If I told you I am using wood pellets from Russia to heat my house you might instantly think I am eco minded or getting a government subsidy or both. The former is true but not the latter but neither are the actual reason: the house I bought had a granular pellet boiler installed already because that is the most practical fuel option. Russian wood pellets are the best quality and the price is sensible.
The reason why you might have guessed at the reasons I suggested is because you may be aware of a trend towards using bio-mass as a fuel on the basis of the (contested) argument that it is carbon neutral. Trends reflect a general direction of change that has impacted enough people or processes or just data to suggest a long term impact. The word trendy implies keeping up with changes in fashion that have become set in.
Knowing about trends in a mathematical or statistical sense is useful when looking to assess the likely direction of stock market asset prices. In fact there is a whole industry built around the concept, called generally ‘charting’. The number one blunt instrument of the chartist is something called the ‘moving average’ which seeks to strip out short term ups and downs in valuation and show how the direction of data is progressing in a nice smooth way.
There are different ways of adding such ‘trend’ lines to charts and the various methods of interpreting them. The interpretation can sometimes seem as improbable as astrology but as one might assume human behaviour across a very wide base of participants does not change much, patterns might exist, I concede. I would however suggest that most charting methods are in fact naïve and useless because they do not account for the exact features prevailing in the financial climate of the time.
Where the trend is useful is in looking at turning points, which can never easily be detected at the time they happen. Looking backwards and spotting quite soon the start of a new trend (an inflection point) can help one see what risk and opportunities are current. Investment fund managers often claim they are good at seeing inflection points in share prices.
An easy way to make some personal use of this concept without being a statistician is to get up a graph from a news service like the BBC of a major stock market like say the FTSE 250 (this is broader based than the 100) over a long period like 5 years. Such charts are drawn with not too many data points so short term oscillations disappear. That can be very informative. If you do it now, you will see we are well into a ‘bear’ market but could have some way yet to go down the slope!
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