Why Trends Exist

March 7, 2012

Trend follower and owner of the Boston Red Sox, John W. Henry, on how price trends are formed:

How are we able to make money by following trends year in and year out? I think it’s because markets react to news, but ultimately major change takes place over time. Trends develop because there’s an accumulating consensus on future prices, consequently there’s an evolution to the “believed true price value” over time. Because investors are human and they make mistakes, they’re never 100 percent sure of their vision and whether or not their view is correct. So price adjustments take time as they fluctuate and a new consensus is formed in the face of changing market conditions and new facts. For some changes, this consensus is easy to reach, but there are other events that take time to formulate a market view. It’s those events that take time that form the basis of our profits.

Doesn’t this make more sense than the Efficient Markets Hypothesis which states that prices instantly change to reflect new public information (as if all people recognize and interpret the exact same data in the exact same way and in the exact same speed)?

HT: Michael Covel

Posted by:


High RS Diffusion Index

March 7, 2012

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 3/6/12.

The 10-day moving average of this indicator is 86% and the one-day reading is 69%.

Posted by: