If You Trade The Averages, You'll Get Average Returns

JC Parets
October 30, 2019

This is a lesson I had to learn the hard way for sure. Early in my career I used to always want to be trading the Russell 2000 or the Nasdaq and sometimes even S&P futures. Some people can do this successfully. Most cannot.

A wise Egyptian man once taught me that, If you trade the Averages, You'll Get Average Returns. This made a lot of sense to me when he first said it, because I didn't have great experiences with that strategy up until that point.

The reason I bring this up today is NOT to convince you not to trade the index ETFs or Futures. You do what you have to do! The point of this post is as a reminder that we use Technical Analysis to identify trends. These trends are in all asset classes - Stocks, Bonds, Commodities, Currencies, Interemarket relationships, Crypto and others. Once we identify the trend, then we can figure out the best way to try to profit from its theme of rising or falling prices.

We've been in the camp that US Stocks have been in a sideways range since January of 2018, over 21 months. You can call this a cyclical bear market. You can call it a sideways range. Pick your preferred nomenclature and let's move on. 

My take is that we've just about completed this bear market and we're ready to move forward. We've been ready. More importantly, a lot of stocks have already been making new highs. We've covered many of these on our Trade Ideas page. So we're not trying to identify specific levels to be long or short the indexes against. That is NOT what we're trying to do right now.

What we would rather do in the current market environment is identify that yes, in fact, more stocks are breaking out than breaking down. Very few stocks, and almost no important stocks (mega-caps, bellwethers, etc) are making new lows. We want to ask ourselves whether this is the type of market where we are looking for stocks to buy? Or are we in the kind of market where we want to be looking for stocks to sell?

That's what we want to answer. And for me, this is the type of market where we (still) want to be looking for stocks to buy.

I expect this to be a choppy mess in the major indexes. It's BEEN a choppy mess, so why should we expect anything different? "Choppy Mess" IS the trend in the US Stock Market, at least for now. That hasn't changed, yet. But underneath the surface there have been stocks to buy, there continue to be stocks to buy and I have a hunch that in the near-term future there will be even more stocks to buy.

To be clear, this is NOT the type of market where we're looking for stocks to sell. We incorporate an intermediate-term time horizon (looking out weeks and months) and within this time-frame I think we're better off buying the right stocks than selling them.

How'd I do? Did that make sense?

JC

 

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