Market Analysis: Primer on Trend Following
Yesterday, I discussed my criteria for deciding when to get back into the markets. Today I will go over the actual analysis that I perform. In this exercise I will start with the major stock markets and then also cover the major and alternate sectors, the countries and also currencies. So, this is a slightly longer post bit will hopefully provide a full picture of my system.
Major Markets
Staring with major markets, let’s review the following table:
This table is an observation of price against its various short- and long-term moving averages. This is the most fundamental basis of my system. We can see that the cells highlighted in green is where the criteria have been met. We can see that all the major stock markets are in a bearish trend from a long-term perspective. They could be reversing which we will start seeing as each column from the left starts to turn green. So far, the price has only met the first criteria which is moving past the 10-day moving average (except for the NASDAQ where it also did go over the 20-day moving average). My buying criteria is when the 10-day crosses over the 20-day moving average. That is where I start to buy, and I continue buying until all the cells turn green.
Major Sectors
Now looking at the major S&P 500 sectors:
This looks very similar to the major markets table. However, we do see the best strength in the Biotech sector (XBI). That is because the price is higher than both the 10-day and 20-day moving average as well as the 50-day moving average. So, is Biotech going to continue to be a leader for the sectors? Time will tell. The Healthcare sector (XLV) also seems to be ahead of the others by a little.
Interestingly, we see that the longer-term indicators for Energy sector (XLE) are green (meaning criteria is met) but the short-term indicators are not. This means that XLE is actually transitioning from a bulling pattern to a bearish pattern. It is going the wrong way (at least for now). We can see that the Utilities sector (XLU) is doing the same, although it is trying to break out again in the short-term (seen by the price moving over the 10-day moving average).
Countries
Moving on to the table for Countries:
We can see a clear winner in China (FXI) here. (Disclosure: I am long YINN which is the 3x leverage of the Chinese stock market). Everyone else is lagging. The only other seems to be Hong Kong. Brazil and Indonesia seem to be transitioning from bullish to bearish trend.
Alternate Sectors
Here is the table for the alternate sectors that I track:
Many in this table are starting to look good and attempt to reverse from the bearish trend they have been in. Clean Energy, including Lithium and Solar, is breaking out. And the ARK funds may finally be coming out from their downward momentum as well. Note that the column for 10-day over 20-day moving average is still all “No”, so I am waiting in the sidelines on these.
Currencies
Finally, the table for currencies:
The US Dollar definitely continues to remain strong against the top basket of currencies. It is up +13.7% over 1 year time frame. I track the currencies but seldom trade them unless something very obvious jumps out at me. Currently, there is something jumping out which is the Japanese Yen (highlighted in red block for emphasis). It is down -19% over 1 year and does not look like reversing anytime soon. I am considering going long YCS which is the 2x inverse of the FXY. That means for every unit that FXY goes down, the YCS will go up 2x.
Conclusion
The above illustrates a simple trend following technique using simple moving averages to drive actions. I have a system based on this and am disciplined in following it. I believe anyone can create their own system based on this framework. This is as close to “Timing the Markets” as we can get.