The importance of having the wind at your back

I've said here more than once that this game is not supposed to be easy. If it was, everyone would be playing it and you wouldn't have those dismal statistics that show 90% of traders lose money in the long run. Although the game is not easy, there are things you can do to make is easier. One of those things and in my opinion, the most important thing, is to have the wind at your back and that means trading in the direction of the general trend. You want to be aggressively long stocks when the trend in the general market is on the rise and when economic fundamentals (earnings, leading indicators) are on the rise or stable.  Using the same line of thinking, you want to be primarily short when you see the inverse of the above. When a trend in in place today,  odds are high that it will be in place tomorrow which makes it whole lot easier to make money if you bet with it is as opposed to against it. If your entry happened to be bad and you get caught in counter trend reaction shortly after it, odds are high that you will eventually get "bailed out" by the primary trend.  This is why they say the trend is your friend. Unfortunately, most people follow this adage only when a trend has been in place for a long time and is just about ready to change. Then they fight the new trend not realizing the main trend has changed!

Right now the wind is no longer at the back's of the bulls as it has been since the spring of 2009. The general market has been be flat for the past 6 and 12 months and has been very volatile.  Earnings have remained strong, however leading indicators have rolled over which potentially bodes ill for future earnings. I say potentially because sometimes a roll over in leading indicators may simply be an indication of a mid cycle slow down as opposed to a full blown contraction. ECRI has just reconfirmed their recession call. The latest OECD global leading indicator chart corroborates what the ECRI sees.

Now as you can see by this chart the rollover in the leading indicator doesn't guarantee a recession, it could  simply signal a mid cycle slowdown much like what happened in 2005.  Notice how the leading indicator didn't roll over last summer when there was a lot of worry about a double dip. This time though, that's not the case.  The stock market will often bottom and go back to bull mode a little earlier than leading indicators do, but until we see that behavior you have to be skeptical of the bull side and take it a step further and make a bearish bet if you detect complacency during such conditions of shitty market action and deteriorating leading indicators. Of course, I'm talking about longer term bets here. Those of you who play ST moves need not listen.

I think we will probably have to wait until at least March before we could be in that bullish "sweet spot" again whereby the market is early in a new sustainable uptrend with fundamentals on the rise. During such a phase picking winning stocks is a lot easier as you get the benefit of "the tide lifting all boats". Realizing success going long stocks in bear markets or sideways markets is lot a harder. 2008 was an extreme case of that where practically no stocks in the world went up.

Neither the bulls or bears have the wind at their back at the moment and it shows with the market being flat on multiple time frames. This type of  sideways market is supposed to be ideal for ST trader types but that's hardly been the case thanks to the unpredictable headline driven nature of this volatility and the big gap up and gap down moves that go with it. Overall though, the bears have the edge here because this volatile, broken action we are seeing suggests we are not yet done with the downside and with economic momentum on the down slope, the market has the opportunity to gain traction to the downside making new lows. One possible silver lining to this broken action is, as I've pointed out before in a recent post, we saw similar broken action in the drawn out bottoming formations of the 2 previous big bear markets. So, the bulls could find some solace that if history is any guide, any downside from here will not be catastrophic and will lead to a LT bottom. The way I look at it is this. I'll believe it when I see it.  Given the shitty action we are seeing and the deterioration of fundamentals it's likely there will be another run for the lows sometime in the coming weeks/months. If afterwards the market action and fundamentals suggest a new bull market then I'll be on board long stocks in a major way. In the meantime, there's no sense in loading up on stocks now gritting your teeth hoping that the downdraft in the market you believe is ultimately going to occur, will only end up being part of the bottoming process.  If it ends up being worse than that, you are caught holding the bag and that's a spot you don't want to be in.

So, overall  this where I stand right now - I believe ultimately the market is going to at least make a run for the lows within 6 months. Despite this outlook, I currently don't see enough favorable conditions to make a bearish bet. Discipline trumps conviction. I will only be willing to purchase a limited amount of stocks at this time and such purchases will be very selective and price sensitive. I will also be willing to go net short.  Right now I'm about 95% cash.