How to Maximize Your Trading & Investing With TM’s Mutual Fund Indicators Lists
How do you use stock
funds? TradingMarkets.com
provides a powerful, easy-to-use database to target the funds that
match your personal moneymaking strategy.
Some people look for
top-performing diversified funds to buy and hold fund shares
for the long term. Others invest in funds for the long or intermediate
term, but they employ active strategies. Some systematically
shift their money among different sector
funds in an effort to stay in the industries most in favor in
the market. Other active investors time
the market. They use funds to take advantage of market
rallies, then run to cash or short the market, in other words, profit
from corrections. Some people blend approaches, dividing their
investment capital between active and buy-and-hold accounts.
Fund traders employ similar
market-timing or sector tactics, but they do more transactions and
carry positions from buy to sell over shorter time frames ranging from
minutes or hours to weeks.Â
It takes all sorts to make a
market. The TM
database of thousands of funds can serve as a valuable tool with the
flexibility to fit with your style of trading or investing.
You have two ways to use
this database, and it helps to take advantage of both in your
investing.
First, each day, the
database crunches the numbers and spits out updated lists of the
top-performing and worst-performing funds. These lists are further
divided into different time frames. A short-term trader, for instance,
might target funds that led the market for the past week. An active
investor might use the 6-month or 12-month lists. Â
Second, you
take control of the database yourself. Using the FundScanner,
you can perform your own customized searches, sorting for funds and
generating lists according to criteria that meet your unique investing
style and goals.Â
This article will deal with
the
performance
lists. These
lists are an excellent place to spot potential investments and trades.
But these lists perform another valuable service. They can serve as
your barometer of the market itself.
Inside
the Market
By scrutinizing which funds
are making or dropping from these lists on a regular basis, you will
develop an up-to-date overview the market landscape. Which industrial
sectors are outperforming the market? Which are falling out of favor?
Are there signs that new funds with a different investing approach are
challenging other fund types that have led the market? Are overseas
opportunities heating up?
First, the point of TM’s
performance lists is to explore the general market internals — which
parts make the best investments or the best trades, short or long
term. Before you drill for that level of detail, you should have a
general notion of the overall character of the market. So each day, do
a daily check of the Dow Jones industrial, S&P 500 and Nasdaq
Composite indexes. What is the general trend of U.S. stocks? Up,
down, flat? Smoothly trending or volatile? Is the trend narrow,
in other words limited to a relatively small number of stocks and
industries, or broad, embracing a wide number of stocks and
different industries?
Next, click the
“Indicators” tab near the top of the page. You’ll see that
the list is
divided
its performance lists into two sets, one for mutual
funds, one for exchange-traded
funds.
For purposes of this
tutorial, we’ll assume that your chosen vehicles are mutual funds, and
that you are seeking to invest long, buying shares in funds in
hopes their stock holdings will appreciate.Â
These lists rank funds by
relative strength over different time frames. Funds are scored by
percentiles. For instance, a fund with a 12-month relative strength of
99 appreciated more by Net Asset Value than 99% of all other funds in
the TM
database
over the past year. A fund with a three-month RS of 1 fared worse than
99% of all other funds over the past three months in terms of NAV.Â
Whether you trade
short-term, or actively invest over longer time frames, it’s probably
best to start with the “Top
50 12-month RS Funds” list. This will gave you a view of the
general, long-term trends at work within the market. Click on the
list.Â
For starters,
don’t worry too much about individual funds. Take in the categories.
One could glean that leading areas are leading the markets. For
instance, you might note that healthcare related funds, or technology,
or energy, might be topping the list. You also might note that the
best-performing funds are charted to focus on large-capitalization
companies, big companies with lots of shares outstanding, vs. funds
that invest in small-cap stocks or funds that are free to invest in
all ranges of the market capitalization spectrum.
Over time, you’ll begin
noticing shifts in the composition of these lists. Perhaps consumer
cyclical funds, which have been absent for months, suddenly storm
their way into winner’s circle en masse. Or maybe you notice that a
declining presence of European funds. Or perhaps large-cap funds are
getting an upper-hand over small-caps.Â
TM
further
helps you get a handle on this information by giving you a statistical
summary of funds making each list by category. Click on “view by
category.” One valuable feature of this summary is that it tells
you how many funds of a particular category exist in the overall
database. So let’s say 12 funds of a given category make a
top-performance list. That may sound impressive. But what if that was
12 funds out of, say, 230 funds in the same category? The fund
managers of those 12 funds are probably better stock pickers than most
of their peers. But the category itself is not exhibiting a powerful
trend.Â
On the other hand, if there
were 17 funds making the top-performance list out of, say, 32 funds in
that category, the category itself is probably in an important uptrend.
Zeroing
In
Now, go back to the actual
list of funds in the list of top-performing funds over the past 12
months. Notice how each fund’s RS score is
reported for
the other time frames as well. This is extremely valuable information.
For instance, let’s say you
are a long-term investor looking for an actively managed, diversified
buy-and-hold fund. Since you’re not going to be market- or
sector-timing your way in and out of such a fund, you want a fund in
the hands of a superior manager. So using the list of top 12-month
performers as starting point, you would toss out any funds that lacked
high RS scores of 5-year, 2-year and six-month time frames.
(Important tip: Once you’ve
drawn up a list of diversified funds with great 5-, 2- and 1-year
scores, phone the fund companies and check to make sure each fund has
been under the same fund manager for all five years.)
On the other hand, a
short-term trader might not care about the 5-year or 2-year ratings.
Instead, he or she might want funds that had high 12-month RS scores
but owed most of that score to their NAV performance over the past few
weeks or months.Â
If you use chart patterns
and moving averages, you
can
quickly move
from lists to individual charts with a click of a mouse. Once within
the chart software, click “charting,” then “show
controls.” Then you can reconfigure the chart by time frame and
type of price display and choose from a variety of moving averages,
indicators and comparison indexes to suit your tastes.
You can be as elaborate and
creative as you wish in using this
feature.
But it helps to have a daily or weekly regime of watching certain
benchmarks. That way, you will stay on top of unfolding market
developments.
In this example, it’s been
assumed the investor uses mutual funds, not exchange-traded funds.
However, even if you don’t invest or trade ETFs, they can give you
valuable insights into the market. ETFs are divided to represent
different industries or countries. So checking the relative strength
lists of these securities can add to your insight into the strongest
or weakest general areas in the financial markets.
And because ETFs trade on
exchanges, you derive the money flows into and out these funds as you
would a stock. This can prove useful information. For instance, a
shift from negative money flow to strong positive money flow can
indicate that a beaten-down security has formed a durable bottom,
preparing it to launch on a recovery.
Â