The Market is in Uptrend

The general market is in an uptrend. We have a BUY signal from a number of indicators.

The BUY signal from the Market Breadth ratios looks better than the previous two buy signals. This time we had more than 500 in the “4% Up” column, when we got the signal. If within the next 2 weeks we get a few more 500 plus reading in this column, it will confirm a very strong uptrend.

 

What is working very well in the stock market is: Big Cap Dividend paying stocks. Here the downside “acc of trend” is nearly zero and the “speed of trend” is more than -10. These readings indicate that the price momentum is changing and turning upwards.

What is not working that well in the stock market is: Growth Momentum Leaders stocks. Here the downside “acceleration of trend”  is -2.2 and the “speed of trend” is less than -10 (it is -11). These readings indicate that the price momentum has not yet changed to the upside.

Since the Growth Momentum Leaders stocks did not participate to the level expected, we should Buy/invest only 20% of the portfolio in these types of stocks. If your portfolio rises by 2%, then BUY another 40% of the portfolio. If it goes up another 2% be fully invested.

Sometimes the growth stocks participate a little later in the Buy-to-Sell cycle. Once the Big Cap Dividend paying value stocks have played out, the growth leaders start to participate.

For a list of Growth Momentum Leaders, look at the “Sector Leaders” list in Investor’s Business Daily.

For a list of Big Cap Dividend paying stocks, I like the following:

CVX

DD

GE

JNJ

KFT

MRK

PFE

PG

T

VZ

Daily Price Trends of various Indexes

Nasdaq ETF (qqq) has the maximum speed and acceleration to the downside.

Dow Jones ETF (DIA) has the least speed and acceleration to the downside.

The minus sign in the “Speed Of trend” shows that the trend is to the downside. The minus sign in the “Acceleration of Trend” shows that there is acceleration to the downside.

For the market to resume its uptrend, the “acceleration of trend” has to go from minus to plus and the “Speed of trend” has to become positive.

According to this data the Nasdaq is in downtrend and that trend is still accelerating.

Market is showing no trend with bias to the downside

Market is showing no trend with bias to the downside. In this kind of a market, dividend paying value strategies like “Dogs of the Dow” work well. Markets with no trend are not good for aggressive growth strategies because breakout and breakdowns fail frequently.

We got a whipsaw in the market

We got a whipsaw in the market. The BUY signal was weak since we did not get any 500 plus values in the “4% up” column. In a weak BUY signal very little or no money should be committed to the market, but start watching it closely to see if it starts to gain strength.

In this cycle the weak BUY signal turned into a SELL signal within 2 days.



Market in uptrend

The market is out of its range bound state and in uptrend mode as indicated by Market Breath Ratios today.

The Market Breath Ratio gave a BUY signal today. It is a “follow through” to the thrust signal received on 6/8/2012.

The only caveat is that we have not seen over 500 on the “4% UP” column, so we cannot say it is a strong buy signal. If we do see a number over 500 in that column in the next few days, it will confirm a strong buy signal.  Read the article “Market Breadth Explained” in the “Readings” area.

So the suggested action is to validate the signal.

To Validate: Buy only 20% of your portfolio. If your portfolio rises by 2%, then BUY another 40% of your portfolio. If it goes up another 2% be fully invested. When we get a BUY signal on the Market direction on the blog and the market does not go up, the market is telling us “not yet” – wait. So by validating the signal we let the market tell us if it is ready to go up. If it does not go up, we lose only a very small percentage of our portfolio.

Market maybe ready to break out of its range bound state

Today’s market action indicates that the market maybe ready to break out of its range bound state.

1.         Market Breadth Ratios have not shown the desired upward thrust.
2.          Short term price trend (daily prices) has started to move upwards. Medium term price trend (weekly prices) has still not made up its mind though the bias is towards the upside.

In this kind of a market, dividend paying value strategies like “Dogs of the Dow” work well.

Aggressive growth trading techniques can be used with tight money management. Look at the “Sector Leaders” list published by Investor’s Business Daily for growth stock ideas. Tight money management means investing only 20% of your portfolio in those stocks and getting out fast if the market changes its direction. Look at the blog of June 8^th for successful trading technique in growth stocks.

Market in a range bound state

The market is not showing any direction (either upward or downward). This means it could be range bound for some time, till it resolves itself either to the upside or downside. During this recent correction we have not seen aggressive or panic selling.  This is indicated in the numbers shown by the Market Breadth Ratios.

Range bound price action is not good for aggressive growth strategies because breakout and breakdowns fail frequently.

What works in this kind of market is dividend paying value strategies like “Dogs of the Dow”.

What is the General Market Price action telling us?

In the chart “Recent high” is higher than the “Old High”. Now if the price does not undercut the “Last Low” and turns up in the next few days with a good upward thrust, we will have a “follow thru” day. A follow thru day at this point will show the prices have started an upward trend.

When we get a BUY signal on the General Market which trading strategy should we follow?

This is a successful Trading Technique for Growth Stocks

1.   Market Direction: Read the blog column every day to stay in step with the general market trend. This is very important since most stocks follow the direction of the general market averages. Only buy stocks when the general market is in an uptrend. Raise some cash during market corrections, when the Market Breadth Ratios show a SELL signal or we get a SELL signal on the market averages. The Market Breadth Ratios and the General Market chart signals highlight key turning points and tell us whether the market is in an uptrend or a correction. Being on the right side of the market direction is the most crucial element in successful investing.

2.      Stock Ideas: Use Investor’s Business Daily to help find potential winners. You don’t need to spend a lot of your time looking for quality growth stocks. Sector Leaders featured in the NYSE & Nasdaq Research Tables gives an excellent list of top quality growth stocks. IBD has started publishing that list of stocks as a separate feature in their B-Section. These stocks must pass rigorous fundamental tests and have a strong record of beating the S&P 500 during market uptrends. Check this list every week and keep your portfolio in sync with this list. If some stocks are not in the list then sell them from your portfolio. If new stocks appear in the list buy them for your portfolio. Normally this list has 8 to 15 stocks. If you want to buy, let us say, only 10 stocks then buy the 10 highest priced stocks from that list and ignore the rest. For some reason the higher priced stocks in that list do very well during a market uptrend.

3.      Validate: You need to validate the Market Direction. To do this buy only 20% of your portfolio when you get a BUY signal from this blog. If your portfolio rises by 2%, then BUY another 40% of your portfolio. If it goes up another 2% be fully invested. When we get a BUY signal on the Market direction on the blog and the market does not go up, the market is telling us “not yet” – wait. So by validating the signal we let the market tell us if it is ready to go up. If it does not go up, we lose only a very small percentage of our portfolio.

No change in general market conditions despite today’s market action

The market may go up from this point without indicating a change in general market conditions. The change in general market conditions will be indicated by a big breadth thrust in Market Breadth Ratios. At this point it looks like a counter trend rally.

We should wait for a change in general market conditions, before we undertake any meaningful buying of stocks.

 

Since the next signal will be a BUY signal, whenever it happens, let us study how to execute our trades when we get the signal

We need to wait for the market to indicate a change in general market conditions before we can give a BUY signal. Since the next signal will be a BUY signal, whenever it happens, let us study how to execute our trades when we get the signal.

When we get a BUY signal on this blog we should validate it with market action. This is a question most beginners struggle with. Their thinking goes,  If we get a BUY signal the market is supposed to go up then why does it not go up every time?

To get a definite outcome every time we need to satisfy the necessary and sufficient condition for the outcome to happen. This is a mathematical concept. Necessary and sufficient conditions mean no other conditions are required for the outcome to happen.

When we get a BUY signal we have not satisfied all the necessary and sufficient conditions for the market to go up. The reason is we do not know all the necessary and sufficient conditions. What we do know are some necessary conditions. To make sure we know the right necessary conditions we test the outcome of the signal to get a 70%-80% success rate.

The next question is since we do not know all the necessary and sufficient conditions for the market to go up should we not take any action based on that signal. The answer is we should take action because the success rate of the signal is 70%-80%. We do not want to miss this opportunity?

The way to take action is to validate your signal. If the signal gets validated you know all the necessary and sufficient conditions have been satisfied, without having to know what those conditions are.

To validate, buy only 20% of your portfolio when you get a BUY signal from this blog. If your portfolio rises by 2%, then BUY another 40% of your portfolio. If it goes up another 2% be fully invested. When we get a BUY signal on the Market direction on this blog and the market does not go up, the market is telling us “not yet” – wait, because all the necessary and sufficient conditions have not been satisfied yet. So by validating the signal we let the market tell us if it is ready to go up. If it does not go up, we lose only a very small percentage of our portfolio.

This way we are able to follow a signal with a 70%-80% success rate and limit our downside risk.

We got a sell signal on SPY today

We got a sell signal on SPY today. With this every index has a SELL on its chart. This index gained 2.8% from its BUY to SELL signal.

If we were doing prudent money management, we should be 100% in cash at this time.

Prudent money management would have been to start selling weak stocks when we got a sell signal from Market Breadth Ratios (on 5/3/2012) and holding on to that cash. This in effect would have gotten us more and more into cash as this correction proceeded instead of waiting till 5/18/2012, when we got the sell signal on Momentum Leaders or waiting till today when we got a SELL signal on SPY.

Now we need to wait for the market to indicate a change in general market conditions. In other words a “BUY” signal on Market Breadth Ratios.