Investing with the Trend: A Rules-based Approach to Money Management

Chapter 10Market Trend Analysis

This chapter focuses on trends in the market—an explanation as to why markets trend, reasons why it is good to know that markets trend, then finally, a large research section into how much markets trend. This analysis will initially be shown on 109 market indices that involve domestic, international, and commodity sectors. Following that the full list of all S&P GICS sectors, industry groups, and industries are shown following the same format. There is a great amount of data in this chapter. I try to slice through it with simple analysis, keeping in mind that lots of data does not equate to information.

Why Markets Trend

Trends in markets are generally caused by short-term supply and demand imbalances with a heavy overdose of human emotion. When you buy a stock, you know that someone had to sell it to you. If the market has been rising recently, then you know you will probably pay a higher price for it and the seller also knows he can get a higher price for it. The buying enthusiasm is much greater than the selling enthusiasm. I hate it when the financial media makes a comment when the market is down by saying that there are more sellers than buyers. They clearly do not understand how these markets work. Based on shares there are always the same number of buyers and sellers; it is the buying and selling enthusiasm that changes. Finally, trending is a positive feedback process. Even Isaac Newton believed in trends with his first law of motion, ...