Just (Trend) Follow Along

Random Thoughts

Last Thursday, I mentioned an email that accused me of always being bearish and getting too caught up in the noise. Since then I have received quite a few emails from those of you who “get it.” Thanks so much! You can only predict the short-term when it comes to the markets. Yes, you have to see the forest for trees but you also have to take things one day at a time. When you get signals that the tide might be turning, you don’t have to sell the farm. You do have pull in your horns a little bit and consider a short or two. And of course, honor your stops. He who fights and runs away lives to fight another day.

In the end, portfolio ebb and flow wins. You let the market take you out of positions that appear to be no longer viable and keep you in those that are. The last market turndown and subsequent turn right back up has left us with 2 longs and 2 shorts (in the Trading Service model portfolio). If the market continues higher, we’ll likely see more longs/keep existing ones and the shorts will likely stop out. And, if it doesn’t then just the opposite. That’s what trend following is all about—following along.

Way back last Friday, the Ps (S&P 500) dipped but then recovered to close strong. For the day they gained around 1/3%–enough to keep them at all-time highs.

The Quack (Nasdaq) had a decent day. It too came back nicely after a bit of a dip. For the day, it closed ½% higher. And, this is enough to keep it at 14-year highs.

The Rusty (IWM) continues to bring up the rear. It tacked on just over ½%. Although it has a little was (around 2 ¾%) before it is back to new highs, it generally keeps clawing its way higher in a 2-step forward/1-step back manner.

With the Ps and Quack at new highs, many sectors are following suit. These include but not limited to Chemicals, Energies, Computer Hardware, Computer Software, Financials, Health Services,

Banks, which have recently sold off a bit, have now come back and are nearly new highs.

Semis which were in a fairly serious rollover earlier in August have now made back nearly all of their losses. Ditto for Telecom and Utilities.

If you look hard enough you can find some areas that are under performing on a relative strength basis but for the most part, the sector action is looking good.

So what do we do? Don’t fight the tape. As long as the market remains at or near new highs there’s no reason to put on any new shorts. Do focus on the long side. I am beginning to see a few new setups. We’ll likely see a lot more if this market can continue to follow through and then has an orderly pullback.

Best of luck with your trading today!

Dave