Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Semiconductor Sector – Watch the Early Bird in 2019 - 21st Jan 19
From ASEAN Economic Development to Militarization - 21st Jan 19
Will China Surprise The Us Stock Market? - 21st Jan 19
Tips to Keep Your Finances Healthy in 2019 and Beyond - 21st Jan 19
Tips for Writing Assignment in Hurry - 21st Jan 19
UK House Prices, Immigration, and Population Growth Mega Trend Forecast - 21st Jan 19
REMAIN Parliament to Subvert BrExit with Peoples Vote FIXED 2nd EU Referendum - 21st Jan 19
Pay Attention To The Russell Stocks Index and Financial Sectors - 20th Jan 19
Hyperinflation - Zimbabwe's Monetary Death Spiral - 20th Jan 19
Stock Market Counter-trend Extends - 20th Jan 19
The News About Fake News Is Fake - 20th Jan 19
Stock Market Bull Trap? January 22 Top Likely - 19th Jan 19
After the Crash, the Stock Market Made a V-shaped Recovery. What’s Next - 19th Jan 19
David Morgan: Expect Stagflation and Silver Outperformance in 2019 - 19th Jan 19
Why Brampton Manor Academy State School 41 Oxbridge Offers is Nothing to Celebrate! - 19th Jan 19
REMAIN Parliament Prepares to Subvert BrExit with Peoples Vote FIXED 2nd EU Referendum - 19th Jan 19
Gold Surges on Stock Selloff - 18th Jan 19
Crude Oil Price Will Find Strong Resistance Between $52~55 - 18th Jan 19
Stock Market’s Medium Term is No Longer Bullish. It is Now Mixed - 18th Jan 19
SPX and Gold; Pivotal Points at Hand - 18th Jan 19
Fable Media Launches New GoWin Online Casino Affiliate Site in UK - 18th Jan 19
The End of Apple! - 18th Jan 19
Debt, Division, Dysfunction, and the March to National Bankruptcy - 18th Jan 19
Creating the Best Office Space - 18th Jan 19
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19

Market Oracle FREE Newsletter

UK House Prices, Immigration, and Population Growth Trend Forecast

Investment Strategy 101: One Trend to Bet On

InvestorEducation / Learn to Trade Jul 30, 2009 - 09:11 AM GMT

By: Q1_Publishing

InvestorEducation

Best Financial Markets Analysis ArticleOld trading axioms, “the trend is your friend” or “never bet against the trend,” are more useful today than ever before.

The day-to-day action on Wall Street has been commandeered by a small group of investors and individual investors are getting left in the dust.


Despite it all though, there is one small group of investors turning one very big trend into profits. Here’s how you can join them.

Staying One Nanosecond Ahead of the Jones’

Billions of shares exchange hands on any given trading day. Even during the summer, when trading volumes are historically low, volume is still exponentially higher than it was a few decades ago.

The increased volume is due in part because there are more investors than there were a few decades ago. We talked about this and the wealth effect of a rising stock market when 70% of American adults have some exposure to the stock market. Most of the increased volume, however, comes from the big “quant” funds.

The increased volume is from quant funds and programmed computers which execute trades in nanoseconds. According to Tabb Group, a financial research firm, computer-directed trading now accounts for 73% of all stock trades on the major U.S. exchanges.

The computers use sophisticated algorithms to spot micro-trends – very small price movements and patterns – and then jump on the trend. Then the fun really begins. A computer starts buying, the price of stock ticks up, and the trend is reinforced. Then another computer catches on and jumps in too, thereby reinforcing the trend. Then the cycle begins again.

This is how computer trading has played a big role in the surge in cyclicality of different sectors.

But here’s the deal, 27% of the trading is not directed by machines. And that’s where the profit opportunities are found.

One Big Advantage

We’ve watched Wall Street’s “black box” trading machines in action over the past couple of years. And we’ve witnessed them take a greater share of the market with each passing.

We’ve been able to spot when they get “bored” with a trend and move onto something new, and how average investors are destined to lose because of it.

Here’s why.

