Don't fight trends 22.05.08

Simple but not easy

The ETF leadership chart has been telling us for many quarters to follow the strength in commodities and avoid growth stocks.

Yet, it seems many on my twitter feed are fixated with trying to catch knives in profitless tech stocks. A couple friends told me that they’re scooping up more ARKK shares at a bargain (these are the same folks that were buying ARKK late 2020, and buying crypto & pot stocks in late 2017).

It’s not just anecdotal. The flows into the ARK funds are quite something:

• Past 3 months: +$1.33B

• Past month: +$636M

• Just Wed & Thurs alone = +$530M!

And it’s not just the public. Cathie Wood herself keeps doubling down on her biggest losers (TDOC, COIN, ROKU, etc) to make them her largest holdings. With each new fresh leg lower in her fund, she comes on the media to announce an upward revision to her future 5-year forecasted return. She’s even quoted as saying “the market has gotten it very wrong.”

The market is never wrong.

We looked in the last post how inflation is putting downward pressure on bonds, stocks (especially high-duration growth), gold and real estate. Why put yourself in front of that freight-train?

Because people can’t help themselves.

It’s ingrained in many to “buy low, sell high.” We love buying downtrends because we think we’re getting a rock-bottom price. And we’re afraid of strong uptrends thinking they will rollover sharply at any instant. Trend following is hard and that’s why it works.

But have a look at the math of buying uptrends vs. downtrends:

Brian G @alphacharts

Expected return = win rate*avg gain + loss rate*avg loss Buying breakouts in uptrends gives higher win rates (trends persist) & avg gain (trends can go on for a long time). Buying support in downtrends gives higher loss rate (trends persist) & lower avg gain (dead cat bounce).

To put in perspective how severe the downtrend in ARKK is: it’s made fresh new all-time-lows against QQQ. All those analysts, spreadsheets, and marketing were no match for market forces.

Now look at the downtrends in Solar stocks, S&P 500, and Bitcoin relative to oil stocks:

These are certainly not trends I want to fight.

I’ll leave you with a couple tweets:

Brian G @alphacharts

Health: We know to eat clean & exercise. Trading: We know to be simple, follow trends, be patient. Doing it is the tough part.

Brian G @alphacharts

We don't try to make sense of this complex world sitting at home in our pajamas. We follow trends set by the big players that dissect all the data points for us.

Brian G @alphacharts

Some say it's 2008, others 2011. Some looking for max pain trades, others sitting in cash. Some catching falling knives in stuff down 70%. I'll just follow trends/leaders and try not to think too much.

Have a great rest of your weekend!

Twitter: @alphacharts.

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Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.