drive the markets up until reality punches it in the nose. Then it will go down. And it could be worse than 2008. A LOT worse.
I don’t blame trump, though. He can only do so much.
He is predicting that the stock market is going to have a strong performance without explaining how the sectors and companies represented in the market are going to be more profitable over the next year than they were over the last year. Right now, the broad market is trading at very high multiples of earnings -- and I haven't seen strong earnings reports to justify a bullish outlook.
And there's your problem right there.
In the age of perpetual near-ZIRP, there is nowhere to go other than the equities casino, is there??
At the start of the banking crisis selloff in 2007 the ratio was 110%
At the peak of the market in 2000 (dot com bubble) the ratio was 145%
It is nearly impossible to time market entries and exits .. as you alluded. I'm in the "lazy investor" camp. Invest 20% of your earnings over 40 years into an asset allocated mix of stock mutual funds, ETFs and bonds and you will do fine. The hard part is to consistently save a significant amount of your earnings. We all know how hard that is.
That is why Bull Markets turn bear. It won’t turn until they have the last suckers last dollar. This market has been more manipulated than any I have ever seen, based around the American elections.
That is why Bull Markets turn bear. It won’t turn until they have the last suckers last dollar. This market has been more manipulated than any I have ever seen, based around the American elections.
That is why a portfolio manager is in a more difficult position than an individual investor.
As an individual investor, if I think stocks are too high, I can sit on my money and do nothing. A portfolio manager HAS to invest the money that is given to him, or it will be taken away.
This is the number one reason why actively managed mutual funds under-perform the market. Money comes in when the market is soaring, and goes out when the market crashes.
Indeed, and this author looks to be working for the smart dollar crowd.
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