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  • Michael Turner

02-23-2022: Why Trend-Investing is Soooo Much Better than BAH

Today, the S&P 500 officially dropped into a correction; down -11.16% at the close. The Nasdaq has been in a correction for weeks, down nearly -18%. It does not take a mental giant or expert chartist to see the trend of the market, year-to-date is in state of collapse (see my Total Market Index, below).

I find some of the headlines this afternoon laughable at best and self-delusional at worst. Here is a couple:

  • "Morgan Stanley says stick to the fundamentals."

  • "Investors who can ride out the current market storm may be handsomely rewarded further down the road, according to data from LPL Financial."

These are the typical BAH ("Buy-and-Hold") commentaries that you see in this kind of market. Just once I would like to ask these pundits/commentators the following question: "How much should I be willing to lose, holding onto fundamentally strong stocks, before going to cash?" The fact of the matter is this: Strong fundamentals do not keep a stock from getting crushed in a bear market.


Oh... they will say, "Don't sell... the market always comes back." I prefer to say, "Sell after the market tops and buy those fundamentally strong stocks after they bottom at far cheaper prices as the market comes back." This is how "Trend Investing" works.


Before I get into the basics of trend-investing, look at the following chart. It is a historical chart of QQQ, the ETF for the Nasdaq 100. Decide, after looking at the chart, if you should buy or sell based on the chart. To make it easy, the dates are on the bottom of the chart. All of the following charts are from StockCharts.com.

The green line is the 10-week moving average (wma), the red line is the 20 wma, and the blue line is the 40 wma. This is an over-simplified chart, but it gives you a good idea as to the process I go through every day. It’s easy to see in the chart that QQQ is trending nicely higher on this chart.


Take a look at short little bounce off the 20 wma. Should we stay in the position or should we sell? The real question is this… has the uptrend in QQQ been broken?


The next chart shows that the uptrend was not broken by this move that hit the 20 wma. Two months later, QQQ broke below the 20 wma. Here’s the same question. Stay in the position or get out?

For reference’s sake, QQQ had dropped more than 10% from its high of $175 in March to as low as $156 in April. That’s a big loss in a short period of time. A lot of traders would have bailed on this last move.


Selling at that point would have been the wrong move. Look at what happened over the next half year. QQQ continued to rise and it wasn’t until October that it broke below 40 wma. That was our signal to get out.

As I like to say, we’re all geniuses on the left hand side of the chart. But we don’t get to invest on the left hand side of the chart. We have to invest into the right hand side, into the area we cannot know.


What does this have to do with the way I manage money? Everything!


To be a successful investor, we have to accept that we are going to take a few percentage points of losses when the market is turning from bull to bear or from bear to bull! There is no way around that! Trend investors know that it is impossible to buy at the exact low and sell at the exact high. Trend investing means to first identify when a bull trend has started... AFTER the market or stock HAS bottomed. This means you have to measure when the trend HAS changed from bear-trending to bull-trending.


And, when do trend investors sell? AFTER the market or stock HAS topped. This takes measuring when the trend HAS changed from bull-trending to bear-trending.


Once a stock is moving higher, I calculate the amount of risk that I’m willing to take in that stock. This is important. The amount of risk is the amount that it can move against me and still be in an up-trend. If it moves against me by more than that amount, I know the bull-trend has been broken and I want out before it costs me more money.


Every day, especially if the stocks moved higher the previous day, I adjust the exit strategies higher so that there is less risk in each position. I probably spend more time adjusting these exit strategies than at any single task that comes up each week.


No doubt short term losses can be frustrating when trends are shifting from bull to bear or from bear to bull. But, accepting small percentage losses is far better than silently sitting in a buy-and-hold (BAH) mode where your life's savings melt away in huge percentage chunks.


Trend investing is not easy. It is not a get-rich-quick methodology. It takes patience. It is the best way to avoid major losses in a large downturn and have a chance to actually profit from the downturn. That is why we are moving into inverse ETFs in our client accounts to take advantage of the market’s downtrend.


As always, through the Client Letter and this Blog, I will keep you informed as to how I measure the markets and what investment strategies will be used to protect your money and give you a chance to profit no matter what direction the markets take.

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