...When To Fold Em?

I have to admit that If I didn't have the benefit of following a reliable timing model I might have cashed in my chips by now. After all the S&P Index May month end close was down 8% from the April month end close. This is in fact more than a "normal" correction and is one of the factors I look at which does point to a potential long term trend change. However, it is only one of a handful of factors that I look at when making a determination as to whether a long term trend change is likely. It's important that you understand that a flip to a green or red arrow only occurs when all factors point to the same conclusion. Right now they do not. There is not unanimous agreement. So the green arrow remains in effect and I'm staying put. This strategy has paid off very well for me in the past...leaving my emotions at the door and making my investment decisions based on a reliable timing model.

IMPORTANT: I encourage you to check in each day next week. The reason is that although the monthly green arrow remains in effect it is rare that the model remains long (green arrow) when there's been a monthly decline of more than 5%. Also, the market is near a very important price level, that if broken, could facilitate a rather dramatic move lower. The last thing I want to have happen is wait until the June monthly close and find the market 15-20% lower than the April close. This would take too large a chunk out of the gains we've seen since March, 2009. So check in each day. If I don't post, nothing changes. If I do post It will be because I believe the long term trend has flipped down (red arrow).

FOR YOUR EDUCATION: I have no educational article for you this week but I think I have some exciting news for you. As you may have surmised by now although the monthly methodology I use has been very accurate in calling the long term turns, it weakness is that in most years there are is at least one, 1-3 month time frame where the market is actually declining or moving sideways. For months I've been researching and back testing a weekly market timing methodology whose objectives are to consistently exit the market as close as possible to a monthly market top and enter the market again as close as possible to a monthly market bottom. Obviously if that could be accomplished the already impressive returns achieved with the long term (monthly methodology) can be dramatically enhanced. The results so far are very promising. I hope to have more to report to you within the next 2-4 weeks.

Have a great holiday weekend everyone. PLEASE take the time to honor your country and the countless veterans who have sacrificed so much for our freedoms by flying your flag!

Market Update

Hello Everyone. No doubt most of you are getting a little concerned and rightly so. We haven't seen much to be positive about since April 30. It seems that every time the market has a strong up day, it is met with selling the next several days. Today the S&P Index closed at 1067.95 which is down 10% from the April 30 close. Remember I mentioned two days ago that if the daily close of the S&P Index closed below 1065 on strong volume that would give a high probability indication that the green arrow will flip to red? I stand by that. If the market closes between now and Friday below that level on high volume the green arrow flips to red. It is also possible that after Friday's close analysis of the monthly chart may also flip the arrow to red. If the S&P Index closes below 1065 on Thursday I will post that evening. If not, check the blog after 12pm on Saturday for an update.

Market Update

Not a whole lot to report today. The market did close lower than Friday's close but it did so on much lower volume. If you recall I forecasted higher prices at least earlier in the week. I think there's a good probability of that still happening based on the price action and volume of the last couple of days. However, if the S&P Index trades closes below 1065 sometime during this week on high volume that will in all likelihood flip the long term trend down. IF that happens before Friday I will post so you can get prepared to take any action with your broker/adviser. Otherwise, check the blog again after 12pm on Saturday for the next monthly update. Have a great night!

Power Of Compound Interest

Greetings all. The S&P Index closed at 1087.69 on Friday, down about 8% from the April 30 month end close (click on image). Remember a couple of weeks ago where I warned about some short term weakness? Well, the weakness has been more pronounced than I forecast. However, the index did close up on Friday with very heavy volume. This buying also took place at a critical support level which leads me to believe that there is a high probability of rising prices, at least through the first half of next week. Right now although the green arrow is still in effect, there are enough warning signs to suggest that the market may be in a transition phase on a long term basis. Next Friday's close will tell us a lot, as it will also be the May month end close. IMPORTANT: I would highly suggest that you may want to check the blog daily next week. The reason is that if early next week the market breaks below current levels on heavy volume there may be some rather serious deterioration in prices. Stay tuned.












FOR YOUR EDUCATION...Remember the article last week which compared three investors? Investor A was good about entering the market on the green arrows but he exited the market whenever he got scared instead of being disciplined and waiting for the red arrows to get out. He averaged a 10% annual return. Investor B followed the advice of many market "experts" and simply left all of his money in mutual funds through the major bear markets. He averaged a 2.4% annual return. Investor C ignored the experts and controlled his emotions by simply putting all of his money into mutual funds on the green arrows and shifting all of his money into money market funds on the red arrows.

I thought it would be interesting to compare the results of all three investors assuming that each was 50 years old, had $10,000 to start, and wished to retire at age 65:

Investor A...$41,772 (A 318% return on original investment)
Investor B...$14,272 (A 43% return on original investment)
Investor C...$135,895 (A 1259% return on original investment)

It doesn't take a rocket scientist to figure out who will still likely have to work at age 65 does it? I hope this motivates you to get serious about taking more responsibility in the planning and managing of your investments. If you don't the probabilities are high that you'll find yourself in the category of Investor B. It doesn't have to be that way.

Know When To Hold Em......

Hello everyone. Hope you all had a great week. The S&P index closed down 4% this Friday from the April 30 monthly close. As you know this correction falls into the "normal" category so the green arrow remains in effect. However, as I mentioned a couple of weeks ago I see some early warning signs of a potential end to this bull market. If any significant developments take place on a Friday close before the next month end update (May 29) I'll be sure to let you know.

FOR YOUR EDUCATION...Today I thought it would be a good idea to recap the most important principles necessary to maximizing returns in your 401-k:

1) Do not make investment decisions based on fear, emotion or gut feel. This is a sure path to substandard results and possible financial ruin.

