This Weekend's Trading Lesson From TradingMarkets

How To Time The Market -- Without Market Timing
By Tim Truebenbach

TradingMarkets.com

Being on the right side of the market is how investors can consistently grow capital in good times, and protect capital from being on the wrong side of the trend. Let me reiterate that I manage money using two simple methods of allocation: either investing in stocks, or investing in treasuries (money market). The best part about what I do is not trying to “time” the market. This style of investing has worked well for me, and the U.S. stock market and economy continually offer unprecedented opportunities for growth, with brief pauses now and again.

Take the following chart for example, even the dips throughout history don’t take away from the long-term trend.

Market timing is often confused with having a sound discipline telling an investor when a stock should be bought or strict rules on when a stock should be sold. Naturally, once these rules are in place, there will be times when the search goes on for stocks to buy because none are fulfilling the entire buy criteria. Likewise, at the same time there are no stocks to buy, sell rules have forced the liquidation of recent holdings and inevitably, the portfolio ends up entirely in cash.

The point of this lesson is to expand on my first lesson: Here's The Checklist I Use Before I Buy Any Stock. I intend to offer the same structure in terms of a Sell checklist, in order to sell positions in order to minimize losses and maximize gains.

To recap on where we left off in the previous lesson, I begin the process with evaluating the overall health of the market that Mr. William O’Neil has introduced to the investing public. By gauging the accumulation or distribution, I solve only one piece of the investing puzzle. As the market shows signs of accumulation for a brief period (seven days or less to be exact), I begin to stalk new stock purchases. A market-timing model would simply respond to the market and require action. In my analysis, the market action is only an “all-clear” to buy stocks that fulfill a regimented list of rules. These rules include strict EPS growth guidelines, industry group strength, strength in the stock’s price performance, strength in the company, etc.

Once stocks have appreciated in a portfolio, it becomes time to watch them for signs of trouble. Ninety-nine percent of the time, leading stocks will flash trouble signs such as new highs on low volume, climax run, no forward price progress on increasing volume and so on before the major market indices flash a warning. This is the time when strict sell rules come into play. These are the second half of the investment puzzle in order to maximize the gains in a portfolio. As stocks flash warning signs that they may be topping, they should be sold. Likewise, the market flashing signs of distribution should also call for at least a partial liquidation. So it comes time to define these “sell rules” so that it becomes a mechanical process on when it is time to liquidate a position.

Beginning this is always the hardest part. I believe a gut feeling is the best thing to use in finding a starting point. Investors, myself included, know where they run into trouble selling stocks. I began the process by looking back at all my past trades and simply pulling up charts on them and spotting the ideal sell points that would have netted the most profit. The next step is to look closer at the chart and identify signs of trouble the stock portrayed before topping.

After my post-analysis and sell-rule statements, I simply went back to charts of winning stocks and applied the rules. In effect, this “tested” my rules and allowed me to see that my specific rules would handle each and every situation allowing me to the best of my knowledge make the most amount of money possible on each and every trade.

Once again, I could have printed my list here, but I feel it is the necessary step for each investor to create a list for themselves, that fits their investing personality. I will go on to state the sell signs my list encompasses including the format I use. A checklist such as this should also be stated in a way that forces each of us to realize that if 1 criteria has been met, it gets checked and the stock gets sold.

I will start this list off with my Rule #1:

1. 7-8% from actual buy point
   
   Now on to the other points which a sell list should cover:
   
   

2. Stock moving up without volume and a lack of sellers

3. Climax Top as stock will most likely fall hard once this begins

4. Heavy volume without further price progress upward

5. After being purchased, a stock moves much higher, then starts returning to the original buy point; (this should never turn into a loss!)

6. Decelerating earnings in a company or declining fundamentals

7. Market appears to be under distribution, (most stocks, no matter how great they seem, will follow the market)

8. Stock breaks out of short base, or is not supported by volume on a breakout

By following simple rules such as these points, investors will find themselves mechanically liquidating stocks before the market falls apart. And as we wade through the recent Bear market, we all know that very few stocks appear qualified under a buy list. This is how a portfolio becomes "protected" in a cash position without trying to “time the market.”

For more information and details on compiling the entire money management and investing picture, I welcome your emails.

Good luck and great trading!

Tim