Timing The Market

When you got nothing good to talk about, tell a joke:

Two men are sitting at a bar: First one says, "I bet you 50 bucks I can bite my own ear". Second one takes the bet. First one then takes his false teeth out of his mouth and clicks his left ear a few times, then takes the money off the bar. Then he says, "Here's another bet you can't pass on: I bet you another 50 bucks that I can lick my eyeball." The second guy says, "I got to see this one", and puts another half c note on the bar. The first guy takes his glass eye out of his socket, licks it and puts it back in. Then he takes the money agian. Then the first guy walks away and sits at a nearby table with a couple of other guys. After a while they are all laughing, alomst rolling on the ground. The second guy up at the bar is now gettng mad, fuming, upset that they are making fun about his 100 dollar loss. The first guy comes back to the bar grinning. second guy says, "what is so funny?", getting ready to land the first punch. First guy says, "look I am sorry about your loss, I will give you a guarnteed bet, you will get your 100 dollars back" . After being burned a few times, the second guy is relunctant to take the bet. The first guy then says, "look here is the bet: the bartender here is going to roll a beer bottle down the bar, and as he does I have to take large drinks of my beer and then spit the beer back out and into the rolling bottle without missing one drop outside of the bottle. All you have to do is stand behind the bar. If I do not get every drop of my beer into the rolling bottle, you win." After giving it some thought and thinking it would be impossbile to lose, the second guy agrees. He gets behind the bar just as instructed. The bartender starts to roll teh bottle. Then the frist guy starts drinking and then sptting the beer everwhere, including a large amount on the second guy, just about drenching him in the process; none of the beer gets inside the rolling bottle. The second guy is now jumping up and down in glee, saying, "I won, I won, this is great!". The first guys says, "Thanks, I just bet those guys at the table over there 500 dollars that you would gladly let me spit my beer all over you."

Note for the week:

I failed to mention the indexes took on another distribution day to make it 4 for the nasdaq and 3 for The S&P 500.in recent weeks. Tuesday's action involved a reversal--where the market rallies in early and then closes lower. If we see more distribution days going forward, there will be cause for concern that the current confirmed rally will end. I think next week will be an important harbinger of things to come.

This week's action (March 20-24):

This week, the NYSE closed down about 43 points. Although it looks to be starting a move down, I cannot yet claim victory for my predictions made in my 3/10 and 3/16 postings.

My favorite publications:

Investor's business Daily:

The Big Picture and the IBD 100 are must reads. I usually just get the Monday special. $2 a read. Other days are $1 each. Get it a Barnes and Noble and most newsstands. Otherwise, subscriptions are available, but expensive. They have very good online tools that come with some of the subscription offers, though.

Business week:

Analysis of the economy and figures of the week are very useful. About $38.00 for a year's subsription.

Value Line Investment Survey:

An excellent resource for individual stock investing. They rate stocks 1-5 on various criteria. It costs about $375.00 a year for a subscription. I go to the library instead and use it for free. It is important to buy the stocks when they have just been upgraded to #1 for timeliness and sell when downgraded.

CNBC.com:

(free) Down load the advanced chart tool. It is extremely useful for evaluating volume and price movements of any index or stock.

CNN.com:

(free) The charting tool is less sophisticated than CNBC's but is easier to use and will basically give you the same info, except if does not do customized periods.

So what about the 20% of time when the market confirmation indicator does not work? (I discussed it my last posting)

1) I do not think it is best to buy on the actual market confirm day. This is because there can still be some selling after the confirm day where the market will still go down about 2 percent or so. So what I usually do, is buy over time in the week or two following.

2) Look for distribution days in the week following the confirmation. If the distribution days start to stack up, that’s very good signal that the rally is faltering. This happened a number of times in the bear market that started in 2000. Often, if I see more than 1 distribution day in the week or so following the confirm, I will either sell or not buy at all.

