Jul

Stock Trading vs Buy and Hold Investing

Does history repeat itself? If so then it’s going to be a tough market for buy and hold investors. Below is a monthly chart of the S&P500. Notice the double top pattern and how the recent pullback after the top looks just like the one in 2000. More disturbing is the moving average crossover that is occurring now, where the 10-month is crossing below the 30-month. The market is actually trading well below the 10-month so the potential for a bear market rally exists, however the current pattern is practically identical to the last one.

Does this not look like an "M" in the making? If that’s the case, the buy and hold long-term investors are in for some real pain.

In this environment I think the only salvation is short term trading. We can see above that if the pattern repeats itself there is a long way to go on the downside and the fact that this is such a long timeframe it could take years for the market to get back to where it is now, not to mention make a new high.

It’s popular for the financial media, the talking heads and the financial crowd to tell people that if they buy and hold for the long-term they will make money, but this is true only if you buy at the right time. As I write this first blog post we are just a week into official bear market territory. everyone is looking for a bottom but every time I look at this chart I see the same thing, a giant "M" that has yet to play out. In the current economic environment I have trouble believing the market is going to turn around quickly so I urge you to frequently look at a monthly chart of the market to get perspective of where we are.

It seems to me short-term trading is the only way to go until we see how this plays out. Whatever you do don’t be fooled by anyone looking for a bottom at this juncture. Sure there are always fantastic bear market rallies and we certainly will see some snap-backs to the 10-week moving average but it is pointing down and acting as resistance. This is not an indication that things are turning around just yet.

Much more coming….

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