Trend Following: Plan for the Next Bear Market with Market Breadth
January 07, 2020
Trend following provides a game plan for when the next bear market inevitably comes. It is a simple, yet effective, approach that may allow portfolios to both participate in the returns of the equity market and protect them from significant market corrections. Trend followers aim to be invested during the good times, when the market is going up, and to sit it out during the bad times, when the market is falling.
Separating the good times from the bad is hard. Unless there is something wrong, historically, the natural bias of the market is upwards. The key to successful trend following is the ability to differentiate between bumps in the road (dips and moderate corrections) and systemic risk-off events (severe corrections and bear markets).
Trend followers want to ignore the small corrections, which typically recover quickly, in order to protect against the big corrections. We believe a strategy based on market breadth, an alternative form of trend following, may improve performance by better differentiating between small and large market corrections.
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