3) Look at the overall market direction. Has the market recently been experiencing a horribly bearish episode where it has dropped 20% or more? or was it only a correction of 15% or less? The more bearish the market has been, the more likely it will take more than one of these market confirmation signals to change its overall direction.

4) Finally Look at the earnings of the S&P 500. If the overall earnings picture of the market is poor, meaning year over year quarterly earnings are flat to down, then the rally probably won't last.

In my next posting, I will discuss some interesting publications and web sites that have helped me make good decisions.

Do you think I am full of it? I would really like to know. I have often made my best decisions when someone was kind enough to show me a better way.

Tip of the day:

Without a doubt the best chapter ever written about equity market analysis is found in the book, How to Make Money in Stocks, 3rd edition, chapter 7, by William J. O’Neil.

It gives excellent advice and examples on how to spot tops and bottoms of the market. The highlight is his his analysis on spotting the bottoms: when an intermediate correction or an all out bear market has become evident, simply look for a market rally that is lasting longer than 3 days.

On the fourth to seventh days look for an up day of 1.7 percent or more on above average volume ( it should be at least higher volume than the previous day's). This is what happened on October 19th to start the current rally. This tool also worked to predict the bull market that started March, 2003. He claims it works about 80% of the time.

What a winning recipie for success!

More later on what to do if his advice does not work.

I don't know why, I used to like giving my money to those guys who would gladly take it for a minute of showmanship. Sometimes I think the market can do its own mysterious disappearing act to profits, if it is not watched carefully enough. The major indexes can be those cups, but often only one of them has the ball underneath when it comes to knowing when to buy or sell.

Market Divergence sounds like a boring topic, but can be a useful tool when it comes to making a buck. In a nutshell, market divergence occurs when the major indexes are performing differently at a given time. For example: recently the Dow, S&P 500 and NYSE recently hit 4 1/2 some new highs, but the NASDAQ was no where close. A more subtle example is that the NYSE has been the best performer of the group. I feel this divergence isimportant because the S&P 500 and the NASDAQ were recently, on more than 1 occasion, at or near their 50 day averages, each time to signal a buy transaction for all of the majors.

Recently I have focused specifically on movements of the S&P 500 to gain an understanding of the short term direction of the market. Then when I thought buying and selling signals presented themselves, I would transact on the NYSE or Russell 2000 because the last two showed more relative strength than the S&P500.

Here is a summary of recent moves I have seen on the S&P 500 and what I thought these meant (starting at the end of 2005):

October 19, Huge buy, (don’t miss this one!): Market confirmation for the beginning of this leg of the current bull market. I have not discussed how to find the market bottoms yet.

December 2: Sell on the Roller coaster effect

December 30: Buy, as S&P 500 is near 50 day average and due to low volume selling

January 27: Sell on the roller coaster effect. I have no other real reason except, that February is often a bad month. I admit it I personally got nervous and sold. I have not bought again since, but probably should have: its that trader/investor inner struggle in me.

February 14: Buy, due to return to 50 day avg after falling below briefly.
(NYSE and R2k did not fall below)


February 17 Sell on the roller coaster effect, volume indicates advance is weak.

March 7: buy on the bad news (I can be contrarian!) and the first 3 trading days of the month were up(haven’t talked about this one yet) so the rest the month will probably be decent

March 16 sell on roller coaster effect and recent buying volume still not that great.

It is important to always review all of the charts of the major averages to try to find the right trend. In this case, it was divergence with the weaker market giving the buy and sell signals.

Disclosure: I don’t always take my own advice, due to time constraints or I just fall out of trader mode, going away from the dark side for while, deciding once again to become an investor.

Its crunch time for my first predictions. If the market continues to rally next week, then my reading of the tea leaves will be blown out of the water (or I guess tea). These things happen.Sometimes a good one can get away. We will find out soon.

Here is a summary of my journal for near term movements in the NYSE index so far:

Predictions are Based in large part on the Roller Coaster Effect and count of Distribution days among other factors, all discussed in my earlier postings.

