There are two main types of traders: trend followers and countertrend traders. If you try to be both, you usually end up getting the worst aspects of each. I've been a countertrend trader since I started. I've tried trend following and had limited success. Its not say that countertrend trading is better than trend following. There are good and bad aspects for each.
For trend following, since you look for price confirmation of strength or weakness before entering, its easier to know when you are wrong and can stop out more easily. If the trend goes against you, you are wrong, and you get out. Take your loss and move on. Its part of the system. For countertrend trading, you are going against price action and buying when its going down and selling when its going up. You don't know if you are wrong or if you are early. In fact, the more a position goes against you, for a countertrend trader, theoretically the better the opportunity becomes. It makes it hard to stop out of a position and take a loss.
So overall, trend followers have big wins and small losses but a low winning percentage, while countertrend traders tend to have small wins and large losses, but a high winning percentage. Most traders want a high winning percentage, so naturally most traders end up being countertrend traders with a high winning percentage (selling winners quickly), but taking big losses when they are wrong (holding on to losers).
Obviously if you were countertrend trading in a relentless uptrend and you tried to short in 2021, you had a tough time. And as a countertrend trader, there were few opportunities to buy a decent sized dip to put on size. 2020 and 2021 were favorable for trend followers, both in stocks and bonds. In 2022, I am expecting a change with more choppy markets, shorter trends, and more fakeouts on both the upside and downside. It should finally be a good year for countertrend traders, like a 2015, like a 2018. Despite the big drop in early 2020, both 2020 and 2021 were great years for buy and hold investors. With the SPX now at nosebleed levels, and with both monetary and fiscal policy less supportive, look for more air pocket drops and fewer V bottom rallies. Fundamentals and valuations are big negatives and it is on the back of the mind of investors. I can sense a little uneasiness among the bulls, even if they are still fully invested. You can feel the lack of conviction among the bulls, as the Fed will soon be raising rates and Biden is having a tough time pushing out more pork in DC.
With most investors now conditioned to be bullish on stocks no matter what, and with above average bullish positioning among speculators and households, but with conviction that seems to be weakening, you have a formula for a 2015 type market. A lot more weak hands in the market that will be pushing the eject button when the turbulence rises.
Added to my SPX short yesterday, still have another bullet to put in the chamber, so will add that last bullet either today or on Friday. Getting set up for early January weakness.
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Owl I mainly trade stocks.Occassionally indexes.I am a trend follower.I have gotten better at trading indexes because over time I have become more of a counter trend trader.So trend following for stocks and counter trend for indexes.
Indexes lag stocks.Stocks bottom and top before indexes do.Is this why counter trend may work better with indexes?
Joseph Faggianelli
I don’t look at a broad enough group of stocks to get a sense for how it affects the indices. I do see breadth indicators but that doesn’t give you a real sense of whats going on underneath. But I have noticed that speculative stocks and bitcoin are good measures of risk appetite among investors, and they are lagging badly over the last 2 months vs SPX.
As for why countertrend trading works better for the index than stocks, I think its because herd behavior is stronger and longer lasting in individual companies than the overall market. But I agree, individual stocks trend much more than the index.
Ran a hedged book all year with ard s&p returns on the long book but significant losses on the hedges. Got beaten by s&p by close to 10pct (1st time since 2007 when I was too early to short). I am heading into 2022 long a lot of recovery stocks and overhedged using spy, dia and qqq puts. Portfolio will outperform if stocks underperform big in Jan. Pumped up to beat the market big in 2022. I generally outperform a little in bull years and by a lot in negative years
I think it will be a great market for those that can play for both the downside and upside. My favorite sectors are energy and consumer staples. A stagflation play. Expecint the first 2 weeks of Janairy to be weak, and then a final big rally in February and March
Strong January effect in effect. Aapl breaking out. Not waiting for lower prices to buy.
Likely short lived as rates are soaring and reality will sink in soon. Still expecting weakness in coming weeks
Less capital gains profit taking then I was expecting for the first day of the year, the fund flows have won out so far. I expect the fund flows to slow down as the month goes on. Usually the biggest inflows happen in the first couple of days in January. Buybacks are the smallest of any month in January, due to earnings and backloaded stock buybacks (Nov+Dec) for most years.
wud u add to your shorts today/tomorrow or just keep what you have?
No, not adding anymore. I have room to add more, but its not a good enough opportunity for me to go "all in".
thanks @marketowl. my sizing might be a little off on this one have bigger shorts than I should have but got a bit greedy. still have room to wait but will wait it out for now
It can definitely go below 4650, but I am thinking risk reward and is it worth it to try to catch 50 more points of downside and risk getting stuck short if it V bottoms again around 4650?
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