Don’t Fight the Trend

“Don’t Fight the Trend”

By: Adam D. Koos, CFP®

President / Portfolio Manager

Not just ANY trend, but “The Primary Trend.”  This is from Charles Dow’s first lesson on the first day of class in Investing 101.  Would you paddle a boat upstream?  Would you bake cookies before the oven is hot?  Would you bet your money on the lowest-ranked team in the upcoming March Madness tournament to win the whole thing?  Well, then when it comes to your retirement portfolio, you shouldn’t fight the trend!  If you’re a long-term investor, the first rule-of-thumb is to ensure you’ve got the trend at your back and not in your face.  So is the market’s trend pushing us forward, or are risk levels high today?

Back in October and November, a defensive stance was prudent as the market fell below all three of the moving averages (trends) below.  However, the slopes of those same moving averages were pointing upward, and the shorter-term, “faster” trends were still healthily above the longer-term, “slower” trends.  This meant that the primary trend was still intact, so while we were on a “yellow light” of caution, being partially invested in stocks was also a prudent position.

Fast-forward to December and January, and you can clearly see that all three trends have reversed downward, indicating that the primary (long-term) trend is decisively downward direction.  The “faster” trends crossing below the “slower” ones make this downtrend even clearer.  The market experienced a nice bounce in January, but has struggled to do two things that would cause me to take more offensive action:

  1. It has not managed to cross above the two, slower moving averages, and
  2. While the bounce in January was impressive, the momentum behind the move was mediocre. To see such a big move accompanied with momentum crossing above the 70-level on RSI… this would be much more encouraging, but hasn’t been the case.

Let’s look at things from another angle.  Below is the 25-year chart I’ve been referring to these past couple months, along with the 5th negative signal in just as many years appearing in November.  If you look back into history, while all five of the positive (blue) signals were valid, two of the previous four negative signals ended up being invalid, while the other two would’ve saved you from a -40-50% market crash.   The inlay gives you a better look at the last two years and how the long-term trend is again, down without question.

<Nerd’s Note:  The blue and red arrows correspond with positive and negative crossovers in the two moving averages represented in the momentum indicator in the lower pane.>

While similar to the chart above, this next one (below) is another look at the long-term trend, but through another lens.  Here, we’re again looking at another monthly chart (where each candlestick is one month), but I’ve added a 10-month moving average (trend) on top of the chart.  Whenever the market closes below the 10-month trend at the end of the month, exit strategies and extreme defensive action should be considered.  Some of the biggest market crashes in history have come after the market is unable to close above – or reclaim this level after 2-3 months’ time.

So while January’s bounce might give some investors a little dose of “FOMO” (Fear of Missing Out), remember how excited everyone was in January of last year, when the market has soared after completing one of the least-volatile years in history (2017)?

The S&P500 went on to fall -10% in less than a month!

Some investors were extremely anxious in the 4th quarter of 2019 – and rightfully so – as the market reversed from a long-term uptrend to a long-term downtrend.  So be sure to step back a bit, pay attention, and keep a good, long-term perspective.  And definitely, don’t fight the trend!

Meanwhile, try to stay warm and we hope to hear from you soon!

Till next time…


Categories: Adam Koos, CFP®, CMT®, Market Commentary

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