Money and Markets - Financial Advice | Financial Investment Newsletter
Skip to content
  • Home
  • Experts
    • Martin D. Weiss, Ph.D.
    • Mike Burnick
    • Sean Brodrick
    • JR Crooks
    • Larry Edelson
    • Bill Hall
    • Mike Larson
    • Jon Markman
    • Mandeep Rai
    • Tony Sagami
    • Grant Wasylik
    • Guest Contributors
      • Amber Dakar
      • Peter Schiff
      • John Sheely
      • Claus Vogt
  • Blog
  • Resources
    • FAQ
    • Personal Finance Corner
      • Hot Tips
      • Investments
      • Money & Banking
      • Consumer Loans
      • College Savings
      • Retirement
      • Credit & Debt
      • Taxes
      • Insurance
      • Life & Home
      • Investment Portfolios
    • Links
  • Services
    • Premium Membership Services 
      • Money and Markets Inner Circle
    • Trading Services
      • Marijuana Millionaire
      • Tech Trend Trader
      • Calendar Profits Trader
      • E-Wave Trader
      • Money and Markets’ Natural Resource Investor
      • Money and Markets’ Natural Resource Options Alerts
      • Supercycle Investor
      • Wall Street Front Runner
      • Pivotal Point Trader
    • Investment Newsletters
      • Real Wealth Report
      • Safe Money
      • Disruptors and Dominators
      • The Power Elite
    • Books
      • The Ultimate Depression Survival Guide
      • Investing Without Fear
      • The Standard & Poor’s Guide for the New Investor
      • The Ultimate Safe Money Guide
    • Public Service
  • Media
    • Press Releases
    • Money and Markets in the News
    • Media Archive
  • Issues
    • 2017 Issues
    • 2016 Issues
    • 2015 Issues
    • 2014 Issues
    • 2013 Issues
    • 2012 Issues
    • 2011 Issues
    • 2010 Issues
    • 2009 Issues
    • 2008 Issues
    • 2007 Issues
  • Subscriber Login
  • Weiss Education

Money and Markets: Investing Insights

Why the Trend is Still Your Friend

Mike Burnick | Monday, May 6, 2013 at 3:30 pm

Mike Burnick

The Dow Jones Industrial Average surged to new highs again last week cracking through the 15,000 level in the process. With the Dow up 14.3 percent already this year, many investors I talk to, both retail and professional, are scratching their heads about the durability of the stock market’s rally.

After all, the Dow has added two-thousand-five-hundred points in less than six months against a steady backdrop of negative economic news and scary headlines about slowing growth worldwide.

This just reinforces the fact that markets often defy logic (and gravity) in their movements, crossing up investors who are more focused on the fundamentals, which are often backward looking. That’s why having a simple but effective method to evaluate the market trend is essential in this, or any environment.

One time-honored method for determining market trends is based on simple moving average analysis. Timing your buy and sell points based on whether the current price is above or below a moving average of prices has proven very effective for participating in the majority of up trends, while avoiding severe losses during bear markets.

xxxxx
Two simple trend-following rules can help you participate in bull markets, while avoiding losses in bear markets.

And there is plenty of historical evidence to back up this claim.

In a paper published by the Journal of Wealth Management money manager Mebane Faber showed that, by following a mechanical moving average system investors could remove emotion and subjective decision-making from the investment process, which often results in poor timing. At the same time, investors can expect to earn superior absolute and risk-adjusted returns, according to Faber’s study and prior research as well.

The trading rules he presented are simple and can be applied to any market index (or index-tracking ETF):

Rule 1. BUY when monthly price rises above the 10-month simple moving average of prices, and

Rule 2. SELL and move to cash when monthly price falls below the 10-month simple moving average of prices.

That’s all there is to it.


Click for larger version

Testing these trend-following rules on the S&P 500 Index from 1900 through 2008 shows eye-opening results (see graph above). The trend-following, moving average strategy resulted in 10.45 percent annualized returns, compared to just 9.21 percent for buy-and-hold, AND with far less volatility to boot!

Of course there are some drawbacks to moving average analysis. First, it never gets you out at the exact top or back in at the absolute bottom. Also, it can produce the occasional whipsaws (inaccurate buy or sell signals), such as we’ve experienced during volatile financial markets in recent years.

Moving average analyses, like other trend-following indicators, have proven to be effective tools because they are based on simple human nature.

People imitate successful behavior. When they hear “favorable news” about a particular stock or the overall market, they are inclined to follow-the-crowd and buy. As a stock or the market’s uptrend becomes established, more investors are attracted by the positive performance and jump on board to follow the trend.

Of course eventually the trend reverses, perhaps due to the normal expansions and contractions of the business cycle, or a specific negative event. The trend gradually turns the previous buying momentum into selling momentum.

But the trend-following investor may have the advantage of spotting a reversal early by monitoring moving averages, and sell before a more sizeable price decline.

By the way, according to this simple trend following system, as of April 30, 2013, the Dow remains on a solid 10-month moving average BUY signal!

Good investing,

Mike Burnick

Mike BurnickMike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

Previous post: Important questions, answered!

Next post: Avoiding the Folly of Predicting Other Investors’ Reactions

  • Sign Up Free

    To receive editorial updates from The Weiss Center for Investor Advancement and Money and Markets, type in your email address. We respect your privacy

  • About Us
  • FAQ
  • Legal
  • Privacy
  • Whitelist
  • Advertising
  • Contact Us
  • ©2025 Money and Markets - Financial Advice | Financial Investment Newsletter.
Weiss Research
Weiss Research, Inc., founded in 1971, has a long history of providing research and analysis designed to empower investors with information and tools to make more informed, independent decisions along with an equally long history of public service. [More »]