Trading Opinions Can Be Costly to Your Portfolio

I saw a great article in the Wall Street Journal a couple of months back. It revealed that times have been tough for those betting against the bull market.

The S&P 500 continued to break higher throughout 2017. And investors have been backing off bets that the major index is headed downward.

Bets against the SPDR S&P 500 exchange-traded fund, the largest ETF tracking the broad index, fell to its lowest level of short interest since May 2013.

The bearish investors say they are scaling back on bets against the index not because their view of the market has changed, but because it is difficult to stick to a money losing strategy.

And the shorting of individual companies is also going by the wayside, if data by Hedge Fund Research Incorporated is anything to go by. Short-biased hedge funds had $US4.3 billion in assets in March this year, well down from $7.1 billion at the end of 2013.

Now, there are a few things I can say about all this…

Markets won’t collapse when everyone is expecting them to.

Think of all the crises and market fears we’ve been through since 2009. The European debt crisis, the Russian financial crisis, deflation fears, concerns over rising rates, the oil slump, China’s collapse, and on it goes.

And remember the Royal Bank of Scotland’s call of a ‘cataclysmic year’, urging people to ‘sell everything’.

Markets climbed on every one of those worries. It’s just what markets do.

It’s only when everyone is fully invested, and there’s only blue skies ahead, that markets can collapse.

The other thing is that the charts are just not suggesting a collapse.

You might look to US housing related stocks as a bit of a leading indicator. If they were to break lower that might forewarn of an impending crisis. But the opposite is happening, and US homebuilding ETF’s are breaking higher.

The short sellers seem to be betting on an imminent recession. But, with US unemployment hovering around 16-year lows and UK unemployment at 42 year lows, it’s difficult to see where this recession will come from.

In essence, the investors and hedge fund managers shorting the market are trading on an opinion, or a story.

And the story goes something like, stocks can’t go higher, valuations are way too high, there’s too much debt and on it goes.

Let’s play devil’s advocate and assume they’re right. That recession is just around the corner and stocks are headed for a fall.

Even if they’re right about all this, you have to wait until the market confirms that view. Then you move with the market.

But the short sellers are trying to pre-empt things, or second guess the market. They think they’re right and the market is wrong. That’s not a profitable attitude to take.

The short sellers are trading against the trend and that’s not the way to make fast money. In fact, they’ve been losing money.

It is far more effective to trade with the trend and short stocks breaking lows from years past, rather than shorting stocks breaking higher.

Since the market low of 2009 the long term trend in most major market indexes has been up.

Never short a rising market.

Again, this shows that the majority of investors just guess, or get caught up following some story of the day.

Don’t trade opinions; yours or others.

Put aside all the stories and just follow the weight of money.

Ignore the supposedly knowledgeable ‘experts’ telling you that the world is going to collapse and just trade the chart.

If the trend is up, go with it until the chart says otherwise.

Trading stories can be costly, but trading the charts I’ve found can be profitable.

And that’s what we do at Money Morning Trader, we trade the charts and put aside all the noise.

When you study the charts you may come to realise that you know more about the direction of the economy than some of the highly paid fund managers.

If developing some chart reading ability is something that might interest you, go here to find out more.


Terence Duffy,
Editor, Time Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia