Trends

“The trend is your friend, until it ends, when it bends”

Ed Seykota – successful trader, engineer, philosopher

Don’t doubt that the market runs in trends (and in between trends, very choppy periods that mess with people’s heads). There are many reasons – some logical, some illogical, but no matter – it’s how it is. if you’re curious, here are a few reasons you can find, if you ask different people, depending on their world-view (I’d use the word “bias” but that has a negative connotation, and I don’t want to do that when I think having a bias is very normal):

• as the price rises, fewer people are negative on the holding so they keep holding – especially at all time highs where no one holding is negative, so no one is feeling the pain of loss, and therefore, very few if anyone will sell.
• people like the hot market, so if it’s moving, has momentum, it will be difficult to go the other way, especially if traders who bet the other way are covering their bets (fueling the momentum).
• Trends can reveal actual fundamental changes before the change is obvious to the general population. Many traders point to markets leading in one direction then months after, the news comes out to justify it. Perhaps a few people know it first, begin making bets on it, then more people, then momentum hits.

And there are many others. These are just a few of the reasons. And here are a few examples:

JNJ 6 month chart (no position):

JNJ 6 Mo chart; Source: Yahoo Finance

Did these guys cure cancer, or is owning US healthcare just the trending thing to do? Later we can surmise what I mentioned on this site some time ago (Here, Here, and numerous other commentaries from 2012  ). Big safe dividend payers would be gobbled up as pension funds etc looked for “bond replacements” in the equity market. But the trend has been going on.

Apple (no position) has been sold, sold short and sold some more:

AAPL 1 yr chart; source:Yahoo Finance

Is Apple THAT bad? Who knows but if you fought this trend you’d be out a lot of money!

This is the agony of “value” managers in the investment world. They have ideas but until (or unless!) their ideas catch on, and form a trend, they may never realize their goals for a position. The other end of the spectrum, chart, momentum and trend traders look for the definitive more then take action. Both ends and everything in between “make a market.” So don’t bad mouth either side, they need each other.

And if you’re in a holding that is trending for or against you, don’t take all the credit/blame yourself. Forces at work are much larger than you think. And in any case, have a plan!

FYI: At the time of this writing, neither I nor my clients hold any position mentioned in this column