Try To Look Smart Or Be Just Be Trend Following Moron? – Dave Landry on Trading

Try To Look Smart Or Be Just Be Trend Following Moron?

By Dave Landry | Random Thoughts

trend_following_moronbutton Random Thoughts

As I preach, when a market is in a range near new highs you have to be careful not to chase your own tail. Towards the top of the range it will look like the mother-of-all bull trends is resuming and towards the bottom of the range it will look like the possible end of the world.

Now, before we get into the action, let’s recap what’s been happening lately. The Ps (S&P 500) have been masking what’s going on internally. Many stocks that have been in longer-term uptrends have sold off. In fact, it seems that the bigger they are, the harder they have been falling. Internet and Biotech are two good examples here.

We’ve also seen a pretty serious sector rotation towards defensive stocks such as the Foods, Energies, and Utilities.

The above sort of action suggests that the run may be over. However, as I preach, you don’t want to rush out and sell the farm. ( Let things shake out. If the longer-term trend continues, your remaining longs will go back to making money and you’ll meet plenty of new friends along the way.

Tuesday’s action suggests that the longer-term trend is trying to resume, at least in the Ps. They broke out to all-time highs, gaining nearly ¾%. This is certainly a positive development but not necessarily an “all clear.”

The Nasdaq had a solid day, gaining well over 1 ½%. So far, it only appears to be retracing its recent slide.

The Rusty (IWM) also had a decent day. It tacked on around 1 1/3%. It still looks a little questionable—possibly Gatekeeper-like or “Micro”(Pioneer) First Thrust-like (thrust down followed but a pullback) but it is now just over 1 ½% away from all-time highs. You need to pay attention but again, don’t get too bearish as long as a market is hovering near new highs.

These are interesting times. Back in the day, when you saw prior leaders breaking down and defensive stocks emerging, you knew that the trend was coming to an end. Nowadays, it seems that the market has the ability to defy gravity. Doing the “right” thing like putting on shorts doesn’t seem to work so well (and many have completely given up on the short side. I’ll have plenty so say about this soon. Stay tuned). It’s almost like there is some manipulation that is keeping this market higher. Every sell off is met with buyers. That’s fine with me. I don’t care which way it goes or why. I just want it to move.

Let’s look at the sectors:

As you would expect, with the Ps breaking out, some areas are also banging out new highs.

What’s interesting is that most of the defensive areas, namely Foods and Energies hit new highs along with the market. One would think they these would correct as stocks that were beaten up bounced. I guess the point is that the rally was broad based—the breadth was good. Most stocks ended higher.

Health Services, Transports, and the Semis (to name a few) made new highs with vigor.

And, weaker areas like Internet and Biotech bounced. This action actually sets up new shorting opportunities here but you might not want to fight the tape for now. Or, at the least, make sure you wait for entries.

Whew, “Chief Orman really wound up today.” If you made it this far (stealing a line from my friend Greg Morris), you might want to avoid operating any heavy machinery.

So what do we do? I think the above is a long-winded way of saying don’t make any drastic decisions. I still think portfolio ebb and flow wins in the end. As usual pick the best setups to begin with. Are they in solid trends or making solid transitions in trends? Do they trade cleanly? Are the underlying sectors trending? And, so forth. Then, wait for entries just in case the trend doesn’t resume and let the market stop you out of existing losing positions. Letting the market make decisions for you will help to keep you on the right side of the market. I didn’t get the nickname “Trend Following Moron” by trying to outsmart the market.

Futures are flat pre-market.

Best of luck with your trading today!



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