As a long-time trader or investor, you have overheard or overused the phrase “trend is your friend,” and the theory that you should stay in a trend as long as it is trending. Yet, many developing market students fail to recognize the validity in each concept and how powerful they are. Why? Because they are staring too closely and too long at the chart.
What is the first step in discovering a trend?
Here’s an example: If you happen to see the chart of sporting apparel company, Under Armour (UA), with minimal chart reading skills, your first impression may be that the stock is choppy and directionless, not so exciting.
To spot a trend, however, you mustn’t move onto the next stock. You must change your perspective and try to observe the stock differently. In other words, step back and look at the “big picture.”
See below for a Weekly timeframe UA chart.
While this is the same stock, we have a much different and more positive view. UA is not a lifeless, choppy stock, rather has been moving up with a few degrees of pullbacks over the last two years. We observe and analyze the stock assuming that Under Armour’s business has been in a healthy expansion stage for the last two years. However, every investor should proceed to review the fundamental information, as well, to confirm that the company is steadily or quickly growing.
What were some reasons behind UA’s uptrend?
After researching the company, most people would surmise that UA has been growing their company for the last two years and turning a profit. They would evaluate that the products being made were quality-focused with touches of advanced technology. The increased stock price was a reflection of their ongoing profitability pattern.
When did this trend start?
The trend began many years ago and has been reinforced in recent years as more and more people sought to pursue healthier lifestyles.
A market trend is simply a perceived tendency of a stock or stocks in a similar category to move in a particular direction over a period of time. When it comes to spotting trends, investors often skip over the origin of the trend and fail to discover all there is to know about the trend: the demand which caused it, how long it may last, external clues to changes in the trend.
In order for a company to grow and prosper, one of two things must happen: they must create a desire from the consumer with revolution and follow-up products or they must capture the merging trends from the consumers. Most companies are trend followers as opposed to trendsetters.
Apple (AAPL) is an iconic example of trendsetting ability. The company has fundamentally changed the way people live their lives with their “iEcosystem”. The iPhone and iPad have generated billions of profit over the last seven years and Apple has forced competitors to launch similar products just to compete with them. As a result of market-changing products like Apple’s, the Apple stock has experienced a multi-year uptrend. Investors continue to expect the stock to rise.
Not every company has the ability to set trends. Most companies have learned, however, how to capture a trend and follow it up. Under Armour (UA) is a company that was able to capitalize on the ongoing lifestyle trend with their athletic apparel.
The public’s awareness of staying active and living healthier lives is the reason for the trend that caused UA’s stock price to fly. Customers purchased more than one pair of shoes, matching pants, and jackets. As time went on and their gear wore out, they continued to purchase product to support their ongoing active lifestyles. The lasting demand from the public helped UA and competitors like Nike (NKE) and Lululemon (LULU) to grow in big ways.
As visible in the below chart, NKE has been riding a strong uptrend since 2009, benefiting greatly from the trend of healthy lifestyles. As long as consumers want to stay active or feel pursuant of healthy choices, the trend will exist, and NKE will continue to ride it.
LULU was a leader in the women’s yoga apparel area and enjoyed high-speed expansion after capturing the active-lifestyle mindset trend. Though the chart below shows some growth issues initially, the company has become a key player in the market, truly benefitting from a public-decided trend.
To Be Continued……