Author: Albert Yang
Yang brings more than 16 years of European real estate investment management experience to Harrison Street. He was most recently at Barings Real Estate, where he served as managing director, client portfolio manager responsible for European capital raising, investor relations and client service.
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It is easier to make a profit in an uptrend or downtrend, and the profits are generally bigger. Furthermore, it is obvious that if the market or security is trending, then support and resistance lines, by necessity, will also trend in the same direction. So the first step to increasing trading profits is to recognize the trend.
No doubt, the above scenario is somewhat true, although it is impossible to quantify the effect. But there is another reason why markets trend — because of the interconnections of the economy. As I sit here writing this in March, 2009, the market indexes have dropped by more than half from their peak in October 9, 2007. Since the peak, the market has been trending downward. Why?
First, it became apparent that many subprime mortgages were defaulting. This didn’t hurt most lenders too much at first since they securitized the loans and passed on the credit default risk to the investors of these mortgage-backed securities. The increasing defaults caused credit rating agencies to downgrade mortgage-backed securities, which lessened their value. Then some banks and finance companies started failing, because it became increasingly apparent that banks and finance companies were major buyers of these mortgage-backed securities. With credit rating downgrades, they had to write down the value of these securities, which reduced their own credit rating, and called into question their own viability. So many companies who bought bonds of these distressed companies entered into credit default swaps, which promised to pay the bondholders the principal should the bond issuers default.