Money is made from the stock market in numerous ways. You could buy a speculative company and see massive capital gain due to a sky rocketing price. You could leverage yourself with CFD’s, Options or Futures contracts to make a bigger gain on a smaller price movement. Or, you might even Short the stock market and profit from a fall in stock prices.
While these are ‘potential’ methods in making big money over the short-term on the stock market, they can also be speculative and therefore have their own Risks and probabilities of success. There is one clear defining factor for any success from the stock market … you need to define a trend, and make the most out of that trend.
A Trend can be defined in various contexts. The influencing factors are its’ direction (up, down or sideways), the time-frame you expect the trend to last, what industry cycle might be influencing the trend, and the fundamental influences that give cause to the trend in the first place.
Have you ever had a hunch about what was happening, but didn’t take action?
All too often I have clients telling me their views on either individual stocks, the stock market as a whole, or the broader economy. And you know what? In many cases they are generally right in their assumptions. That doesn’t necessarily mean they end up making money out of their views. A lot of the time people will have an opinion, but not take action. Mostly due to confidence.
That’s where a professional like myself steps in. I’m here to provide a review of those views, offer alternative strategies and plans, and to discuss the Risks associated. At the end of the day, however, it is the client’s decision to take action. I’m here to simply support that.
But those hunches will normally be a view that something is too over priced or that a price has dropped significantly and is now a good buy. A great example of this was the 2007/08 Global Financial Crisis where over a period of 6-months at the end of 2007, many investors were concerned as headlines were instigating fears of a contracting economy. As time has proven, the ‘crash’ that occurred in later 2008 had plenty of warning.
Yet, investors held their stock positions and didn’t take action! A bear trend had formed by late 2007 and although investors were panicking, very few capitalized on this change in trend, despite opinions that the markets had an increased potential to fall.
Key trend changes
Sometimes key trend changes are hard to define. Dynamics can take time to change, or your focus is on other areas of the market, and you miss the shift between supply and demand. Successfully identifying when trend dynamics are changing, however, can be a key method in setting up a position to capitalize on the new directional movement.
For example, in 2014 we had seen a major change in trend in Crude Oil. With America becoming a net producer of Crude Oil for the first time in history, no longer relying on imports to sustain its insatiable need for the ‘black gold’, supply had increased substantially. At the same time, production levels through OPEC (Organisation of Petroleum Exporting Countries) continued to remain high. Spearheaded by Saudi Arabia and with Iraq and Iran providing increased supply to the global market, there has literally been a flood of Crude into the markets. This is despite declining demand in Europe as the EU is on the verge of another (3rd) Recession.
So there was a key change in trend in Crude Oil, with the price halving between July and end of December.
Improving economic activity in the 2nd half of 2014 also provided a change in trend for Retailers. At the same time, positive expectations for this sector leading into the Christmas period resulted in a continuation of that trend.
Using the Exchange Traded Fund (ETF) code: XRT (SPDR S&P Retail ETF), a sideways range that dominated the first half of the year was broken in October with an almost 20% increase into the end of the year. This was almost double the S&P500 (leading index) gains of 11.5% for 2014.
So what are the Trend Changes for 2015?
First and foremost, our view for the broader US stock market is to continue the growth trend, with an expected gain of 8% to 10% for 2015. Technology stocks are cashed up and have been acquiring small start-up innovators. This sector is poised for the greatest growth, and is the space we will be looking for opportunity. It is also the sector that tends to have more volatility, so investors need to be aware.
In the second half of the year, the potential for rising Interest Rates will see a dynamic change in Bonds. With this in mind, we will be monitoring TBT (ProShares UltraShort Lehman 20Yr Treasuries ETF) for a change in trend.
Gold prices have already started a trend change at the end of 2014. Investor fears in Europe are influencing this ‘flight to safety’. Although we could see more volatility in the precious commodity, changes in Central Bank holdings is likely to have an impact on supply. It might not end up a ‘skyrocketing’ trend, but a new trend all the same.
Agricultures have been declining for the last year. This is on the back of improved production and supply. Demand for agricultural products, globally, will only continue to increase as the world population increases. We are monitoring 2015 for a change in trend on DBA (PowerShares DB Agriculture Fund ETF).
How to identify a change in trend
Having a view to start with is important. That could be defined by a fundamental view, a cyclical change in industry (seasonal planting in agriculture for example), or a view based on a published report or article that you agree with. With a defined view, there is a simple method in which you can then technically define the change in trend.
Industry standards use Moving Averages to define trend. Long-term standards use 100-day or 200-day moving averages. Medium-term views use 50-day moving averages. Short-term views need to be defined by the expectations by the trader, however, our standard setting for 1-month trading is to use a 20-day moving average.
To identify a major change in trend, particularly in any of the aforementioned 2015 trend changes, we are using a 100-day moving average. When underlying prices break above the 100-day moving average, this will signal an alert for accumulation. Of course, we will use other factors to evaluate the entry, and to define what strategy we implement. This is simply a starting point to assist in defining when to enter.
The next big trend could be just around the corner. Missing opportunities can be frustrating, and hence you need a plan in place ready to identify when a potential trend is changing. First, formulate a view. Next, monitor for the opportunity for that stock/index/commodity to accommodate that trade outlook. If you are looking for a primary change in trend, then using a 100-day moving average for example, will assist.
There are many ways of making money in the stock market. And it is just as easy to lose money if you do not have a defined approach that has been proven. 2015 will offer many opportunities, but you need to be ready now.
To learn more about these strategies click here.