Those investors who have chased the trend guided by charts and software have had a particularly hard time this year. In recent years, nearly all trend-following methods have failed, but in 2012 they have failed miserably.
The stock market fluctuations that began in the late spring and early summer of 2012 tended to confuse the most emotional traders as well those who rely heavily on computerized software for trading decisions. This is the ultimate defeat for technical analysis because it has become incredibly popular with the least sophisticated traders worldwide.
One of the fundamental characteristics of the financial markets is that when everyone is investing in a certain way then you can be confident that it will lead to failure of one kind or another. It may lead to a loss of more than half of an investment portfolio during severe bear markets, or it may cause a gain which is far less than the average gain realized by being invested in a diversified ETF or equity fund.
Often with our style of trading what appears to be daring is actually a purely rational decision. It is just that in the moment it can be very emotional not to follow the crowd and to do the opposite which is to buy into severe market panic times. Investors fail to grasp the fact that the risk in buying during market uptrends is far higher than buying at low prices when the market is going down and everything looks hopeless.
Currently, the financial markets are systematically shaking out as many fundamental, technical, momentum, and emotional investors as possible before a powerful equity rally. The S&P 500 can easily climb to an all-time high during the first several months of 2013. Once the herd moves from all the safe-haven assets and defensive equities, into risk assets, then we will be ready for a new and difficult bear market of stocks. This is not going to happen until all your friends and relatives get positioned into the stock market, wanting to ride the trend.