Monday, February 03, 2014

2008 revisited

The year 2008 was memorable for many trend followers. As the general public came to realise that this was not a mere pullback, or a correction, but a full-blown market downtrend, many investors unfortunately lost much of their hard earned profits that had been accumulated over the period since 2003.

For trend followers, however, it was a different story. Their systems gave them the signal when to exit long positions, and then gave them the opportunity to go short. It sounds almost too simplistic, but if their system gave them a short signal, then they went short, and held that position until the appropriate exit signal was given.

Below is the chart of the Dow from May through to December 2008 (the Dow finally hit the bottom of the move in early March 2009 at around the 6,500 level). In that period, even the strongest stocks fundamentally suffered. 

To a trend follower though, this was a great opportunity to make money, in the same way that the bubble in 1999/early 2000 was. 

In both cases, individual company fundamentals were pretty irrelevant. The market gave a clear signal in which direction it was moving, and you either hopped on for the ride or were left on the sidelines, or worse still, tried to fight the market (and lost).

In 2008, those who tried to pick the bottom in the market in this time suffered repeated losses, in the same way that those who tried to pick the top of the indices in 2013 also did.

No-one knows whether this current move down in the markets will be short-lived, or whether it will develop into another significant downtrend similar to 2008. Trend followers do not use crystal balls as part of their trading system, nor do they rely on the opinions of others. They rely on the one piece of factual information that matters - price.

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