Buying Opportunity Or Time To Sell? That's The Wrong Question


  • Many investors are wondering if the recent market correction is just a buying opportunity or the beginning of a deeper bear market.
  • Trying to predict the market is futile. Instead, you should make plans to protect your portfolio in different market conditions.
  • Trend-following systems can be very effective at protecting your capital during big and ugly bear markets.
  • With most of the stock indexes around the world trading below their 200-day moving average, the long-term trend for stocks as a global asset class is no longer up.

It makes a lot of sense to reduce market risk by raising cash and/or hedging your portfolio in the current environment.

It's no secret at all that many stock markets have been under considerable selling pressure lately. The big question we need to ask right now is whether this is just a short-term market correction (meaning a buying opportunity for long-term investors) or the beginning of a bear market.

Personally, I think that valuations are expensive, we are late in the economic cycle, debt levels are at historical highs around the world, and global liquidity is declining. Based on these factors, the risk vs. reward equation in stocks looks unattractive over the middle term.

But that's not the main point. Trying to predict the market is futile, and even the smartest professionals with massive amounts of intellectual and financial resources fail miserably in their attempts to forecast bull and bear markets.

As opposed to making market predictions, relying on objectively quantified variables with a solid track record of performance is a far sounder approach to protecting your capital through the ups and downs in the markets.

The following paragraphs will introduce different quantitative systems based on trend-following for portfolio protection. These kinds of systems are obviously not perfect or infallible, but the evidence shows that they can be remarkably effective at providing market protection through all kinds of environments.

Importantly, these systems are entirely rules-based, and they don't involve any kind of market forecast or prediction whatsoever. The main idea is that you can reduce your downside risk in bear markets by relying on cold-hard data and observable indicators.

The Trend Is Your Friend

One of the most popular sayings in the market is "the trend is your friend". Even if that is a cliché that doesn't make it any less true. There is plenty of statistical evidence proving that investors can optimize the risk vs. return equation in their portfolio and avoid big drawdowns by following the main trends in asset prices.

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Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in ...

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