Both the trend and the trend reversal are your friends

Major price movements do not happen by chance, but are of course the result of sustained buying interest from many or large investors. Whether the interest is simply due to the stock rising, or whether it is something more fundamental that is the ultimate driving force matters less, because once the momentum has started, it tends to continue. Expensive can become more expensive. Rising stock prices can continue to rise and attract more and more interest, and vice versa. The 200-day sets the primary trend, and Bollinger Bands signal when the secondary trend within the primary direction may be about to turn up or down. Well, it's not quite that simple, but there is no doubt that there is a strong trending effect on the stock market. Group psychology and inertia in both the dissemination and processing of information and beliefs naturally create these trends.

However, no trees or trends grow to the sky. Sooner or later momentum runs out and the trend turns out to be only the first half of a cycle. This is especially true if it was only a price-technical momentum without anchoring in underlying value creation. "Mean reversion" is therefore, if possible, your even better friend, perhaps your best friend, in the stock market. Because if you manage to buy low and sell high, even if it is only occasionally and you may only manage to buy "a little lower" and sell "a little higher" within the trend, you can gain many percent outperformance per year. So both the trend and the trend reversal are your friends. It is "only" a matter of being experienced and wise enough to be able to distinguish between temporary recoils that constitute buying opportunities, and more decisive trend reversals.

Fundamental accounting data and valuation ratios are one of several ways to identify major turning points. It is not a matter of pinpointing tops or bottoms perfectly, but rather of recognizing when a secondary trend in counter-phase may be the beginning of a new trend direction, e.g. when the price falls through the lower Bollinger band in a previously rising trend. Then it may no longer be a good idea to buy the dips, but rather to sell the rips to create a liquidity buffer. This will later be put to work when the market signals a new, positive trend reversal.

There are also trends in the fundamentals. Companies with a surprisingly positive history often get a persistent tailwind of customer interest, low financing costs, higher revenues and lower costs than expected. Perhaps it can be explained by good management, a well-structured company build, or just a positive wave for the product category or industry. However, it is no coincidence why Apple has been so much more profitable than Samsung, Nokia, Ericsson or any telecom-related company you like for almost 20 years. Everyone could have sold books and other products on the internet. In fact, everyone tried, from Pet.com to Amazon, but the fact that it was the latter that had to run for honor after honor is due to the details of how Jeff Bezos chose to run the company. Good management, however you want to identify it beyond company growth and profitability, often continues to be good management. Just look at all the best and biggest companies, from Microsoft and Meta to Amazon, Alphabet and Apple, or Netflix, Nvidia, Berkshire Hathaway and Tesla. The difference between them and their competitors lies in the leadership and the structure of the entire organization. These companies have sustainable competitive advantages created by insightful and strategically competent founders and leaders. These "moats" that protect the company from competitors can, if properly managed, widen and deepen as long as they are not tempted by short-term profit maximization or unnecessary risk-taking. It is a kind of fundamental "trend" that is not only sustainable but can be reinforced and accelerate the advantage. Such companies can be difficult to value using traditional valuation rules and conservative mean reversion-inspired forecasts.

In short, the fundamental trend of some companies and their management is something to be trusted and relied upon. To the one who has should be given. Until you can't anymore. All companies are being overtaken. All shares become too expensive. The market is almost always wrong: first, the stock is too cheap relative to a reasonable valuation, even taking into account potential fundamental trends or even with a God Mode perspective in retrospect. Then it becomes too expensive. And later perhaps too cheap again, depending on whether the company manages to make a comeback. And from start to finish, the end point, the "value", was always the same and the share price fluctuated violently around the fundamentally long-term reasonable or correct value.

This mechanism is much clearer for entire markets, because then profits and valuations are limited by, for example, the number of people and companies that can create value, and at the same time the cost base in the form of wages and materials - business costs that then also become income for employees and subcontractors. These, in turn, should be enough to buy all products and services. The circular cycle of costs=revenue=sales is a negative feedback loop that limits how far a trend can go before it reverses.

In practice, the S&P 500 index has therefore for 100 years fluctuated up and down around the rising line at which, in retrospect, you have received a 10% annual return for the next 10-20 years if you bought there. And a 10% annual return is precisely both reasonable and common to expect as compensation for the time and risk involved in gaining access to a well-diversified stock portfolio, so you could actually identify where the line was at any given time, i.e. not just in retrospect with the perspective of God. The line (10% future annual return) is where P/Sales (Price-toSales)= 1 for the market. Or..., it has worked that way for 100 years. If something has actually changed permanently, regarding the distribution of created added value between employees and shareholders, the 10% line may be at a different level than where Price/Sales is 1. For example, if the profit margin has permanently moved from 7% to 10%, P/S=1.5 is more consistent with a 10% annual return. Or if GDP growth has permanently increased compared to the last 100 years, the equilibrium P/S ratio also increases, for example to 2.0. Or if the market in the future is satisfied with only, for example, 8% annual return on average, the equilibrium P/S ratio is higher to a similar extent, for example 2.5 if the other extremely positive assumptions also apply at the same time.

However, with a 5% policy rate, the world's highest debt mountain, falling productivity growth and falling population growth, the equilibrium P/S is much more likely to be below the historical 1.0 than significantly higher. So, the trend and its mean reversion are your friends. The question is which trends are central. Here are some candidates:

Recession indicators have been piling up this summer. China's weak currency, industrial production, Producer Price Index PPI, real estate sales and exports/imports, the strong Swiss franc, the US PPI and not least the very strong recession indicator GDI (Gross Domestic Income, instead of Production), the bank problems with SVB and First Republic and others, the H.8. statistics (commercial banks data published in the US) and other bank indicators in the US that show collateral hoarding of US Treasury bills and reduced lending starting around the banking crisis, etc., etc. There's more: reduced oil production in OPEC+, record high mortgage defaults in the UK and weak retail sales in the US (negative last year, before deducting the effect of inflation). Even the long-term unemployed are becoming persistently more numerous in the US, not to mention the LEI (Leading Indicators) which has fallen for 15 months in a row and now at -7.8% year-on-year points to a 20% decline in profits for the companies in the S&P 500.

According to the usual correlations and lags relative to interest rate increases and data series such as the Purchasing Managers' Index PMI and LEI, a fairly substantial recession in the US begins at the end of the year. The forecasts have been pushed back a bit by some, but by and large, veterans such as investor legend Stanley Druckenmiller have always talked about the end of 2023/24 as the point at which the recession becomes clear.

Stock markets, on the other hand, are accelerating, and the narrow group of stock generals (MANAMANA companies with at least $1T in market capitalization) that led the market upwards seems to be eventually bringing more unprofitable tech companies and even small caps into the rally. This trend has its own self-fulfilling momentum and requires a clear external variable to reverse suddenly. The dip-buy mentality is back and it takes something big to reverse the direction. That something is fundamental reality in the form of sharply lowered earnings forecasts or significantly less disposable income to consume and invest. When this happens is hard to say given the huge stimulus that was executed during the pandemic and has meant that consumers still have a sizeable savings buffer.

As a sub-component of the real world, outside the positively trending stock market, the underlying trend of rapidly increasing demand for reliable energy, especially heating and cooling, continues. This means that base demand for oil and gas has risen faster than expected in recent years. At normal capacity utilization, the shortage of oil is greater than ever and this shortage is increasing every year due to underinvestment in new oil production. Here, your trend friend for the next five years consists of oil producers who can take advantage of their price power when the economy picks up again and the actual energy shortage becomes more apparent. Then the uranium sector will also be able to benefit from the investors' increasingly strong hunt for energy resources.

But before that, the ongoing AI boom with lagging cloud companies and small caps will set new all-time highs for the S&P and Nasdaq. Then it's time for the recession to push down everything from engineering to real estate (one more time), banks and consumption, and certainly also important resource companies such as oil companies and all kinds of mines. Perhaps tech companies will then rush even higher when the money first rotates to the only thing that "works", i.e. before money is withdrawn from the stock market in total, which happens at a later stage. In other words, it may very well first be more of the same as we have already seen in the last twelve months. As I said, the trend is your friend until it isn't.

And then it's time for the central banks to swoop in like white knights to save the market from the chaos that is ultimately their own fault. However, rapid cuts in interest rates and various bailouts tend to coincide with real stock market crashes: pits of air that are replaced by reflexive bounces, but overall form an abysmal waterfall graph. And somewhere along the line, really good buying opportunities are finally created in the best companies, and probably also in the trusty gold and crypto, which quite undeservedly tend to follow the shares downwards, despite the fact that they have no costs and revenues to take into account, and despite the fact that you know that there will soon be a lot more money in the system to be distributed among the assets.

For the most part, things will be as they have been for the most part. Until it isn't. What it will actually be like, no one knows. The market is reflexive, i.e. players adapt to history and each other and make different decisions. This is how trends and reversals occur. Like a swarm of starlings or the "3-Body Problem". Predictable and unpredictable at the same time. But the more perspective you have, the more you see that history (including the stock market) is cyclical. Rising inflation and interest rates are followed by falling and vice versa in really long cycles. Great powers and their currencies challenge each other over even longer time horizons. The 2020s seem set to reverse several trends simultaneously: falling interest rates will become rising, and rising valuations will become falling. Perhaps it is even time for the debt mountain to erode, through defaults or forgiveness. There are likely to be huge opportunities for wealth transfers and class travel. And also, of course, to lose one's assets and position, as so many, almost all, did in Germany in the last 20th century.

My assessment is that you should have a solid foundation of real assets to stand on (gold, gas, oil, minerals, real estate), limited or no borrowing (or very long-term fixed interest rates) and high liquidity. Then you will maintain your real position (and probably also float upwards when real assets appreciate compared to fugazin in the cloud), and you will be ready to buy good assets at relative fire sale prices in the chaos of money printing, recessions and other shenanigans that usually follow a Fourth Turning (yes, it's here now, i.e. the new version of the book.