A Defensive Game Plan for This Friendless Market

AdamI’m sure you’ve heard the popular saying…

“The trend is your friend.”

And also variations of it, like…

“The trend is your friend… until it ends.”

And my personal favorite…

“The trend is your friend… until it stabs you in the back!”

The idea here is simple: following along with your friend, the trend, is usually beneficial. But every once in a while, and without much warnrning, your “friend” will desert you.

That’s essentially what happened last August.

At the time, the S&P 500 had maintained a positive six-month trend for 184 consecutive weeks – between January 2012 and August 2015. That’s one heck of a loyal friend, that trend. And any bullish investor who followed the rising trend in stock prices did quite well.

But then in late August, over the course of just two weeks, the positive trend in stock prices vanished. It left bullish investors in the lurch, without their beloved “friend.”

The market’s sudden change of heart, last August, has had a lasting impact on investors.

Long-term buy-and-hold investors are still feeling the sting of love lost after being abandoned. Even short-term traders have been forced to readjust.

For Cycle 9 Alert subscribers, the sudden trend change was impactful because it triggered the No. 1 rule we live by: don’t fight the trend.

I’ll let you in on a bit of a secret…

In my trading service, Cycle 9 Alert, I monitor the six-month trend of any investment vehicle I’m considering.

If an investment’s six-month trend is positive… I’ll consider it for a potential bullish trade.

But if its six-month trend is negative… I WON’T consider it for bullish trades. (I’ll simply ignore it, or consider it for a bearish trade.)

Knowing this… I’m sure you can understand why I steered Cycle 9 subscribers into “defensive” plays last year.

After the late-August sell-off… most “risky” investments were in a negative six-month trend. So we avoided those… or looked to bet against them.

At the same time, most “safe-haven” or “defensive” investments were in positive six-month trends, thanks to investors who flocked to them after stocks tumbled. So I recommended a number of defensive and hedging positions to take advantage of that new, defensive trend.

All told, my Cycle 9 subscribers did quite well during that rocky transition.

I recommended six positions between May and December 2015. All of them were either “defensive,” or “hedge” positions that were specifically designed to profit if/when stocks stumble. And in the end… we made money on two-thirds of those positions, netting an average gain of around 26% per trade.

Clearly, our defensiveness paid off!

Now, let’s fast-forward to today…

As I recently pointed out to Cycle 9 subscribers, it’s been more than six months since the start of the late-August sell-off. And that means stocks are now being compared to their lower, post-sell-off prices – in determination of their six-month trend.

So over the past week, a large number of investments have experienced another trend change – this time, from bearish to bullish.

That’s good news for us, because it widens the pool of potential investments we’ll consider buying – the list of “buy-qualified” stocks and ETFs I maintain (which, remember, require positive six-month trends).

But at this point… I’m only cautiously optimistic. (With much more emphasis on “cautiously” than “optimistic.”)

That’s because the investment vehicles that have recovered the most, recently regaining their positive-trend status, are by-and-large defensive investments!

This shows that investors are still sore from last August’s sell-off. And if they’re buying anything… they’re buying defensive investments.

The bottom line is…

Investors are still skittish, even six months after losing their then-trusted “friend,” the bullish trend. And defensive investments are the place to be for now.

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research