Strength Begets Strength

One of the most challenging concepts for many investors to embrace is the adage – “The trend is your friend.”

There has long been an established view that being contrarian is the best approach in the investing world.

We think that using this viewpoint broadly is a faulty interpretation of a small set of situations.

It is true that when we are in the wildest BUBBLE stock markets, we should not follow the crowd. It is also often true that when certain stocks have been dumped, we should buy them.

The problem is that these statements will help you a small amount of the time and HURT your investment returns the rest of the time.

Stocks that have been crushed are almost always down for good reasons. Occasionally, the stock market overreacts. Sometimes, those reasons may reverse, or the company may fix its situation.

Though, those are the exceptions and not the rule.

Remember that a stock must be down -50% before it can be down -90%.

The same is true for the overall stock market. There are crazy stock market bubbles that will lose investors tons of money.

Those happen rarely, though, and it is difficult to determine when they will turn. Conditions that are "bubble" like might persist for years or even decades.

Not participating in those types of stock markets can cost you ample opportunities. Actively shorting them could cost you actual money.

As famed investor George Soros said, “When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational.”

We agree with this principle, although it needs to be put into practice in a very particular manner.

The reality of how the stock market works is that TRENDS are how you make real money.

Remember that a stock that goes up +100% (or a stock market) must go up +50% first!

The stock market goes higher over time. This is because we have a productive economy with companies working hard to succeed, and America is improving, believe it or not.

The best way to make money is to identify the most significant long-term trends.

In the short term, though, it is essential to respect the value of the trend.

Strong trends—judged by history—show the stock market's underpinnings of supply and demand.

During the current BULL MARKET, we have mentioned this concept many times.

At the end of Q1 2024, we wrote this note explaining how the technical signals indicated the stock market would be higher in a year.

It is worth a read!

Now that we have reached the end of Q2 2024, we wanted to share this table from one of our favorite market strategists – Ryan Detrick of Carson Group. You can follow him on X/Twitter here or check out his website here.

On Friday, he posted this…

This graphic shows the stock market performance if the stock market (S&P 500) is up +10% or more in the first half of the year.

The stock market is up most of the time in the short term (three months), though not much more (65%) than in any average three-month forward period (61%).

Through the rest of the year, though, the stock market is up 83% of the time—a significantly higher percentage (72%) than all other periods.

It is also much higher on average (+7.7% vs. +4.8%) or when viewed as a median (+9.8% vs. +5.6%).

Now – there are no guarantees. Being up 83% of the time means that 17% of the time, it was down or almost one in five.

Look at those instances, though, and you will see that only ONE of them – the stock market crash of 1987 – was of any real consequence.

The lesson is to respect the trend and the strength of the market. This kind of history DOES tell us about the probability of the future.

Again, remember that the trend is your friend!

Check out Enrique Abeyta’s conversation with Greg Guenthner, editor of The Trading Desk at Paradigm Press on the HX Podcast, or watch on our YouTube below.

Recently we were introduced to the work of Greg Guenthner. GG is the editor of the Trading Desk at Paradigm Press. He has a unique skill to marry technical analysis with stock market narratives and generate winning trades. We talk about his background and methodology on this week’s HX Podcast.