Most investors are at a fundamental disadvantage to the computer-based trading platforms. Obviously, the computers are much faster and can catch bounces of a few cents. Emotions don’t get in the way of computer-directed trades either.

Those are not the biggest advantage of these trading systems. The true advantage of the computers is they act on, and profit from, random market movements. There doesn’t have to be a “reason” for things to happen. The trading systems react to the markets rather than following a specific story.

This is a tremendous advantage and puts them in far better position than most investors.

You see, the demand to figure out why something happens is an inherent human trait. That’s why we look at all the daily headlines, which sound reasonable at first, but don’t make any sense when viewed against each other.

A Tale of Two Headlines

Here’s one classic example from the past year. Last July, one headline said, “$140 oil drags markets down.” Oil did pass $140 and the markets fell.

Was rising oil prices really the cause of the decline?

If so, it would make sense that rising oil prices were bad for the markets.

Now jump to a year later. Oil prices have had some big swings, but they’re nowhere near last summer’s bubble highs. Still though, one Wall Street Journal Headline earlier this month proclaimed, “Falling oil prices drag on markets.”

Now, falling oil prices are bad for the markets?

That can’t be true…just last year high oil prices were bad. Now high oil prices are good.

It doesn’t make any sense. But it does help provide people the reason “why” the market moves up and down from day to day and its information they so desperately crave.

In the very short-term, the markets are random, but here’s why it plays into the hands of the computer driven trading programs.

Man vs. Machine: The Winner Is…

Over the past few years we’ve watched the hot money jump from sector to sector every two months or so. No one really knows where it’s going next, but we see the impact of it near the top and get ready to profit when they move on to another sector.

Look at what has happened over the past six months…

At first, it was infrastructure stocks which got all the attention. Infrastructure stocks started to rise from the ashes of last fall’s market downturn. For whatever reason they started going up. Then they continued to go up as the computers caught an uptrend, jumped in, and continued to pile in. Next thing you know, infrastructure stocks were up 50% to 100% across the board.

This rise got a lot of attention from the mainstream press. The reason for the rise was the coming “stimulus” bill and all of its infrastructure spending.

We poked quite a few holes in the questionable theory about infrastructure stocks and avoided the inevitable downturn. In due time, the computers pulled out and infrastructure stocks came back to reality. Many investors who wanted to “get their piece of the stimulus” and bought in when it all made sense certainly paid the price.

The same is true for education stocks. If you recall, back in January there wasn’t a hotter sector than for-profit education stocks. They were going up and the computers were piling in. Then the herd created the “they will benefit from Obama education spending” thesis. Everything has to happen for a reason. Again, the computers moved on and the herd that created a reason to explain why some stocks were moving took a beating.

Then a few months ago it was precious metals stocks. It seemed like these stocks were off to the races…gold was making another run at $1,000…and the herd was jumping in “before it’s too late.”

The results were the same.

Use This Trend to Beat the ‘Bot Today

Don’t get me wrong, in the examples above there are some great long-term opportunities in some of those sectors. Others, there’s not much. The key here is to understand what’s going on in the markets in the short-term and use it to your advantage. We will continue to go over various strategies that are perfect for this market in our free e-letter, the Prosperity Dispatch.

That’s why, now more than ever, a contrarian investment strategy is more important to have. If you get caught up running with the herd and buying in when there’s an obvious “thesis” in place, you’re going to constantly be one step behind the markets.

Sure, you’re stocks may hold up briefly, but it won’t last long. The computers chase action. And once they’re all in, there’s not much action left. As a result, the stocks level off or start to dip and the herd comes piling looking for more gains and the computer-driven trading programs move onto the next sector.  

From a trader’s perspective, you can catch some decent trading opportunities on the way up and on the way down by keeping an eye on these trends. From an investor’s perspective, it’s much easier to see the sectors which are completely out of favor and look for opportunities there. By doing that you’ll get in lower and your upside potential is higher.

There’s no reason not to expect the growth of computer-based trading to continue. Sure, Congress will vilify speculators and hedge funds, but computer-directed trading is here to stay. So it’s not something to get overly concerned about, it’s just another market reality which successful investors will use to their advantage.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules