"Know Your Edge, Style and Time Horizon"

As we continue to find ourselves in highly correlated, news driven markets, a number of prior leadership names are breaking down or at least showing signs of weakness ( i.e. CRM, LULU, GMCR, NFLX).  Despite having a laundry list of names, many swing trade breakout plays have also been few and far between, in terms of sustainable trending moves.  However, as I have been going through my nightly screens for the past couple months I am noticing a higher proportion of high dividend names continue to emerge.  Many of the same names are at or just below 52 week highs.

Amidst an environment in which treasury yields continue to narrow, and markets tread in a largely trendless fashion, it seems reasonable for investors to hide out in high yield, “defensive type investments.”   A look at the chart of TLT provides further evidence to such a thesis.

Regardless of the rationale and whether or not the aforementioned reasoning is sound, I think it is increasingly important to be cognizant of one’s time horizon, and mindful of where money is flowing.  As a greater proportion of the high dividend names hit all time highs, it is becoming more important for longer term investors to be cognizant of charts/the momentum mindset and traders to identify their time frames.  From an investment point of view, one must understand that momentum traders are often attracted to names with great relative strength, at or near all time highs.  However, they do not have a fundamental allegiance to the names, and as a result can “flush” a name just as quickly as they bring it to new highs.  Rather than passively buying and holding, longer term investors must be mindful of the difference between momentum driven price action and fundamentalist factors.  On the other hand, as a trader it is important to define one’s time horizon prior to execution.  Even though a name may yield 5-6% (relative to 0 on cash), does not take away from one’s primary edge upon entering the position, which is a result of technical analysis. 

Using a combination of technical analysis and fundamental reasoning to structure an investment thesis is one thing.  However, structuring a trade through technical analysis and then rationalizing it later via fundamental reasoning results in inconsistency and often hardship.  Although rationalization through inconsistent reasoning is never a good idea when managing an investment portfolio, in my opinion recent developments can make such a mistake even more damaging.