Determine Market Direction to Make Index-Beating Gains – Part 2 of 3
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, Investing, Stock Market, Investment Fund, Wealth Building on 16th September, 2009.
Tags: index-beating gains, isa, isa trend investing, market direction, trend.
How Determining Market Direction Helped Make 67.8% Gain
Recently I was fortunate enough to make a ten month gain of 67.8% through a brand new method of investment – ISA Trend Investing.
When people hear that I made such a decent gain in a relatively short period of time, the first thing they want to know is exactly how I did it so that they can do the same.
Over the next few weeks, I’m going to be explaining exactly how it is possible, so that in the right market environments you’ll also be able to make similar – if not even better - gains.
In my previous blog I showed you the 3 simple steps to ISA Trend Investing and how they can help you to determine market direction.
Today I’m going to show you the best way to determine the overall trend and direction of the market.
The Secret to Successfully Timing the Market
The best way to determine the overall trend and direction of the market is to follow, interpret and understand what the general market averages are doing every day. This is the most important lesson you can learn.
In his bestselling book, How to Make Money in Stocks, William O’Neil said: “Don’t let anyone tell you that you can’t time the market.”
According to O’Neil, the erroneous belief that no one can time the market evolved more than 30 years ago when most funds that tried it were not successful. This is because they had to buy and sell at exactly the right time but due to their asset size problems, it took weeks to raise cash and weeks to re-enter or get back invested into the market. Therefore, the top management at these funds imposed rules on their fund managers that required them to remain fully invested (95% to 100% of assets).
Study the Major Indexes
If you want to make big money in investment funds (or stocks) over the long-term, you must observe and study the major indexes carefully. Here they are:
• The Nasdaq Composite
• The S&P 600
• The S&P 500
• The Dow Jones Industrial Average
As well as watching these four indexes, the action and behaviour of the highest quality stocks (the leaders) is also a key indicator of future market direction.
By studying these four indexes plus the action of leading stocks–each and every day, you will come to realise meaningful changes in the daily behaviour at key turning points like market tops and bottoms and learn how to capitalise on them. As O’Neil explains…
“Recognising when the market has hit a top or has bottomed out is frequently 50% of the whole complicated ballgame.”
The buy and hold strategy does not work with ISA Trend Investing. Anybody who was using the buy and hold strategy, and bought a growth fund just before the 2007-2009 bear market, would have probably seen catastrophic losses. And those losses could have been in the region of 75% to 90%. To make up for a loss like that, it can take you as much as a decade or more just to get back to even.
Take a look at this example.
• A loss of 33% requires a 50% gain just to get back even.
• A loss of 50% requires a 100% gain just to get back even.
• A loss of 90% requires a 900% gain just to get back even.
This is why it is so important to preserve your capital and get out of the market and into the safety of a cash based fund when you can see the first signs that the market’s health is deteriorating.
Is Your Advisor Helping or Hurting?
Does your current adviser tell you when the market’s health is deteriorating?
Do they advise you to switch out of the market at the first signs of a bear market?
Do they suggest that you switch into a cash based fund to protect and preserve your capital?
If they don’t, why not?
You see, after you identify the first definite indications of a market top, you can’t wait around. You have to quickly get out of your chosen fund/s before real weakness develops. Lightning fast action is critical to ensure you do not give back your hard-earned gains.
Unless you are able to get in and get out of the market at the right time, you will have difficulty making headway. You or your adviser might be able to pick the best fund in the world but unless you get in sync with the market’s trend, the fund will not achieve the returns you desire. But if you master the art of determining future market direction, you will have learned. Getting in sync with the market is not easy and takes countless hours of practice, taking many years to master. However, knowing the basics about how the market works is going to be of great benefit to you.
Next time, in Part 3 of this series, I am going to look at the parallels between the stock market and property market and how investors can use these parallels to their advantage when it comes to determining market direction. In the mean time, if you would like to find out more about ISA Trend Investing and how it could help you to retire rich please click here for a FREE sneak preview of my book Liquid Millionaire.
Happy reading!
Your friend,
Stephen Sutherland
The UK’s Leading Authority in ISA Trend Investing and Author of Liquid Millionaire
Please Note: As always, let me remind you that I am not a financial adviser and therefore not authorised to give advice on what investments to buy or sell.
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