Determine Market Direction to Make Index-Beating Gains – Part 3 of 3
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, SIPPS, Investing, Stock Market, Investment Fund, Wealth Building on 18th September, 2009.
Tags: index-beating gains, isa, isa trend investing, market direction, property market, stock market.
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 best way to determine the overall trend and direction of the market.
Today I’m going to be looking at the parallels between the stock market and property market and how you can use them to your advantage.
It’s All about Supply and Demand
Just like the property market, the stock market works on supply and demand. Using the property market as an example, house prices, as you know, go up and down in value. Why is it that property prices rise? In a word, demand. Why do they fall? The reason is oversupply. The level of supply and demand is determined by confidence.
If there are high levels of confidence and optimism, more people will look to buy. But when confidence is low, people do not want to buy and will therefore be more inclined to sell. When there are more sellers than buyers, prices drop. When people do not want to buy, prices have to drop until they reach a price level where confidence is restored. If houses sell quickly, it means there is demand and this in turn forces up prices. If houses sell slowly, it means that there is no demand or oversupply and that in turn forces prices down. The stock market works in the same way as the property market. It’s all based on supply and demand.
It’s Time to Get Excited Again
Contrary to popular belief, it is not Joe Public who make up the majority of the market’s daily trading volume. It is the professionals that amount to approximately 75% of the trade that goes on – which means these individuals and organisations buy and sell huge amounts of shares.
And because these professionals buy and sell such large volumes of shares, it means that the market’s trend and direction is greatly influenced by these big players. And that is why it is best to get in sync with what they are doing.
If the stock market professionals sell, prices drop. If they buy, prices rise. If you try to go against these huge investors and buy when they are selling, you are going to get hurt–and hurt badly. You see, as you’ve been reminded on this blog on many occasions, three out of every four stocks (and funds) move in the same direction as the market and that is why you have to get in sync with the market’s overall trend.
How to Seriously Profit
When the professionals have low confidence about the values in the market, they start to sell. Because they hold such huge amounts of stock, they simply cannot sell all the shares they own in one day. That indicates they have to sell over weeks, months and even years to get completely out of a company they think is overvalued.
Just as with selling, buying into companies takes time too. From this knowledge, you can seriously profit by simply acquiring the ability to read the market’s health. If the market is healthy, it will form an uptrend and approximately 75% of stocks and funds will rise with that trend. When it is unhealthy, the trend will be downwards and 75% of stocks and funds will fall.
The multi-million pound question at this stage must be:
How do you read the market’s health?
First of all, reading William O’Neil’s latest edition of his bestselling, How to Make Money in Stocks should ideally be on your things to do list. I always tell my clients to pay particular attention to Chapter 9 entitled “M = Market Direction.” In that chapter, you get a simple but detailed explanation of exactly how the market works. And given Bill’s great track record, it would be a good use of your time.
In addition to learning from O’Neil, here are some good pointers on how you can get quickly started.
Price and Volume Is Everything
One of the best ways of reading the market is to look at charts. A stock chart is a graph that displays the price and volume history of a given security or index over a period of days, months or even years. Price and volume charts help you to see what the professionals are doing so that you can follow in their footsteps. Whether they are buying or selling, through a chart you can see what they are doing by simply looking at the price and volume action. Price action is how a stock or index changes in price. Volume action tells you the number of shares that have been traded.
For example, if volume is far above its average and the price action is up, the professionals are buying. On the other hand, if the volume is far above average and the price action is down, it means that the professionals are selling. Lack of volume combined with prices moving up indicates little demand from the professionals. This is viewed as unhealthy action.
Lack of volume combined with prices moving down means that the professionals are reluctant to sell. This type of action is viewed as healthy action. By watching the market every day, and keeping a close eye on price and volume action, you can determine exactly what the professionals are doing with their money so that you can do the same.
It is also important for you to understand that it takes a lot of buying or selling to confirm that the trend of the market has changed.
For example, if the trend of the stock market is up, it takes a lot of selling to change the trend from up to down. By measuring how much selling is going on over certain time periods, you can determine when the trend is about to change or has changed and you can then act accordingly ie; switching some of your holding into a cash based fund or completely switching out onto the sidelines.
Next time I am going to talk about how to time your moves in and out of the market and share with you some key questions to help determine whether your current financial advisor has their finger on the pulse of the market. This information will be absolutely crucial for your financial security so please don’t miss out.
In the mean time, if you have any questions regarding ISA Trend Investing or determining the health of the market please contact a member of my team for a chat. As always you have my word that their will be no sales, no jargon, just the facts.
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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