There is nothing as powerful as a market that is trending. Think of the U.S. stock market in 2013/2014, or gold in 2010/2011. For short sellers, the crude oil market in 2015 was a wet dream.
What we currently see, however, is a neutral market. There is no trend, and that is by far THE most difficult thing to deal with, at least for the majority of investors. In a trendless environment, investors feel the need to “do something”. When you think about logically, you will conclude that it is better to give trendless markets time so they can choose a direction. While that is correct in theory, it appears not as simple in reality. Does that sound familiar?
Trendless markets are nerve-wracking. One of the easiest tricks to manage emotions in a trendless market is to rely on charts. No, we are not talking technical analysis. In our view, chart analysis is the art of looking for trends and patterns solely based on price points. It is easy to mix up chart analysis and technical analysis, but still those are two different things.
Let us take an example from our intermarket charts. One of our favorites is the bonds vs stocks ratio. Intermarket ratios of leading asset classess, in this case stock and bond markets, are a great way to understand which market is leading. Currently, the market is unsure whether it should prefer safety (bonds) or risk (stocks). That is what we “feel” as an investor, but it is also confirmed on the intermarket ratio chart.
Below bonds to stock ratio chart learns a couple of things:
- Early 2008, the bonds to stocks ratio broke out from a very clear and consistent multi-year pattern. It indicated something serious was going wrong.
- Since 2009, the ratio is setting lower highs, suggesting stocks were the leading trend.
- Since 2014, however, the ratio is also setting higher lows, which means tension is increasing, and risk-appetite is diminishing.
Today, however, we see that the bonds to stocks ratio is trading in an area which is outside of a trend pattern. That simply implies that no trend is prevailing. The hard thing to accept for investors is to accept there is no trend, and to reflect that in investment decisions. Charts can help with that, investors better make use of it.
Now is the time to watch moves in the markets with an eagle’s eye, and be patient, as there is nothing as profitable as getting in early into a new trend.
This, and many more topics, will be discussed during our next live educational webinar “How To Survive And Thrive In Today’s Difficult Market“. Register for free, and become part of our growing investor community.