True Confessions (Reflections)

Over the past year, I have been very disappointed in my overall market performance.  As a matter-of-fact, I would give myself a big-fat “F.”  I always stated that the “trend is your friend.”  In other words, stay with the underlying trend of the market and avoid at all cost its daily noise.  (I have definitely been guilty of listening to the daily noise of the market and its so-call market pundits.)  That was the main reason why I focused on the 15/40-weekly exponential moving average (EMA) strategy.  This strategy, if you recall, simply states that when the 15-week EMA > 40-week EMA, the market’s immediate trend is bullish; and when the 15-week EMA < 40-week EMA, the market’s immediate trend is bearish.  I even had an article published, entitled “Market Timing with Exponential Moving Averages.”  The findings from the article demonstrated that the EMA strategy outperformed the traditional Buy-and-Hold, P/E, and Dividend Yield strategies.  Following this strategy in January 2008, one would have avoided the entire market debacle that followed.  The strategy reverted to bullish (15-week EMA > 40-week EMA) on August 17, 2009.  Then, on August 23, 2010, the EMA strategy turned bearish.  Two weeks later (September 7, 2010), the strategy turned bullish.  Overall, the EMA strategy has done remarkability well in identifying the underlying trend of the market.  As I indicated, I failed to adhere to my own strategy.  Becoming way too bearish when the EMA strategy was signaling that the immediate trend was turning from bearish to bullish.  For those of you that followed the EMA strategy the way it is suppose to be followed, I give you an “A,” because I know your portfolio has benefited from following the strategy.

Now, what lies ahead for the market near term?  Let me start by saying that I firmly believe that the market will do whatever it has to do to prove the majority of investors wrong.  Also, the legendary market technician Joe Granville stated, “If it is obvious, it is obviously wrong.”  Ok, where am I am going with this?  Right now the current investor psychology is so one-sided in favor of overwhelming bullishness that something has to happen.  For example, 94% of future traders, as measured by the Daily Sentiment Index believe that the S&P 500 will continue to rally.  In regard to gold, 98% of trades, as measured by the Daily Sentiment Index, are bulls, which is an all-time high.  For silver, 92% are bullish, which is a record.  In regard to dollar, everyone hates it.  This belief is so pervasive that it has to be wrong near term.  In other words, when the psychology of the market place becomes clear to all that the current trend must continue, it is almost always close to a reversal.

 

Since I received a “F” in my own market-timing course, I am in the process of going back to the basics and focusing on the EMA strategy.  I want an "A."