Trend Following Financials

  2016-09-15_18-55-38  The article was written by Jacob Saphir, a Financial Analyst at I Know First.

Trend Following Financials

“Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.” Martin Zweig

Trend Following Financials

Summary:

  • “The trend is your best friend”
  • Trend Following and Technical Analysis
  • Financial Outlook for 2017

Background:

Trend following is one of the most common strategy among investors.  This is the act to compare historical price movements, and identifying a trend within its given time frame.  If we see stock price posting higher highs and higher lows than its previous price, we may see an uptrend, or bullish trend.  Vice versa, if the stock price posting lower highs and lower lows than its historical price, we may see downtrend, or bearish trend.  Although strategies change and technology advances to forecast the stock market, historical pricing remains a viable source of information.

We have heard the saying, “the trend is your best friend”.  Do not confuse this with herd behavior. Herd behavior is an emotional act of following what others are doing.  Much like peer pressure, it is investing without taking your consideration into account.  We all share the fear of missing out from gains or investing too late into the rally.  Impatience is among the top reasons many investors lose.  Removing emotion is the key to making a profit.  Although, such forecasting requires self-discipline and not wild emotions, one who can accurately do so, stands to benefit.  To see how we can benefit using this strategy, trend following can be compared to technical analysis and how trend following is exhibited in the financial sector of the market.

Trend Following Financials

Trend Following and Technical Analysis:

Trend following may be similar to technical analysis.  Although both forecast the market using past market data, they differ in execution.  Unlike technical analysis, trend followers don’t speculate specific stock prices.  For example, as stock begins to rise by posting new highs compared to its previous close, a trend may be in the making.  A trader may then place a trade with the hopes of hold onto the stock as it continues its bullish rise.  If the trend ends or the stock decreases, the trader is impulse to sell before the loss continues.  One of the most popular tools for trend following is moving average indicator.  If we compare with technical analysis, the strategy uses various chart patterns, to indicate specific price ranges to buy or sell shares.  It recognizes resistance and support trend line, as we can see in the chart below.

Trend Following Financials

 

Financial Outlook for 2017:

Trend Following FinancialsAs we can see, the financial sector was relatively flat leading towards the US election of 2016.  A win from Hilary would continue Obama’s policy and delay a hike in interest rates later in the future.  After Trump’s victory, the financial sector increased.  This is due to his policy of deregulating financials, as we can see in a previous article from I Know First.  We also saw that interest rate increased only the second time in nearly a decade.  An increase in interest rate would yield banks higher revenue as they could charge higher interest rates for loans, and as a signal the economy is increasing.  One of the earliest signs for an improving economy is to see the change in interest rates. These encouraging events and its current price continuing to increase from its historical price, indicates to investors we may seeing a bullish trend.

In the chart below, we can see for after the end of the election in November 9, 2016, the financial sector or the SPY Financial ETF (XLF) began a bullish trend.  Within 2 weeks, banks stocks and the ETF itself experienced over 10% return.

Trend Following Financials

 

Past I Know First Forecast Successes:

In such as the one dated on December 13, 2015, the algorithm accurately forecasted a bullish signal for First Bancorp.  In its 1 year time span since the forecast’s release, the stock increased by over 90%.  Among other stocks picks in is bank stock forecast, the package yielded over 36% compared to the S&P 500 return of nearly 13%.  That is nearly three times the return.

Trend Following Financials

In another example, the algorithm accurately forecasted a bullish signal for the financial sector on November 14, 2016.  In a 7 days time span, the stock increased by 25.46%.

 


premium