Long-time readers know that when it comes to investment opportunities, the main thing we look for is a trend. As a general rule, market movements are random, meaning one cannot predict what is going to occur from one day to the next. Trends are the exception. By their nature, trends are not random. Instead, they tend to adhere to the rule that objects in motion tend to stay in motion.

When it comes to trends, the financial markets have an upward bias. The bulls always have an advantage because there is a constant inflow of buying regardless of market direction. This inflow comes from pension funds, retirement accounts, corporate investments, etc. In most cases it is an automatic process that doesn’t consider current conditions.

This upward bias is one reason it is difficult for investors to profit from shorting the markets. Bear markets tend to be shorter and more volatile than bull markets. True bear trends are rare and risky. A better use of shorting is as a hedge against long positions during periods of overall market weakness.

Different investors have different ideas about what constitutes a trend. There are very active traders who consider three or four-day market moves as trends. I tend to be on the opposite extreme. I like to look for trends that have been in place for several months. One tool I use to help me identify long-term trends is a 200-day simple moving average. It is easy to argue that any investment that can hold above a 200-day MA is in a long-term trend.

Let me give an example. The chart below shows daily price activity for iShares S&P Latin America 40 Index (ILF) over the past three years. Notice that although this fund has experienced some periods of weakness, it has generally remained above that 200-day MA and has tripled in value over this period. This three-year view allows us to see that the fund’s long-term trend remains intact. Now look at just the past year. Since June of 2007 the fund has gained about 25% amid some significant downturns and plenty of volatility.

Unfortunately, the current bear market that began in October 2007 has been severe enough that there are very few investments that remain in this kind of a long-term trend. Today the Dow reached its lowest level for the year and there is little reason for optimism about a turnaround anytime soon. Over the past few days I have looked through hundreds of exchange-traded funds (ETFs) representing virtually every market sector in an effort to find any that are in solid trends. It is a very short list.

The chart below shows the best performing sectors over the past year that have also had a decent trend during that time. The black line is again ILF. Notice that on the shorter one-year chart the trend is much harder to discern. The line everyone is drawn to is the yellow line, United States Oil (USO), which is up more than 100%. Another fund with a nice trend over the past six months is United States Natural Gas (UNG), represented by the blue line. The orange line is SPDR Gold Shares (GLD), which appears to have lost its trend about four months ago. And the brownish line is Powershares DB Agriculture (DBA), which also seemed to go off track. The gold line is the Nasdaq, included for comparison purposes.

That’s pretty much it, folks. There are some other individual investments that remain in solid trends, but most are representative of these same sectors, such as precious metals, energy or commodities. Now you might be wondering if investors should allocate all their assets to these sectors if they are the ones showing the most strength.

There are a couple of problems with such a strategy. First, over the past four months the only positions that have moved up strongly are USO and UNG. The second problem with any of these funds is volatility and risk. These funds are much more volatile that most investors can handle. Each has the possibility of dropping 20% or more in just three or four trading days. In addition, technical tools are showing that both of these sectors are overbought and due for some corrective action. More aggressive investors might be able to handle small positions in these sectors, but they need to have a thorough understanding of the risks involved.

I wish the news were better, but I don’t expect any major market rebounds until the presidential election picture clears or until economic indicators show substantial improvement.
F.S.

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