Investors are known to be price sensitive. The trend investor is different. It is not a cheap price that interests him, but price momentum. Still, there is a difference to the trend trader or trend follower.
Trend investors try to combine a fundamental trend with a price trend. They replace value with growth. Practically this means that a value investor buys into falling prices or when prices are low, while the trend investor goes with the trend and buys high. Both of them don’t go short.
What to invest in? Mostly stocks, of course. The new world of financial inventions brought ETFs and ETNs to us, which are funds and notes traded like stocks on stock exchanges.
The fine thing about these is that they enrich the stock market. Typically all stocks are affected by the market mood. An investor’s portfolio goes up and down with the market and is thus exposed to a systematical risk.
ETFs and ETNs track international stock markets, commodities, currencies, and also artificial financial constructs. There are also flavors of long and short, double and triple ETFs and ETNs.
There we have it. The direct way to profit in a bear market. But be careful! There is no magic here. A stock can’t go below zero, but theoretically it can go to infinity. Shorting something directly has always the potential for a maximal gain of hundred percent whereas the maximal loss is not capped. This is why these synthetic stocks have to be rebalanced each night and the outcome is that they don’t behave like stocks in the long run.
In other words, our trend investor should avoid short ETFs or ETNs. Look at long term charts and you see what I mean. There is an inherent downward trend statistically overlaid in these synthetic notes. They same holds true for price movement multiplied funds or notes (double or triple). Being technically stocks they still behave differently in that they mirror downward moves stronger than upwards moves.
Principally every investor should look for potential long term returns in excess of hundred percent. Only then the mathematical magic of larger gains than losses even in random driven markets may come true. Real stocks fulfill this promise to some extent, because chances of a doubling and a halving of its price are roughly equivalent.
Synthetically propped up speculation vehicles deviate from this principle. They don’t move pseudo-randomly on a logarithmic price scale like stocks. It is exactly this asymmetric price behavior on the logarithmic scale that makes them less interesting for investing.
To say it bluntly, short, double, triple and some other synthetic ETFs and ETNs go down in the long run. In the short run they may have difficulties to follow upmoves proportionally.
There seem to be some exceptions from this rule of thumb to shun short or multiplied ETPs. One example seems to be the VIX, the volatility index of the S&P500. In times of fear, like we have them right now, the VXX and especially its volatility doubled version TVIX seem to easily be able to double in price.
Moreover, the TVIX seems to mirror the VXX quite precisely for time frames of one or two months. But in the long run they both go down, too. So, these synthetical stocks are not really for trend investors, they are more for trend trading investors. Of course, they are even more so for trend traders.
