trend chasers always LOSE !

Discussion in 'Strategy Development' started by marketsurfer, Apr 21, 2009.


    Why Contrarians Make Money And Trend Chasers Lose Money
    Friday April 17, 11:33 am ET

    Don't you hate being left out? Going against the grain is usually the unpopular direction to go. Nobody likes to be the oddball out. For the sake of popularity, humans tend to conform to the general trend eventually, especially if the trend continues to persist.

    As it turns out, when it comes to investing, being the oddball is much more profitable. Oddballs in the investment community are considered contrarians and contrarian investors have been one of the few to actually book profits over the past year or so.

    If you are willing to exchange some of your trend conforming popularity in return for profitability (don't worry, making money will once again increase your popularity score), this article is for you.

    Trend chasing - a losing proposition

    Most investors - novices and pros alike - rely on news and news- based forecasts to make their buy/sell decisions. News is always good at the top and bad at the bottom. Excessively bullish news will trick you into the market before it falls, excessively bad news will squeeze you out of the market before it bounces.

    Here are a few examples to illustrate what I mean: Equity mutual fund cash reserves reached an all-time low of only 3.5% just before the market topped in October 2007. This means that 96.5% of mutual fund managed assets got to participate in the decline that followed.

    Broad index funds such as the Dow Jones (NYSEArca: DIA - News), S&P 500 (NYSEArca: SPY - News) and Russell 1000 (NYSEArca: IWB - News) lost over 50% from top to bottom. Most actively managed mutual funds did even worse. Why? Because fund managers based their decisions on positive news.

    In the fall of 2008, the Federal Pension Benefit Guaranty Corporation shifted most of its $65 billion in assets from bonds to stocks and real estate. This move came just before the bear's attack intensified.

    In 2007, companies belonging to the S&P 500 index spent a record $590 billion repurchasing their own shares. On average, this buy-back decision resulted in a 50% loss. Index components like General Electric (NYSE: GE - News) and JP Morgan (NYSE: JPM - News) did much worse than the broader market.

    General Properties (NYSE: GGP - News), one of the largest mall operators in the states, had to file for Chapter 11 bankruptcy protection due to its aggressive and overleveraged expansion at the height of the real estate boom.

    Yes, as the example of General Properties and once highflying homebuilders (NYSEArca: XHB - News) shows, trend chasing is actually the root cause for the financial and economic meltdown. The fear of losing out on profits caused even the most prudent investors and business men to throw caution to the wind.

    As Ben Stein commented in the New York Times, nearly all of us are part of creating the prevailing trend, which inevitably turns against its creators. Ben noted that 'almost all economic pundits and soothsayers - whether on television, in newspapers, or at brokerage firms - are asked to tell the future. Some of them are stunningly well paid for their efforts, even though they are wrong decade after decade. Yet, we cry out for someone to tell us the future, like children who want to hear the end of the story.'

    If you are looking for a crystal ball of what the future holds - as long as it relates to equities and economics - resisting your urges and swimming against the current is your best bet.

    Easier said than done

    As so often, this is easier said than done. Certain people, perhaps even prior contrarians with a stellar reputation and brilliant mind, may abandon their out of the box views and conform to the general trend tempting you to do the same.

    Crispin Odey, a London hedge-fund manager who gained fame and money by shorting U.K. banks, has switched teams and is now cheering for the bulls. After being short for most of 2008, Mr. Odey started to accumulate bank stocks again earlier in 2009. The SPDR KBW Bank ETF (NYSEArca: KBE - News) is the U.S. cousin to U.K. bank stocks.

    On a larger scale, even Mr. Roubini, one of the few economists who predicted the real estate meltdown and Mr. Soros, the billionaire investor who came out of retirement to steer his Quantum fund to an 8% gain in 2008, believe that the worst is over. Albeit slow, they expect an economic recovery to begin over the next year or two.

    Like sand on the beach

    Look around and you'll see that economic forecasts are as abundant as sand on the beach, and they are worth just as much. It is tough to find a precious gem (an accurate forecast) amidst worthless sand.

    To further illustrate the folly of news and news based forecasts, consider this: On March 9th, the day the market bottomed, the Wall Street Journal featured an article called 'Dow 5,000 - There's a Case For It.'

    True, there might be a case for it eventually (more about that below), but as it turned out, the market decided that March 9th was not the time and place in history.

