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  1. Home
  2. / Investing
  3. / Stocks

Only Hindsight Will Let Us Know If a Bottom Is In, So Trade Cautiously

It's normal for investors to want definitive answers about trends, but it's not realistic.
By BOB BYRNE Aug 16, 2022 | 08:30 AM EDT
Stocks quotes in this article: QQQ, SPY, IWM

We've reached that point in the rally where I'm no longer asked by other traders what I'm long or what I want to buy. Most traders are now questioning whether they should be fading the rally. Investors are a bit different. A few longer-term investors have asked if I think the bottom is in for this bear market, but most seem content to stay on the sidelines or remain underinvested while the Fed raises rates and inflation runs its course.

As far as fading the rally is concerned, shorting into strength and guessing at tops isn't my forte. It never has been. More to the point, I don't see the need to anticipate a turn. If you run a large hedge fund and need time to establish a position, you may need to get in front of a turn. But for the average retail investor or even someone running a small to midsize fund, jumping in and out of the Invesco QQQ Trust (QQQ) , SPDR S&P 500 ETF (SPY) or one of the E-mini contracts is pretty simply.

Take the QQQ, for example. QQQ is up about 11.5% since closing above its 50-day simple moving average (SMA) on July 19. While I sold my QQQ position into resistance, there's no reason buyers can't chase price into and through the 200-day SMA.

If you didn't read Helene Meisler's article Monday, you should take a minute and do so. Helene reminds us that price can break above a moving average and still be in a downtrend, and she cites the iShares Russell 2000 ETF's (IWM) break above its 50-day SMA in March/April as an example. All three ETFs broke above their 50-day SMAs during that period, and all three rolled back over and plummeted to new lows a few weeks later.

It's normal for investors to want definitive answers about trends, but it's not realistic. Trading, charting and speculation combine art and risk management with a healthy dose of well-thought-out position sizing. And while we would all love to know if June 16-17 will mark the low of this bear market, it's impossible to know that without the benefit of hindsight.

If you're anxious to sell something short, my advice is simple. Wait for whatever instrument you are trading to break its short-term uptrend; my tool for measuring trends is the 21-day exponential moving average. By giving the trend a chance to fail, you're also creating a logical area against which to measure your trade risk. The worst approach is to look at a price and decide it has "gone too far," because as we saw in the early 2000s bear market even the indexes can rally between 40% and 50% before rolling back over.

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TAGS: ETFs | Index Funds | Investing | Stocks | Technical Analysis | Real Money

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