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State of the market: Buy high, sell higher is a worthwhile strategy

I probably need to issue a word of warning about this morning's meandering market missive. In light of the fact that I have run out of ways to say “The trend is your friend” and “Don't fight the tape,” and I've used up all of my favorite Wall Street-isms lately – including “Do nothing, absolutely nothing until there is something to do” and “Things don't matter in the markets until they do, but then they matter a lot” – I'm going to spend my time this morning talking about Ms. Market's game and some of the things I've learned over the years in this business. As such, I'm definitely going to be “talking my book” and can probably be accused of being a bit self-indulgent. So, if you don't care to hear about my views or my thoughts on this game, now would be a really good time to click the delete button.

For starters, let me state that I'm not a pure technician. Nope, as with most types of market indicators, chart analysis can only do so much for you. In short, I've learned over the years that the chart really doesn't tell all and that most of the popular technical indicators can and do work pretty well – right up until they don't. I've learned that head-and-shoulders, double tops/bottoms, flags, and any number of other chart formations may or may not be helpful in determining what to do next. I've learned that Fibonacci retracement work is great – at times. And I've learned that I'm just not smart enough to utilize the Elliott Wave theory.

Next, I am most definitely not a pure fundamentalist as markets can and often do diverge from some of the big picture stuff like economic data and earnings. And while I might be able to stumble round a company balance sheet and income statement if forced to at gun point, I don't believe this is especially helpful in terms of making timely buying and selling decisions.

As I may have mentioned a time or twenty, I'm also not a believer in making market calls or predictions about what might happen next in the markets. So, I'm definitely not a global macro guy or a “deep thinking” discretionary trader. In addition, I'm not a pure trend-follower, I don't play the “mean reversion” game much (although there are clearly times such as 2009, when this approach is golden), and I believe that there are indeed times that it's okay to “fight the Fed” (just not right now). I'm not big on market valuations as they are next to useless from a timing perspective. I believe that sentiment indicators are greatly misunderstood and misused by the public. I don't believe in buy-and-hold. I think that Modern Portfolio Theory, which may have been “modern” in the 1950's, has clearly been debunked. I believe static asset allocation is downright silly because times and markets change. I see quarterly rebalancing as a great way to limit one's returns (although it does pad a great many financial advisor's wallets). I don't think “hard stops” are a good idea. And while I AM a believer in systems and models, I'm not a pure quant as I don't believe computers deal with change well and that a little human intervention every once in while can add significant value.

What I DO believe in is a flexible approach to investing that is based on guidelines, models, tendencies and rules. The bottom line is before I make a move in or out of a market, I want to know that the odds are in my favor when I make the move. But since I also know that you are likely to be wrong at least 40% of the time in this business, I strongly believe in managing risk at all times. As Warren Buffett is famous for saying, “Rule #1 in investing is don't lose big money.”

I have learned that buying high and selling higher has its place and is a strategy that is every bit as good (if not better) as the traditional buy low and sell high mantra at times (does anybody remember how a bull market acts?). I believe in focusing on the leaders. I believe in buying the dips (at times) and identifying sound entry points. I believe that markets can do whatever it takes to frustrate the masses (the current joyride to the upside would be an excellent example of this).

I believe that electronic trading is here to stay. However, I believe some forms of HFT skirt the laws and should be banned. I believe the algos are only going to get better/smarter. And I believe that stock exchanges should not be privately owned/for-profit entities. But the good news is that as the technology gets cheaper and faster each year, the effectiveness of the current HFT game is likely to diminish over time.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.