Gabe Varga, CMT

Gabe Varga, CMT
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The Fidelity Trends blog is a market commentary for Fidelity mutual fund investors. My goal is to highlight key changes in market conditions using technical analysis tools.

A unique feature of the blog is that I utilize technical screens provided by Fidelity Sector Report, an independent investment tool for Fidelity fund investors. Once new opportunities and risks are identified using the quantitative tools, I provide additional technical analysis on this blog site.

The technical screens and the charts are unbiased, but my interpretation is not. Please feel free to comment if you have additional thoughts on a given subject.

I hope that the market insights can help you to make more informed investment decisions when managing your retirement account, saving for a nest egg, or investing for college education.

The sections below provide more explanation on my investment philosophy and methods for analyzing investments.

Misbehavior of Mr. Market

I am inspired by “The Black Swan: The Impact of the Highly Improbable“, a bestseller book by Nassim Taleb. However, the recognition of the often unpredictable nature of the stock market and the devastation caused by unlikely events described by Taleb is not new.

Benjamin Graham, the author of the famous book “The Intelligent Investor“, referred to “Mr. Market” as a schizophrenic. In addition, Benoit Mandelbrot‘s “The (Mis)behavior of Markets” book provides insight into erratic market action using the chaos theory.

Alchemy of Financial Bubbles

George Soros, the famous hedge fund manager, describes the intriguing concept of reflexivity in his bestseller book “The Alchemy of Finance: Reading the Mind of the Market“. Reflexivity describes how the biases of investors that are manifested in large swings of the financial markets can change the behavior of participants in the real economy, essentially creating feedback loops that can reinforce financial booms and busts.

Soros argues that the markets are more often in a state of disequilibrium rather than in equilibrium.  In that light, it is not surprising to see that the history of the financial markets is full of bubbles, manias, and crashes (see the investment classic book “Manias, Panics, and Crashes: A History of Financial Crises“). How is it then possible for individual investors to make money?

The Trend is Your Friend

My investment philosophy is that the market alternates between periods when random noise dominates and periods when a trend is in place. It is in the trending periods, whether bullish or bearish when momentum investors have the best chance to generate investment gains. Conversely, in periods of random market action, it is difficult to make money, and the best strategy is to preserve capital by building cash reserves.

The tools of Behavioral Finance (see Prospect Theory below) are extremely useful to help us understand and interpret current market conditions. Moreover, the tools of Technical Analysis can help further diagnose market action, identify investment areas and sectors where a trend is in place, and find entry and exit points.

Greed, Fear, and Hope

Nobel Prize winner Daniel Kahneman along with Amos Twersky developed the Prospect Theory (see Nobelprize.org or wikipedia.com), which describes how people make financial decisions under uncertain conditions. Their findings have roots in the works of Daniel Bernoulli, the famous mathematician of the 18th century, who first formalized the theory of the “utility of money”. Bernoulli defined concepts such as risk aversion in the context of the value generated by financial gains versus the risk it takes to obtain them (see wikipedia.com).

The influence of fear, greed, and hope in human decision-making, as described by the scholars, continues to drive investors’ response to risks and opportunities in the current market environment too. Indeed, these overriding emotions are hard-wired in our “reptilian” brain stem and are difficult to override. As a result, our financial decisions are often clouded by emotions evoking the fight or flight response.

The fight or flight response is not the only emotional reflex that investors have to be aware of. Another common human behavior involves ignoring reality for years and then throwing in the towel exactly at the wrong time. This behavior makes losses permanent and leaves little hope to recover. Furthermore, investors can find themselves sitting on the sidelines, not daring to jump in when the market takes off.

What can we learn from past bubbles and crashes?

In my view, there is a better way to make financial decisions than relying on impulse buying and panic selling. Just like running a business, investing money requires attention to performance, the ability to act under uncertain circumstances, and a balanced view of the global market environment to make optimal trade-offs between risks and rewards.

The FidelityTrends blog was created to highlight new investment ideas to investors looking to put “fresh money” to work, and to complement the buy-and-hold strategy employed by most long-term investors. A shortcoming of the buy-and-hold strategy is that it does not work well in markets with high volatility.  Many investors can recall the pain and fear experienced during the Internet bubble bursting in 2001, the housing bubble and the near-collapse of the banks in 2008, the European financial crisis in 2010, and the COVID19 market crash in 2020.

The impact of market crashes can last for years. For example, it took more than four years for the financial system to recover from the Great Recession of 2008, and the Dow Jones Industrial average had a negative return in the first decade of the new millennium. Will financial history repeat itself, perhaps in a slightly different form? Most likely, in my view.

Can financial markets experience even longer losing streaks? It turns out that challenging investment periods happened repeatedly in the past. For example, it took the Dow Jones Industrial average 25 years to recover after the 1929 crash. Also, the Dow index had a negative return for the sixteen years starting in 1966.

During these prolonged periods of market weakness, buy-and-hold investors were faced with holding declining assets for 10 or more years. However, despite all the risks, investing in stocks using smart strategies has proven to be one of the best ways to build wealth.

The new millennium brought changes to our lives and our investments. For one, electronic trading became dominant causing more volatility in financial markets. The buy-and-hold strategy that worked so well in the 1980s and 1990s has resulted in extremely high risk and very little real return for investors between 2000 and 2010, and during the subsequent bear markets. That is why I believe that the years ahead will require more flexible approaches, and technical analysis may be one of the best tools available for supporting investment decisions because it can provide an unbiased view of the market.

How can Technical Analysis Help?

Using Technical Indicators to stay on the right side of the trends can be extremely helpful in taming the bubbles and avoiding market crashes. Technical Analysis, the study of price trends, volume patterns, and inter-market money flow, provides us with excellent tools to interpret the market action.  Imagine being in a safe cash-equivalent investment (e.g. a money market fund) during a prolonged bear market, but participating in strong bull market periods. Trend analysis can help investors achieve these goals.

To identify strongly trending bullish sectors, we apply a simple and time-tested trend analysis approach, the 100-day moving average. First, we adjust the historic prices for dividends and capital gains distributions to avoid the distortion of the price patterns. Next, the moving average is constructed by averaging the closing prices of a given mutual fund over the last 100 trading days.

By our definition, a mutual fund investment is in a bullish uptrend when its price (a.k.a. Net Asset Value) is above the average of its recent prices represented by the 100-day moving average. Consequently, we can use the 100-day moving average as a directional indicator for identifying intermediate-term trends. Since both human behavior and business cycles tend to exhibit seasonal trends, the 100-day moving average becomes the perfect tool for capturing bull and bear market moves lasting three to six months.

The result of using the 100-day moving average is an unbiased and quantitative view of the performance of the mutual funds we track. Our market commentary is based on this simple, but highly effective approach and aims to highlight the prevailing trends in domestic and international markets. Using Technical Analysis enables us to screen mutual fund investments for profitable trends and price patterns, to avoid market noise, and to identify emerging market leaders. Furthermore, we are always excited to uncover new investment opportunities.

Why Mutual Funds?

There are many ways to participate in the financial markets, but our main focus is on mutual funds, simply because tens-of-millions of Americans own them in their retirement or taxable accounts.

We especially like mutual funds by Fidelity Investments, because of the breath of no-load investment choices they offer from sector funds to investments in international regions, as well as the long-term track record and the high quality of the fund management they provide.


Disclosure: The FidelityTrends blog site is independent of, and not affiliated with Fidelity Investments.

Disclosure: I often invest in the mutual funds highlighted in the blog.

Disclaimer:  The FidelityTrends blog site does not offer personalized advice and is not an investment adviser. The views expressed on the blog site are for informational purposes only.

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