This Weekend’s Trading Lesson From TradingMarkets

• July 29, 2005
• TradingMarkets Editors

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