Chasing the Market

Chasing the market refers to entering or exiting an investment with the intention of profiting from an occurring development or trend. The evolution of efficient market theory suggests that the financial markets are extremely efficient with new factors influencing price often integrated into valuations in real time. This is typically evident in the market’s continuous trading, often making chase-the-market strategies futile.

Chasing the market is a concept that is derived from standard investing motivation. Investors and traders chasing the market seek to invest in new developments and trends that can be profitable for their portfolio. Market trading mechanisms and the efficiency of the market make it challenging for investors using chase-the-market strategies to identify substantial gains. For these reasons, chasing the market is typically a futile endeavor unless investors have large amounts of capital for investment. This gives institutional investors an advantage as they trade with funds from large pooled portfolio investments. Day traders with portfolios of $25,000 or more may be able to chase market profits, but overall, the efficiency of the market’s pricing of securities makes chasing short-term profits less attractive then investing with standard long-term goals.

Chasing-the-market strategies can be profitable for investors with large amounts of investable capital. Generally, chasing the market can be important when new developments and trends present profitable opportunities or new twists to an investor’s current holdings. While markets are generally considered to be efficient both in valuation and market trading mechanisms, following new developments in the markets overall is what keeps prices fluid and creates profit in both the short and long term. Waiting too long to chase trends that have already been well established and priced into valuations is where investors may find trouble. Investing based heavily on market chasing emotion rather than careful analysis can also be problematic and typically unprofitable.

In many instances, short-term chasing-the-market strategies are what drive efficiency and create profit opportunities. Institutional investors place a high volume of trades for actively managed investment portfolios based on daily, short-term, intermediate-term and long-term valuation trends and developments. This gives them a significant market-moving advantage and also facilitates efficient pricing from smart money investments.

The activity of institutional investors makes it extremely challenging for retail investors placing relatively small blocks of trades to generate profit from any market-chasing strategies. However, day traders and technical analysts with portfolios of greater than $25,000 may find some success with market chasing. These investors have the ability to place advanced conditional trades around daily occurrences in the financial markets, which can generate some profits as market efficiency occurs. For most all other types of investors, chasing-the-market strategies can have high costs with low results.

Since there are always anomalies, there can be scenarios where all types of investors may have the opportunity to profit from chasing a market trend. These situations are typically few and far between, but they do occur. Examples would include scenarios such as the dotcom bubble where internet stocks trended significantly higher for a prolonged period of time, allowing investors with timely trades to chase market profits and exit with big gains before the bubble burst.

For more, see: When Fear and Greed Take Over and How the Power of the Masses Drives the Market.