We’re trend-followers at TrendLabs for one simple reason: asset prices trend.
That’s not a theory. It’s a fact.
Fighting those trends doesn’t just make investing harder. It goes against the entire point of what we’re here to do in the first place.
Asset prices trend. That’s why technical analysis works.
The best technicians aren’t in the business of guessing tops and bottoms. They’re in the business of identifying and riding trends.
Because history is clear: Once a market gets moving in a direction, it tends to keep going that way longer than most expect.
The Contrarian Side of Me
You’ll regularly hear me talk about how everybody’s always wrong. And they are, particularly at extremes.
When everyone is leaning one way, we want to look to take the other side.
But we don’t just want to be contrarian for the sake of being contrarian. That’s actually the opposite of what we want to do.
If we’re fading sentiment, we want to wait for the trends to actually turn before getting involved, with very few exceptions.
Here’s a great quote that I think about all the time. This one comes from Jeff deGraaf, the chairman and CEO of Renaissance Macro Research, one of the greatest Technicians to ever do it:
“If you’re always contrarian that makes you a cynic. If you’re always a cynic that pretty much means you’re an asshole.”
He’s right. Being contrarian just to be contrarian isn’t smart. It’s expensive.
And it’s a fast way to get run over.
The Divergence Strategy
Every week in our Divergence LIVE strategy session, I like to kick things off by reminding everyone exactly what we’re here to do.
It’s a simple three-step process.
First, we find the crowded trade. When everyone’s leaning hard in one direction, that’s where we start paying attention. Extremes in positioning create the biggest opportunities.
Next, we wait for the flip. This is the key. We don’t jump in just because the crowd’s on one side. We wait for price to confirm by crossing a level we’ve already mapped out ahead of time. That flip is our trigger.
Then we ride the acceleration. Once we’re in, the goal is to let the market do the heavy lifting. We stay patient, give trades room to run, and let profits pile up. Because the only way to make a lot of money in the market is to let the market make you a lot of money.
Or, as we like to say around here, “Let them dance.”
Bearish Sentiment
It’s amazing how many people are fighting the trend right now in the U.S. stock market.
We just finished a seven-week streak of more individual investors who are bearish vs individual investors who are bullish, according to the American Association of Individual Investors.
And here’s the latest from Goldman Sachs(GS), showing its sentiment indicator of investor positioning is still, somehow, bearish:
After historic pessimism this spring, at -2.5 on the scale, you can see how sentiment and positioning is still in the negative.
This sentiment indicator, which combines nine measures of positioning across institutional, retail, and foreign investors, is still showing little to no optimism, according to Goldman Sachs.
I have eyes. I see what’s going on.
Investors aren’t buying into this strength. They’ve been scared to death since the spring lows, and many have missed this historic rally in equities.
Good. I think they’re all wrong.
And the market keeps proving it.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs