Ignore the media pundits–Stage Analysis shows markets remain in up-trend

GMI5/6
GMI-28/9
T210862%

Every time I open my browser it opens the marketwatch.com webpage.   This site is a wonderful way to keep up on the trend of the market during market hours.   It also has many great articles.   However, I am struck by the number of pundits who have recently written about the tough market that we have and how weak and dangerous it is. While I often read such articles, it is important for me to remind myself that no one knows what the market will do in the future.   The best I can do is to use technical analysis to determine the current and recent trend of the market.   Trends tend to continue along—until they don’t! The only way I know to interact with the market is to stay on the side of the current trend and to manage my position size and exit points as the trend strengthens or weakens.

Now, how can one measure the trend?   It depends first on one’s time horizon.   Day traders need to look at intraday trends using hourly or even 5 minute bars on the chart.   I am too old to attempt such tactics, which are to me the equivalent of flying with the Blue Angels. I cannot react fast enough and I sure do not want to spend every second of the trading day watching my stocks and reacting. As a Boomer, I want to enjoy other things in my life, and even continue to teach and do research, but I still want to manage my investments, and my financial future, but only part-time.

I therefore have adopted for many years   Stage Analysis, the method first advocated by Stan Weinstein in his 1980’s classic book (posted to the lower right of this page).   Stage analysis relies on examining the weekly chart of a stock.   Each bar on the chart represents the high and low of the equity during each week. It is noteworthy that William O’Neil, founder of IBD and a very successful investor, has said that he uses weekly charts to discern the trend.   With Stage Analysis, one plots both the weekly price bar, which shows the high and low of each week, and the 30 week moving average of closes over the prior 30 weeks (usually each Friday’s close).     As each new week is added, the close from 31 weeks ago is dropped as the most recent week’s close is added, thus the average moves along each week.   It turns out that as long as prices remain above the 30 week average and the average is rising, the market is in a Stage 2 up-trend.   As long as the major index ETF’s remain in a Stage 2 advance I leave my conservative university pension in   mutual funds. I do not care what the media pundits are saying, or try to out guess Mr. Market.   (This does not stop me from trying to beat the market in my trading accounts, by exiting and entering even during a Stage 2 advance.)

With the above as a context, what does Stage Analysis say about the market over the past year?   It is clear that the SPY (S&P500 index ETF) and DIA (DJ-30 index ETF) have been in a steady Stage 2 up-trend since early 2013. The solid red line is the 30 week average.

SPYwkly05272014

 

DIA05262014Stage 2 in the QQQ (Nasdaq 100 ETF) really started going strongly a little later,   in mid 2013.

QQQ05262014

All three of these indexes are clearly now in a Stage 2 up-trend and remain above their rising 30 week averages.   The pundits are bemoaning the fact that the past few months since the beginning of 2014 the indexes have been relatively flat. These indexes are all up over 30% since 2013 and the pundits seem to think that they should always be climbing at this super rate!   No!!!   A health market rises and consolidates over and over again.

So I remain invested in   mutual funds in my most conservative pension accounts and ignore the ever present cacophony generated by the media pundits.     I once heard Steve Forbes say that his grandfather told him it is much easier to make money from the market by selling advice.     Hence the plethora of writers and market prognosticators who have rarely walked their talk………..

Now back to my trading oriented numbers. The GMI statistics remain strong, with a Buy signal in place since 4/22.   My short term trend count for the QQQ is U-9, 9th day of the current short term up-trend. The people at IBD still call the market in a correction, as they wait for a strong volume up day (follow through day).

GMI05232014

 

Yes, one can time the market!; IBD 50 lists outperform on gainers and decliners

GMI6/6
GMI-27/9
T210848%

The media pundits say it is impossible to time the markets.   By making investing appear complex and beyond most people, they protect their jobs and the jobs of many financial advisers.   I have been able to use a few simple indicators to keep me out of the major market declines.   I protected my pension from the 2000-2002 and 2008 declines. Below is a chart showing the periods when the GMI was on a sell signal (in red) versus a buy signal (green) since 2006.   The GMI, a collection of six indicators,   has helped me to get out of the market during the major declines.   Yes, there are   times when the GMI gets whip-sawed, but only for a few days.   I so not mind going to cash and then re-entering on a new buy signal in my trading accounts.   The problem is that my pension plan prevents me from market timing.   They want me to ride the market down in a large decline.   I refuse to do so. Below is a graph of the GMI signals as they apply to the QQQ. Click on it to enlarge.   Judge for yourself if you would have preferred to be out of the market or more defensive during the periods of red days. You can also check out the strategy of using GMI signals to trade QLD the past two years here.

GMIQQQperfOne of my perspicacious honors students questioned my analysis of the IBD 50 stock lists’ performance during the period since the last GMI buy signal, which I posted a few weeks ago.   He suggested that while the IBD 50 stock lists might have had more large gainers than the stocks in the major indexes, perhaps the IBD 50 lists also had more big decliners.   So, I am re-posting below the table I posted a few weeks ago, with the addition of a new column (in red) showing the percentage of the IBD stocks that declined 10% or more in the study period. The data do not support his hypothesis.   I found that 2%-10% of the stocks in the IBD 50 lists declined 10% or more, not very different than   the NASDAQ 100 stocks (8%), but a little more than the Dow 30 (0%) and the S&P 500 stocks (3%).   Furthermore, there were very few of the IBD 50 stocks that declined as much as 15%. So we are left with the conclusion that the IBD 50 stock lists were much more likely to contain stocks that had large gains (more than 20% or 30%)   but are not more likely to have large decliners. Thus, the IBD 50 lists were more likely to contain stocks that outperformed, at least during the period I studied.   Nevertheless, I do know, and IBD has said this, that the IBD type   growth stocks do tend to decline more than other non-growth stocks during major declining markets.

IBD50perfrev

Finally, here is this week’s GMI table. While all but one of my indicators are positive, I am aware that investor sentiment is getting quite optimistic.   (But the Worden T2108 is only 48%!) Until this extreme bullishness translates into low GMI readings, I remain 100% invested in mutual funds in my conservative university pension accounts.

GMI12062013

GMI based strategy using 3X ETF’s beats IBD 50 stocks

GMI6/6
GMI-27/9
T210856%

I decided to look at how IBD 50 stocks have performed during the time since September 4, when the GMI issued the   buy signal, that is still in effect. I examined seven IBD 50 lists that had been published, beginning with the one from 2/7/3013.   Using TC2000 I computed the percentage of the stocks in each IBD list that   has advanced in the period from 9/4 through Friday’s close on 11/22.   I compared these results to how stocks in three major indexes (S&P 500, Dow 30 and NASDAQ 100) performed during the same period. Finally, I looked at how their respective index ETF’s performed during the same period.   I hypothesized that the IBD 50 stocks, which are picked based on the IBD   growth stock strategy, would outperform most other stocks. I was surprised by some of the results.GMIperf11232013

As this table   shows, the percentage of stocks in the IBD 50 lists that have gained at all since 9/4, ranged from 76% to 82%. In comparison, 87% of the S&P 500 stocks have gained, 80% of the NASDAQ 100 stocks and 90% of the Dow 30. Thus, IBD 50 stocks as a whole were no more likely to rise than were the stocks in these indexes.

The superiority of the IBD 50 stocks began to show up when I looked at the likelihood of having larger gains.   The percentage of IBD 50 stock lists that advanced 10% or more since 9/4 ranged from 54%-62%, much better than the stocks in the three market indexes (37%-45%). The IBD 50 stocks did even better at higher levels of gains.   Gains of 20% or more were found in 16%-32% of the IBD 50 stock lists and in no more than 14% of the stocks in the major indexes.   Finally, gains of 30% or more were found in a small minority of the IBD 50 lists   (8%-14%) but were very rare in the stocks in the general indexes (0%-3%).

Thus, while IBD 50 stocks were not more likely to have gained (at all) as the stocks in the three market indexes studied, they excelled   in their likelihood of having larger gains.But that is not the full story.

What would have happened if during this same period, one simply had bought a major index ETF instead of searching for better returns by buying individual stocks?   At the bottom of the table are the performance of some major index ETF’s during this same period. Simply buying and holding the SPY would have yielded a return of +9.1%. The DIA was up +7.5% and the QQQ was up 9.5%.   The majority of the IBD 50 stocks would have beaten these returns, if one had been able to identify in advance which of the the 54% to 64% of the IBD 50 stocks would gain at least 10%.   However, the 2X leveraged QQQ ETF, QLD, advanced 20% and the two 3x leveraged ETF’s, TQQQ and UPRO,   gained 30%!

Thus, by merely buying and holding TQQQ or UPRO on 9/4, one would have beaten about 90% of the stocks in the IBD 50.   And who is so good a stock picker that s/he could have identified in advance the 4 to 7 stocks out of 50 in on one these IBD50 lists that would have beaten the strategy of just buying and holding the 3X ETF’s? Over the past few years I have had to repeatedly learn the lesson that when the GMI issues a buy signal, I should begin accumulating QLD or TQQQ instead of trying to find the rare stock that will eventually beat them. (Yes, I know that the leveraged ETF’s can fall more quickly, but it is much easier for me to focus on   just the action of one market index and to exit quickly when its trend turns.)…

I have added a new and exciting book   by Alan Ellman to the list of books to the right of this post. Alan has been teaching folks how to earn income from their portfolios by selling covered calls.   Now Alan has turned his attention to teaching high school and college students the basics of stocks investing and how to build a sound retirement.   The book is a great introduction for persons who want to learn about both fundamental and technical analysis of stocks. It also has a chapter   for young and old investors that explains the ins and outs of taxes.   This book will be added to the   required reading for my students next semester. By the way, I was honored to write   the Foreword for the book and I receive no compensation from its sales, but if you order it from my site, my son and webmaster will benefit. This book would be a great gift for anyone in our lives whom we want to introduce to the stock market….

Now for the GMI:

GMI11222013