Tuesday, February 5, 2013

Strong Uptrend

In 2011 and 2012, trend following funds produced bad returns while the S&P rose considerably during that period.  Like many strategies that lose effectiveness when they become too popular and crowded, the tide seems to have turned back into favorable trend following markets. 

The USDJPY uptrend since last fall is a classic example of trends returning.  The S&P is another.  The S&P has traded in a strong uptrend with hardly any pullbacks.  The markets have transformed into fearless trending markets.  The central bank puts in place have a lot to do with the fearlessness.  If you take out tail risks and dampen volatility, funds will take that as an invitation to lever up and chase equities.  That is what is happening right now and we have a long ways to go, since this has only started in earnest from January 2. 

You will be surprised how high this market goes and how strong it is.  The fundamentals only serve to build a wall of worry.  If the last 4 years in the market have taught traders one thing, it is that the stock market and the economy are two totally different animals.  The best markets to be long are strong uptrends where the Fed is on your side. 

Strong markets do not let you in unless you pay up.  Today is another example, if you didn't get long yesterday, you have to pay up on this gap or risk being left behind. 

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