Recall all the great news that was in the press when that 50-day crossed lower in late 2007. Then it was the “Goldilocks Economy” and Greenspan’s “there is no bubble in the housing market,” etc. Price was signaling there was more selling supply than buying demand.
And what about the buy signal in mid-2009? Lehman vanished; Bear Stearns was dismantled; AIG was in free fall; margin debt and all sorts of creative leverage were forced to unwind. We were looking at near collapse of the entire financial system.
Yet in 2009, price was telling us something important. While fear was high, the selling pressure had passed and a new uptrend was underway. An easy-to-follow trend-based process can work. The hard part is finding a process you can follow and sticking to it.
Stick To Your Plan
There are other price-momentum approaches you can incorporate. The point is to find something you have conviction in and, again, stick to it. Something really good happens when you combine a number of diverse but disciplined strategies together in one portfolio.
Whether it’s a 10-week over 40-week trend process or a 50-day over 200-day, the message today is that when valuations are rich and forward return low, the risk imbedded in your portfolio is much greater. Overcoming a 50 percent loss takes a subsequent 100 percent recovery gain, and that also means years of lost earnings potential. And this is just to get back to even. Overcoming a 15 percent decline is much easier to do. It’s for this reason that a risk-management process is so important.
That’s especially true when the hamburgers aren’t cheap.
At the time of writing, the author’s firm owned shares of GLD on behalf of clients. CMG is an ETF strategist specializing in tactical investing, using trend-following and relative-strength-based strategies. CMG Chairman CEO and CIO Stephen Blumenthal also writes for Forbes and speaks on various radio and TV shows. Contact CMG at 610-989-9090 or at [email protected]. Click here to receive his free weekly e-letter. For a list of relevant CMG disclosures, click here.