Friday, September 02, 2011

Don't be blinkered by individual equity fundamentals

Trend followers should be trading solely on the basis of price action, however it is very difficult to ignore what is going on in the world and the increasing amount of economic doom and gloom. Those who like to incorporate fundamental or economic factors into their trading will have been looking solely at the short side for a while now.

The movements in the markets in August showed a sharp break down followed by a snap back rally of sorts, with some markets weaker than other - the German DAX for example, has not rallied as strongly as either the S&P or the FTSE.

I only use the indicies as a guide to assist whether I should be looking at the long or short side on individual equities, as the majority of stocks will tend to trend in the same direction as the indices. Even those stocks with the strongest fundamentals will be dragged down if the markets falls - Autumn 2008 and even last month showed that. Also remember that, in strongly trending markets, oversold and overbought indicators are rendered useless. The safest course of action is either to trade in line with the trend, or to be on the sidelines.

No doubt, if markets start to fall again, there will be people wanting to pick a turning point, and try to time the bottom. The easiest way to do this is the wait for the downtrend to end. So you don't get the bottom, to the penny - so what? Either way, I think it's safe to say that increased volatility will be here for a while to come.

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