Tuesday, March 31, 2015

Trend is Your Friend

The Irrelevant Investor Blog hit on an interesting topic today and it's something that we've wanted to touch on.  We employ a slightly different method for long term moving averages (12-month vs their use of the 10-month) but the idea is the same.  We've referenced this trend on several occasions and offered that, from a tactical perspective, it's useful when attempting to be on the right side of a market trend.  When the S&P is above the 12-month simple moving average you want to explore opportunities from the long side and vice versa when the index has fallen below the measurement.

As of today's close, we'll have wrapped up the 39th consecutive month of closes above the 12-month moving average.  To put this in perspective, the current streak is the 3rd longest since 1960.  However the longest streak lasted 56-months during the 2003-2007 bull market.  So while we may feel extended, history suggests that there could be plenty of upside remaining.  What's to stop this current streak from eclipsing the 56-month record.  Trying to call a top and time frame of this current bull is an exercise in futility.  But we can use historical context to gain helpful perspective.  Naturally the longer we continue this streak the more likely we are to experience a correction.

For now the trend is your friend until the end.  That's when the fun begins!

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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