    In fact, just a few days earlier, on March 2nd, the ETF Profit Strategy Newsletter sent out a Trend Change Alert recommending ETFs that benefit from a rising market. Such ETFs included traditional broad market index ETFs, dividend ETFs, sector ETFs like the Financial Select Sector SPDRs (NYSEArca: XLF - News) and leveraged ETFs such as the Ultra Dow Jones ProShares (NYSEArca: DDM - News) and Direxion Large Cap Bull (NYSEArca: BGU - News).

    Back to the folly of a news-driven market; Wells Fargo's (NYSE: WFC - News) positive earnings report sent stocks soaring last week while Goldman Sachs' (NYSE: GS - News) earnings surprise this week was greeted with indifference. If news drives the market, why does the market react differently to essentially the same piece of news?

    The profit prophet

    The ETF Profit Strategy Newsletter has often referred to the inverse effect investor sentiment tends to have on the market's performance. On December 15th for example, it noted the following: 'Optimistic sentiment, which should be more visible above Dow 9,000, will give way to further declines. At this point, the best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600.'

    The beginning of January, right about when investors started to feel comfortable with the market's future prospects again, proved to be the time to load up on short ETFs such as the UltraShort Dow Jones ProShares (NYSEArca: DXD - News), UltraShort MidCap ProShares (NYSEArca: MZZ - News), Direxion Large Cap Bear (NYSEArca: BGZ - News) and many more.

    Economists and market analysts often use projected growth and earnings numbers as foundation for their forecasts. We have found that using projected numbers does not deliver accurate results. 'Projected' implies the possibility and often probability of change. Who wants to hear after the fact, 'sorry, we had to adjust our forecast because things got worse than expected?'

    The market's built-in indicators

    Most people don't know this, but the stock market has several built in indicators visible to the naked eye. Just like a fever is the body's way to let you know something's wrong, the stock market's internal indicators are telling investors whether its current valuations are 'healthy or sick.'

    While it does take some common sense to interpret the market's symptoms, you don't need to be a Doctor or rocket scientist to figure them out.

    Dividend yields, P/E ratios and investor sentiment are the market's way of letting us know what's going on. An analysis of the above three indicators reveals that the stock market does not bottom until dividend yields, P/E ratios and investor sentiment reach certain levels, just like your body is telling you that you won't be fine until your temperature calibrates back to about 98.6 degrees.

    An in-depth analysis of the above three indicators along with the Dow Jones measured in the only true currency, gold is available in the March issue of the ETF Profit Strategy Newsletter. The results show that contrarians will continue to be the ones raking in profits.
  2. asap


    i am afraid this thread wont get much controversy as many of the trend chasers here on ET have been caught on the wrong side of the long trade this week and hence are too depressed to come up and defend their utter non sense and complete failure.

    i am sorry for them

    aint life a bitch?
  3. eagle


    Is there any significant difference between Contrarian and Trend Follower?
    Not much.

    Contrarian - Spot the trend early and follow it.
    Trend Follower - Spot the trend lately at specific point along the trend and follow it.

    PS: That is my own definition, accept it or leave it.:D
  4. Marketsurfer,

    You Sir are a fool. You should not be allowed to post in a 'trading strategy' forum. You post articles in this forum quoting Ben Stein. WTF is wrong with you?

    You need therapy, and not that free shit on the radio. I mean the kind where you pay big $$ and lay down on a leather recliner and talk about your mother.
  5. EPrado


    Surf and his little puppy ASAP will continue to make fools of themselves. All one needs to know is that neither one of them actually trades. So anything they say holds zero weight.

    Surf is a nice guy, but in my 17 yrs of being in the trading world, he by far has the worst opinion.....ON EVERYTHING !!! :)

    That's why he writes about trading, but doesnt trade.
  6. T2GR8T


    Yeah you certainly don't want to be caught on the right side of a trend :p
  7. :D
  8. And I am surprised you find time to post while licking your wounds. But oh well, the market has finally given you what you searched so hard for, the pennies in front of the steamroller. Just make sure you run or else you may soon get completely rolled over.

  9. Agree. What I cannot understand is why some people don’t wait for a pullback, which would result in better R/R and more logical stop placement. Then they could enter when the lower timeframe begins to reverse back in the trend direction.
  10. A contrarian makes money unless his views are not contrarian to other contrarian with respect to him views than generate moves against most other contrarian positions.

    I think this should settle the matter once for favor a simple, common sense trend following with sensible money management...
    #10     Apr 22, 2009