Cash is King…For Now!

Fear has spread throughout Wall Street and Main Street. One consequence of all the fear on the Street is the lack of sustainable positive trends.

As the heading on this blog states I believe that “There’s always a bull market somewhere!” In other words, I believe that at any point in time there is always a broad market index, a sector, an industry group, a country, an asset class, a commodity, or a currency that is in a rising trend. For instance, the first six months of this year stocks in the U.S. and across the globe were down. However, the price of oil was up, commodity prices were up, and precious metals were up. You could have generated some nice returns during the first half of 2008 by avoiding stocks and investing in USO (oil), GSG (commodities), GLD (gold), and SLV (silver). However, in July the trends in all of those asset classes turned bearish. Trend followers would have exited those positions only to find a lack of sustainable trends elsewhere.

The third quarter of 2008 was marked by fear and panic as the credit crisis and collapse of financial institutions roiled the markets with uncertainty. But remember, fear and panic is what it will take to establish a bear market bottom that lasts. Everyone would like to know where the bottom of this market is or how long the bear market will last. The answer is: no one knows. Changes in market trends and the duration of those trends can not be predicted in advance. As a trend follower, all I can do is identify current trends and follow them. What I do know is this: CASH IS KING…FOR NOW!

Here are a few trend following principles to keep in mind:

  1. Don’t fight momentum; embrace it! Trends often last longer than people expect. It is more likely that a trend will continue rather than reverse. The path of least resistance is most often the current path of the trend. Always assume a trend will continue until you have proof (from charts and technical analysis) that it has reversed.
  2. Trends reverse quickly. Just review the charts for the ETFs I mentioned above. You will see that although they were all in rising trends during the first half of this year, they all reversed sharply in July and August. The trend is your friend…until it isn’t! You must have an exit strategy. Know your sell rules and follow them.

With those principles in mind it’s important to remember that the current trend for almost everything is DOWN. Until there is more certainty related to the credit crisis and problems in the banking industry, don’t fight the downside momentum. If you’ve been executing a trend following strategy, then by now you should be in cash and you should stay in cash until new trends are established.

[DISCLOSURE: Clients of Freedom Financial Solutions, LLC that are invested in the Global Trends Strategy currently have a cash position that ranges from 90% to 100%.]

Trackbacks

  1. […] as well as “the worst week ever“. On October 3rd (with the Dow at 10325) I wrote “Cash Is King…For Now“.  My main point with that post: If you’ve been executing a trend following strategy, […]

  2. […] well as “the worst week ever“. On October 3rd (with the Dow at 10325) I wrote “Cash Is King…For Now“.  My main point with that […]

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