Good Day All, this week I want to talk about trends. I am talking about all kinds of trends, not just stock market trends although those are what we are most concerned about. I am going to talk about the trends I see developing and maybe more importantly trends I believe may come to an end or at least a change.
It will come as no surprise to any trader that identifying trends is an important skill that must be developed to be efficient in trading. There are lots of ways to determine the trend. We can use fundamental data to see what the trend might be. Of course, we can use technical analysis to see the trends as well, this is really the bread and butter of stock traders. These are not the only way to see trends. We can see trends just by listening and watching the movement of people, goods, and services. This may sound simple but I think a lot of people miss out on this great way to determine trends.
Let me explain what I mean by that last statement. I have been listening to some of my peers, as well as many in the industry that there is a lot of upward pressure in the stock market from a new group of investors. These new investors have been termed Millenials or the Robin Hooders or even the amateurs. Now, let’s be clear I don’t personally know if this group actually exists or whether it’s just something folks are saying right now. Here’s what I do know, I have been talking to a few friends in the real estate market and the market where I live has been on fire recently and from the little research I have done the market seems to currently be driven a group of young new investors/buyers. There is one other market that seems to be driven by a similar demographic and that is the luxury purchases like boats, high-end cars, and other high price tag items. I spoke to some of my friends in the area where I live and they had told me that if you want to buy a boat here that you would have to wait until at least next year for delivery.
Looking at this raw data it seems to me that there is a trend here. This trend seems to have some commonalities in my opinion but these commonalities may not be the ones you are thinking. The easy ones to spot are perhaps the perceived age of the investor/buyers or that there is perhaps a lack of experience from this particular group. This can easily be justified by looking at the things that are happening around us. For instance, in the last couple of weeks, the risk-on crowd seems to have gotten very aggressive. The best example I can think of is the sky-rocketing of Hertz rent a car company share price. You see Hertz filed for bankruptcy a few weeks ago and yet their stock price mysteriously quadrupled in a manner of days and so it is easy to jump to the conclusion that only young, inexperienced investors would push the prices of a bankrupt company higher and higher. These are the easy things to point out but I feel there is more to this trend than meets the eye.
I believe that this trend is brought about because of two factors that might not be as clear as the two I mentioned above. I believe the two factors that are causing these reactions in these different markets are conditioning and the ease of credit. In the last couple of months, we have basically had the Federal Reserve come out and tell the whole world that they will stop at nothing to prop up the economy and the did so by making, in my opinion, a very quick drop in interest rates and an increase of buying various debt instruments. I believe this move by the Fed along with the way our society appears to be conditioned is causing this influx to the stock market, the real estate market, and the luxury market as well. The conditioning that I speak of is the low-interest rate that we have been in for a long time now. I am just old enough to remember when we had 21% interest rates in the 1980s. We haven’t had anything that even resembles a normal interest rate, which I would put at around 6%, for what seems like forever. Most folks would see lower interest as a good thing and maybe it is and maybe it’s not? Let me share an observation that I see from many young people that I interact with, not all young people but many of them. I see that young folks seem to be so conditioned to borrowing that they seldom actually look at the overall cost of something and instead they just ask what the monthly cost of the item is whether it be stocks, real estate, or luxury goods. This way of thinking because of the low-interest environment seems very dangerous to me because I feel that many folks are completely ok with paying very high prices for assets and liabilities. This seems like an unsustainable trend in my opinion and I say this because I still remember very vividly the carnage from 2008 when we only had one debt bubble and that was the real estate bubble. If you look at the other markets I think it would be a fair statement to say that maybe those other markets are looking a little bubbly at the moment as well.
So what does this have to do with trading? Well, trends are very interesting. Trends can last a very long time in one direction but they always reverse at some point and the way this happens is when there is no one left to take the other side of the trade or better put when the exhuberence of funny money finally has no more takers then we will most definitely see these current trends reverse and the tragic thing is that most folks are unprepared for this eventuality. This is where as traders we need to train ourselves to not only be able to follow a trend and ride it as far as we can but we also need to train our eyes to see when things are changing.
The way we train ourselves is we look, listen and feel and then use those tools to make better decisions about what trends we get involved with and which ones we let pass by.
A final word of wisdom, trends are like buses, if you are patient and wait long enough another one will come along and then you can make a better decision as whether to get onboard or let it ride.
Trade Well Friends,