The trend is your friend…

The buyers were back today as the indexes moved to new highs. What has changed over the last ninety days for stocks to trend higher? To put it in simple terms… confidence. The buyers were confident the Fed was not going to engage in doing any more than they stated they would with stimulus and interest rates. They were also able to grasp what the Fed was explaining about the future growth of the US economic picture, and equally important believe it will happen. That confidence has allowed investors to put money to work in stocks on the belief it will all be fine looking forward. That confidence was built one day at a time, no one threw a switch and made it happen. If we look at the Volatility index as a barometer, if was at it was at 17.5 in April and declined to 10.5 in June. Slow growth in confidence built a slow rising uptrend in stocks.

The challenge will come if what the Fed has been preaching doesn’t come to be relative to the economic growth. That is where the current worry lies, but according to the VIX index that worry is very small currently. Thus, the uptrend remains in play, investor confidence remain strong and the outlook for the belief to come true is still believable enough for more money to go to work in stocks.

A trending market is not one to be explained as much as enjoyed. What I mean by that is simple, we spend too much time in life attempting to explain why things are happening versus just enjoying the fact they are. That goes for bad things as well. They are not enjoyable but rather stressful. But, letting go of the need to understand ‘why this is happening’ isn’t easy. The idea of dealing with what you can and believing the rest will work out in time isn’t in the cards. The reality of understanding events comes better with time versus here and now. Trending markets are better explained by history than they are in the middle of the event. As a mathematician I am driven by wanting to have an answer or explanation for everything. Call it age or just simple statistical analysis, but explaining what takes place today while it is happening is like counting the stars on a clear night. We need to learn to just enjoy the view and then later you can work on explaining why it was so good. The important thing to remember is trending markets make you a lot smart than you are in non-trending market. Nothing changes except the uncertainty of the outcome of your belief.

The chart below is of the NASDAQ 100 index. As you can visually see the bottom was established on April 11th. The resulting bounce and consolidation over the next five weeks was investor confidence building and starting to believe in the story as told by the Fed in this case. Once the confidence was in place the rise from the final test on May 15th resulted in a trend that has been in place for the last six weeks. The resulting gain for the index has approximately 7.8% since May 15th. Looking back at the series of events that have taken place and the reasons for each move is becoming clearer with each passing day and hypothesis proposed. The only part of the story that is still unwritten or explained is where and why it ended. Time will tell, but for you and I to worry about the answer is folly. We simply need to decide if the trend were to start a reversal tomorrow at what point would I want to head for the exits and watch from the sidelines? 3800 looks good today, but we will see how it all unfolds going forward and take it one day at a time. Enjoy the trend while it is in play regardless of you ability to explain it clearly or not.

Practice patience.