Prediction #1, made on 3/10: NYSE will go up 1-2%. NYSE closed that day at 8079.24. 3/16 NYSE: 8271.61. Outcome for prediction #1: This prediction has been slightly exceeded so far to the upside but the NYSE may continue to climb.

Prediction #2 made on 3/15: The NYSE will move sideways or start going down, it is now close to a near term top. NYSE level at close that day 8261.92.
Current outcome: The market continued its upward move 3/16 but not by much and now stands at 8271.61.

A little disclosure on what I currently own:

I am currently invested money markets and short term debt. If the NYSE moves back to its 50 day average, I may commit a trade to a no load equity mutual fund that get returns parallel to that index. I am changing my tune some. The old recent high of the market has been topped in last week's action, a positive development that should not be ignored. The second major advance (started Octoer 19, 2005) of this bull market (started in March 2003) may be refusing to die after all.

Why are the actions of institutional investors so important? Because they conduct about 75% of the transaction volume on the market. With that kind of clout, what the little guy does is of little consequence.

Look at it this way: When my oldest child was 2 years old, he would turn his sippy cup over and then smile at me and say, "drip, drip". Then a little bit of milk would come out and the "maid and butler", my wife and I, would get the honor of cleaning up the little messy trail left behind. One day at dinner, this happened and I was not paying attention, just thinking about another one of those little puddles to clean up when I knocked over my own glass of milk, making a huge mess everywhere. Then he giggled and said "flood".

That’s what it is like when thinking in the institutional mindset. The big players can make a huge mess out of things when they start selling and flood the market with their large transactions. The little guy just has his milk cup like portfolio.

The easiest way to tell what is going on with the institutional investors is: focus on the dialy volume on the major indexes. High volume means the institutions were busy that day. The volume reading is also a great way to gauge the strength of the market when it is on its way up.

Yesterday's action and my second prediction:

Yesterday marks a day that was probably the beginning for what I dub the "roller coaster effect": The major indexes did not exhibit much upward/downward action, taking place after a number of up days. Because of this, I think the market will probably start moving sideways to lower for about a week or two or so. Will this be a mild decline or something worse? not sure yet.


You are probably asking: what in the world is the "the roller-coaster effect"?

Here is the best way to describe it: As a kid, I liked to ride roller coasters. (Space mountain, Colossus, & the Beaumont roller coasters were all practically in my backyard). The ride would usually chug along from the bottom, starting somewhat quickly and then as the top approaches, it slows to a crawl, almost seeming to stop, suspended for a moment, as if stalling. Then the descent begins. A childhood friend of mine used to joke that he felt like the Galaxy was falling apart when the ride was getting just past the top.

An easy way to spot the roller coaster effect on a chart (use high/low close mode) is to look at the short term peaks themselves. Pick one and look at it and the preceding days. What you will probably see in most cases are 1 or more trading days that did not show much upward action (It doesn’t matter what the volume was). What's interesting here is that the first or second stalling day in the ascent (or groups of them) are usually not far its nearby top (may even be the top itself).


Tip of the day:

Does the roller coaster effect by itself spell long range trouble for the market? Usually not. The roller coaster effect may be signaling a decline of about 1-5% in the major indexes. If you are a an active trader and you own a no load mutual fund with free exchange privileges, it may be a good strategy to sell on the roller coaster effect and then buy back at the 50 day moving average. However, I do not recommend doing this during the beginning phase of a new bull market (first leg up or a really strong second advance) that is only a few months or so old.

Side note from a parallel universe:

The NASDAQ took on another distribution day yesterday to mark 3 of them for the last 4 weeks. The s&p 500 remains at 2 as its retreat was not that great and it still closed in positive territory. The counts arent bad but what the leaders have done lately is still a nagging issue.

Action of the last few days (March 14 & 15):

The major indexes have completed the 1-2% up trend that I predicted a on March 13. If it continues to go up, the market performance will exceed my prediction. The volume of the last two days was decent, but not as high as as that seen on some of the down days of about a week to two weeks ago.

