Dizzy From the Stock Market Roller Coaster? – January 2007

by | Jan 20, 2007 | Point and Figure, Stock Market Comments, Technical Analysis

Dizzy From The Stock Market Roller Coaster?

Here’s How To Get Off:
I want to share with you the part of my playbook I use when the market starts falling.  Although that is NOT falling now, it also wasn’t raining when Noah built his Ark.

It’s just better to be prepared then to make decisions on the fly. Emotional, snap decisions about your investments are often bad decisions. Wouldn’t it be better to have a clear indication of the TREND of your investments, before making a decision to sell?

Hopefully we won’t need to take defensive steps right away.  But eventually, we WILL need to use some of these action steps.

Look, there are times to play offense in the market and times to play defense.  Playing offense (meaning to stay invested in the market 100% of the time) is just NOT a game plan.  Playing offense 100% of the time (never selling) means you will ride the roller coaster all the way to the top and then all the way down.

Why do that — when we have tools in place that tell us, very clearly, when supply starts to control the market?

Anything with too much supply sees a price decline.  That’s not theory, or even a fact.
It’s an economic LAW.

Although we can’t guarantee we’ll be getting out at the very top, we’ll have clear signals when demand has dried up and supply begins to take control.

Remember, the main objective when we play defense is to avoid serious losses in your portfolio and keep you in the game.

So, Step One is to know whether we’re on offense or defense. The way I know this is by watching the bullish percent charts.

Bullish percent charts merely tell us the percentage of stocks on buy signals.  If only 40% of stocks are on buy signals, we know there are plenty of stocks around that haven’t yet given buy signals. At 40%, there’s plenty of gas left in the tank.

But say 80% of all stocks are on buy signals.  Then there aren’t many stocks left to generate buy signals, right?  So the odds of the market pushing much higher become pretty slim.  Got that?

That means nearly all stocks (80% of all stocks) are already ON buy signals.  At that point, there’s only a few left that haven’t given buy signals.  So anyone that wanted to get IN the market, is probably already in.  At this point, demand is starting to dry up.

What we want to watch for is when that bullish percentage starts to decline from those levels.  Because that means supply is now starting to come back into the picture.

So where are we today?  We are currently at 70% on the main indicator, the Bullish Percent chart.  It doesn’t mean the party is over.

It’s just a reminder we should start reviewing our game plan for any possible trouble.  I sometimes call these life boat drills. Everything’s calm right now.  When we hit choppy waters at some time in the future, we want to have our game plan ironed out because there will be no time for thinking on the fly; only doing.

I would also add the following: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be profitable or equal to past performance levels.

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions, or withdrawals may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an investor’s portfolio.