Trend: Most of the major indexes are trending down.
In an excellent overview of investing in trends, Chris Ciovacco at Seeking Alpha looks at current market trends from an investor (vs. trader) perspective. The introduction and conclusion of his article are included below, but the whole article should be reviewed. Click on the link below.
Link: Risk Management in Trending Markets - Seeking Alpha.
Long-Term Investors Need Trends to Make Money
Most of us would prefer to be investors instead of traders. Investors, with an intermediate to long-term time horizon, must be aligned with a positive trend in order to make money. This is true even for value investors who focus on a company’s valuation rather than a trend that can be seen on a chart. For the value investor to make money, eventually the position must turn up.
A Tough Environment: Inflation Is Rising, Equity Markets Are Falling, and Commodities Correcting
As a portfolio manager, options in the current environment are somewhat limited. We have no particular fascination with commodities, they just happen to be the only source of strength. We would much prefer never to use inverse funds, but a 100% commodity portfolio is not prudent. Global inflation is on the verge of getting away from central bankers, which means investors who wish to protect their long-term purchasing power cannot afford to park funds exclusively in CDs and money markets. Our approach will continue to use a mix of multiple asset classes in an effort to grow and protect principal within the context of volatile and increasingly interfered with markets. While in an environment where the source of strength is basically limited to commodities and inverse or bear market vehicles, we have to tread with extra care. We are willing to give investments a reasonable amount of rope on the downside based on recent volatility characteristics. However, a continued pullback in commodities could quickly morph into rapidly falling prices. In that event, principal protection must become the primary focus in order to preserve capital to fight another day.
While some shortsighted stock investors see an opportunity in stocks based primarily on a possible correction in commodity prices, they should not ignore the fact that continued global economic deterioration is the driver behind falling commodity prices. This serves as another reason to be skeptical of what appear to be textbook bear market rallies. The markets and economy would be better served if the Feds backed off on the tinkering and just let the markets deal with those who made poor decisions in the form of overbuilding, real estate speculation, securitization, and a general lack of managerial oversight and discipline. Recessions do many things to help the economy move closer to a sustainable recovery including the all important purging of bad debt from the system. Unfortunately, we will most likely see just the opposite from the Feds in the form of continued “unprecedented” intervention into what is inaccurately described as a free market economy. In the end, all the tinkering will simply prolong the recovery process. As always, if we keep an open mind (recognizing things may not unfold as described above) and pay attention to what is actually happening versus being concerned with what may happen, the markets will guide our asset allocations if we are willing to follow.
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