The Market's Next Big Move - Identifying The Trend
Thursday, November 29, 2007 | Chris RoweRating:
I'm going to keep today's article short and to the point, and the point is extremely important...You've probably been hearing a lot about this hedge fund and that hedge fund's closing up shop because of investments in mortgage-backed securities. You may have been one of the Tycoon Report readers who commented on recent articles, angry because you think that the Fed bailed out a bunch of hedge funds by lowering rates.
But this year, some of the largest hedge fund profits ever recorded have been made, and they were made by actually betting on the deterioration of these mortgage-backed securities.
Lahde Capital is a hedge fund that was set up just last year. So far this year they have returned investors over 1,000% - AFTER FEES - by betting against sub-prime home loans. This Californian hedge fund isn’t the only “hedgee” ringing the register in this credit market meltdown. Paulson & Co. made $12 billion so far from their bearish sub-prime bets. (And to think that hedge fund fees are 1% - 2% and 20% of the profit!)
Great - the super wealthy get super wealthier. What else is new, right? But here's why I'm writing about this today: You don't have to be a hedge fund or "super wealthy" to profit from the downside. Anyone can do it!
At The Trend Rider, we know how good it feels to be wildly profitable on our bearish positions while the front page of every financial publication in the U.S. seems to be talking about recession and questioning whether we are in a bear market in terms of “Dow Theory”. But you don't even have to be a member of The Trend Rider to "profit from the trend". You just have to know how to identify the trend and act on it.
Being too afraid to act on it doesn't make you a coward. It just means that you don't feel confident enough that you do, in fact, know how to identify a trend, and/or how to identify times when the trend is ending and a new one is likely to begin. Once you are confident that you can tell when a market is overbought or oversold, and when the market is reversing to the downside or to the upside, you're no longer afraid to bet on both the upside and the downside.
The biggest opportunities to make huge profits in the stock market are when one trend is ending and another one is beginning. And I can't stress enough how important it is to play both sides.
Even when you are bullish on the market, it makes sense to take at least a small bearish position in a weak area of the market. If you’re not willing to bet on downside moves, then you’re not only missing out, but you're taking on a tremendous amount of risk. (What if the market gives us a 1987 type of scenario?)
One way to identify tops and bottoms is by following breadth indicators. The idea is to understand when these indicators show overbought readings that reverse lower and oversold readings that reverse higher.
I don't want to come off the wrong way here and sound like an arrogant know-it-all, because I know that I do make mistakes, and at some point, I will foul up again. But to make my point...
Since the October top, I took five bearish positions that are all profitable. On Monday, November 19th, I told members of The Trend Rider that the market was very oversold, but that it wasn't the right time to get very bullish because while the indicators were at low levels, we needed to see them reverse higher. Two days ago, I sent another commentary saying that we were even more oversold than we were a week ago, but that it still wasn't the right time to get bullish because we still needed to see the indicators reverse higher. (The more oversold we are, the less risk there is in taking bullish positions, but I trade with the trend, so I wait until I see signs of a reversal higher. And the "signs" are not based on what the S&P500, Dow-30 or NASDAQ are doing.)
But yesterday, I started to see signs that it's time to start getting more bullish, and I'm looking for additional signs to confirm the ones that I've already seen. Now, I'm no genius. It's so important to me that you understand just how non-genius I am. I just know what to look for and where to look for it, and any average human being can do the same.
I'm sorry this wasn't as short as I thought it was going to be. Please take some time to learn how to identify the trend and condition of the stock market, whether it be from me, or anywhere else. Think of how much time you spent learning how to do whatever you do for a living. How much time was then spent actually making the money that you invest in the market? Why would you stop there when you're so close to the finish line?
Spending a little time learning can change your life dramatically. (I won't always be here to tell you what "my indicators" are telling me. And besides, how do you know I'm not a crazy man formulating an opinion that isn't based on fact? How do you know who to listen to? The only way to know for sure is to see it yourself, and the only way to feel confident enough to make meaningful investments in something is to clearly understand the market for yourself.
I hope this helps someone.
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