2) Do not simply put all of your money into mutual funds and forget about it. This also is a sure path to substandard results and possible financial ruin. Hopefully I've demonstrated that to your satisfaction in the April 23 article. If you haven't read that yet PLEASE do so now.

3) The most sensible thing you can do is find a market timing method which has been successful in accomplishing three things: A) Has all of your money in well performing mutual funds when the probabilities favor that over the long term prices will rise. B) Keeps all of your money in mutual funds through the "normal" corrections. C) Has all of your money in safe money market funds when the probabilities favor that over the long term prices will fall.

Let me demonstrate the importance of following these principles. Please click on the following image. Take some time to examine this chart. As you can see the chart shows the important long term buy and sell arrows. A buy in April 2003, a sell in November 2007 and a buy in March 2009. Next I've noted the magnitude of all the "normal" declines in each bull market.












OK, now let's assume three investors:

Investor A tends to be influenced by his emotions. Although he puts all of his money into mutual funds when the green arrows appear he gets scared and looks to exit when the market declines significantly on a daily or weekly basis after negative news.

Investor B has ultimate faith in the market. He leaves all of his money in mutual funds all of the time assuming the market will always bounce back.

Investor C follows my market timing model. He puts all of his money into mutual funds when the green arrow appears and leaves the money in through all the normal corrections. When the red arrow appears he puts all of his money into money market funds. When the next green arrow appears he again moves all of his money into mutual funds.

Let's assume that all three investors start with $10,000 all in mutual funds in April, 2003. How would each have performed from April 2003 to May 14, 2010? Let's take a look:

Investor A puts all of his money into safe money market funds in April 2005 when the market declines 5%. He then shifts back into all mutual funds in March 2009. He then shifts all the money back into money market funds in January 2010. His account balance is now $17,000 which which represents a 70% return on his original $10,000 investment. His average annual return was 10%. Not too bad.

Investor B has had all his money in mutual funds ever since April 2003, enduring even the brutal bear market decline from November 2007 until February 2009. His account balance is now $12,400 which represents a 24% return on his original $10,000 investment. His average annual return was only 2.4%. Obviously not that good.

Investor C keeps all of his money in mutual funds through the normal corrections. He shifts all of his money into safe money market funds in November 2007. He then shifts back all of his money in mutual funds in March 2009. His account balance is now $23,000 which represents a 130% return on his original $10,000 investment. His average annual return was 19%.

Have a great weekend everyone!

Time To Panic?

In a word...no. At least that's my opinion. No doubt you are aware of the the significant down day on Thursday and to a lesser extent on Friday. Please click on the chart which follows. For the week ended 5/7 the market closed down 6% from the April 30 close. If you remember last week I stated that there was a good probability that the market may decline over the next 1-3 weeks. So why did the market sell off so dramatically last Thursday? In my opinion there were primarily three reasons...1) One of the things that led me to believe that the market may be susceptible last week is the lack of institutional volume supporting rising prices. Click on the chart again. Look at the bottom of the chart. This green histogram is simply the monthly NYSE volume. Notice the blue arrow? This shows declining monthly volume since November, 2009. Essentially higher prices were being supported by the retail crowd. 2) The market had moved 63% from the March, 2009 low without a meaningful correction. A market correction was way overdue. 3) When you combine #1 with #2 and a negative news story comes out, like the Greece financial situation, the "herd effect" kicked in. In other words panic selling. Everyone and their brother rushed in to sell at the same time.












So what does all of this mean? Although there has been significant weakness recently which is an early warning sign to potential long term weakness, not all the signs are there yet. This correction although swift is still only 6% which is well within the realm of a "normal" correction in a bullish market. So the green arrow remains in effect at least until the next monthly update, which is May 29. HOWEVER, given the current market situation I will monitor the markets weekly and if conditions warrant, may make an adjustment to a red arrow prior to May 29. So keep a cool head and stay tuned. Have a great weekend everyone.

Stay Focused On The Big Picture

Hello everyone. As you know April 30 was the last trading day of the month so today is the monthly update for April. Below is a chart of the monthly closing prices of the S&P Index (click on image to enlarge). If you shift your eyes to the right edge you'll see that the index closed at 1186.69. This close is higher than the March close which is bullish. My other indicators do point to potential weakness over the next 1-3 weeks. So it would not be unusual to see a decline of 1-5% over this time frame BUT the most important thing is on a long term basis the market remains bullish. The green buy arrow from March, 2009 remains in effect.

FOR YOUR EDUCATION: Some have asked me why I use a chart of the monthly closing prices to determine long term market direction. There are several reasons but the most important is that IMHO examining monthly closing prices allow you to filter out the daily and weekly fluctuations that otherwise may cause you to panic and thus exit you position prematurely. Let me illustrate what I mean. Click on the chart again. Notice the red down arrows numbered 1-10. Arrows 1-8 represent the maximum monthly percentage declines the market experienced between the April, 2003 green arrow and the November, 2007 red arrow. Arrows 9-10 represent the maximum monthly percentage declines since March, 2009. As you can see during these bull markets no decline exceeded 5%. The lesson to be learned is this; it is normal for a bull market to experience "temporary" declines ranging from 1-5% before the market resumes it's upward trend. I guarantee you that during many of these "normal" declines there were days that the S&P may have dropped 30-50 points, causing many to wonder, perhaps panic and maybe even exit their position. They then sat and watched the market take off again while their money earned 1% or less in a money market fund. SUMMARY: Stay focused on the big picture and do not let the daily fluctuations and news stories affect your investment decisions.