Trading Strategies Using QID and QLD

On August 23 our Sentiment Table suggested that the market was oversold, and on August 29th, after the aggressive market increase that followed, that same indicator offered an overbought signal (a trigger to sell ProShares Ultra QQQ (ETF) (NYSEARCA:QLD) and buy ProShares UltraShort QQQ (ETF) (NYSEARCA:QID) ).  The market moved that fast in just 6 days.

Typically it takes much longer for a cycle like that to come full circle; what we just saw was unusual.  However, it was only unusual for its speed, not for the accuracy of the Sentiment Table. 

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The speed at which the market has moved recently had some heads spinning because we have not seen this type of thing since 2012, BEFORE STIMULUS, so most people were not ready for that.  If you think there is a coincidence here, I think you're right! 

Think about it logically.

When there was a constant inflow of money into the system there were no major gyrations, declines like what we just saw just did not happen, and institutional investors were starting to pile on margin debt (recall that report). 

The point is the flow of money kept the market from behaving normally.  What we are seeing now may be a little abnormal too, albeit on the other side of the fence, but normal market conditions certainly are not what existed during the FOMC's Stimulus Phase. 

Fortunately, that is what we are faced with today.

When markets behave more normally (they are never normal) predictability increases.  I think that is all most investors are looking for anyway, a higher degree of predictability, so the new era of indicators is probably upon us. 

Because some trading strategies have worked wonderfully during this volatility investors are revisiting the notion of trading strategies, which implies trading indicators as well.  It is, after all, important to everyone to use good indicators, and great ones when they find them.

Indicators are not the most important thing though; the most important thing is getting back into the groove.  The groove of trading is very different than the groove of buy and hold, unless of course you seek out managers who provide proactive alternatives, but even that requires more work.

Both DIY strategies and proactively managed accounts require different work and in different quantities, so it is very important for all investors who are considering a switch to proactive strategies to identify the added work that would be required in each of them.

Ultimately, the time you have to manage risk will determine the approach that is best, but in my opinion proactive approaches will have the opportunity to trump market returns in the years ahead. 

It is already happening.

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