Tip of the day:

Look at the charts of the major markets for signs of strength or weakness. How? If you see the indexes going lower on higher volume than the last up day's volume, it is probably experiencing a "distribution day", where the institutional investors are selling off. If you see at least 3-5 of those in the latest 2-4 week period, that is a sign of weakness. Also, if the market peaks during the day and then reverses to close in the range of slightly higher or slightly lower on higher volume, this is probably "churning" and also counts as distribution. At this point the count stands at 2 for the NASDAQ and S&P 500for the last 4 weeks. When distribution days occur I will make note of them. Can you find those days on those charts? Check it out for March 2000 and for periods leading up to other bear markets. This gauge works really well when the distribution is on above average volume. However, do not take it out of context: It should not be taken as seriously if the overall recent volume is below average when the higher volume selling days happen.

As far as trending the market goes, it makes sense to look at the overall recent volume of the up vs. down days of about the last month or so. The period of selling on the major indexes around the beginning of this month had overall higher volume than the current uptrend. I see this as a negative sign, as it may be an easy set up for the sellers to step in and take over.

Feel free to post any questions or comments about this or any other investment questions you may have.

Today's Acton:

The major indexes were mixed. Most were up a small amount, except for the Dow, which was down slightly. Volume was not decisive. If this continues I think a stalling or "thinning out" action may take place and the market will not achieve the 1-2% gain that I predicted on 3/10. We will just have wait and see.

My Take on things:

I think Money Markets and CDs are best for now, The stock market may present some opportunities, but I am not biting at this time. I am bearish on real estate and bonds.

Why the big view matters:

Some think that it comes down to some methodology or scheme to finding a few good stocks and letting them run whether it be based on technical factors, on the fundamentals or my preference, both. But I do not always take a long position in stocks. It is so much easier to get a good payday when the general market is moving (or about to move) in the right direction at the same time I want to buy. Why? because the odds improve on picking a winners when most stocks are moving (even better yet, about to move) in an upward direction, because there are simply more of them presenting themselves as dynamite investment opportunities at that time.

For example: My mutual funds recently returned an average of about 10 percent for about the time I held them from October of last year to February this year. When I bought: technical indicators were telling me that institutional investors were coming in the market to buy on big volume, probably based on the important fundamental of good earnings news. When I sold, I thought the market would be flat to lower due to the interest rate concerns and earnings no longer a catalyst. Since then there has some minor ups and downs with nothing really to write home about either way.

I have learned about a number of ways to tell, usually with-in a few percentage points, when the major indexes may be near the top or close to a bottom, the best times to conduct transactions. Does it work every time? No. But it usually works, and when I am wrong I have been able to reposition my overall investment strategy without taking on significant damage to my portfolio.

In the coming weeks I will share with you how to get the pulse of the overall market. I feel this is a very important ingredient when deciding on whether or to be in stocks at all.

When the market is down, 3 out 4 stocks are losers. I could get better odds in Vegas.

Feel free to discuss what works for you. Whether it be a particular stock pick or a device on gauging stocks or the market in general. Anything can be fair game. All just for fun.

Today's TIP:

Check the leaders. This can done in reading about Investor's business daily IBD 100 index and Big Picture article. The paper will tell you if the index is experiencing trouble. Today's edition noted quite a few of the leaders were down last week; And two weeks before that they said the same thing. this is important because the condition of leaders are most often a leading indicator to the general performance of the market.

Today's prediction:

I expect NYSE to increase from the current level by about 1-2 percent before leveling off and starting new descent.

Current Market status:

Rally continues that started on October 19, 2005. There has been some selling as of late, but the market responds to the selling by bouncing off the 50 day moving average. The leading stocks are showing signs of weakness, the lucky streak may end.

Investor's Insight (or not):

Investors should consider holding money funds and cds, given that these investment types get the best historical returns at the end of an interest rate tightening cycle. Do you agree?