These are some examples I fully support.
What sector does the company belong to (natural market rotation), and how has that sector performed? Don't own too many names (overdiversification). Be a TV critic (the experts have conflicts and self-serving agendas) and there's always a bull market (it's up to you or your adviser to find it).
Let me now table two groups of investment strategies, split between those that tend to work and those that tend not to.
Strategies that tend not to work:
Short-term daily charts are fine for the financial pages, but they do not set out the longer-term trends required for investment decisions.
Engaging in sheep-like behaviour by entering overcrowed trades. Some examples were the red-hot potash and energy companies in early 2008. The current overcrowed trade is the buy-gold and sell-the-dollar trade, so use caution here.
Acting on, or following investment folklore such as seasonality, which is now too widely followed to be of any value – when we all know something will work, it usually won't. So don't sell and go away just because it's May.
Investment decisions based on economic data. Follow these numbers and you may as well follow the business headlines of three months ago.
Acting on "buy" recommendations from experts, and then expecting a phone call when they are selling.
Strategies that tend to work:
Following the market leaders such as the financial sector, the technology sector and the materials sector, because no bull market can exist without the participation of these key stock sectors.
Follow weekly and monthly charts, because they set out the longer-term trends in the major stock indexes. This will at least identify bull and bear markets. Keep in mind the duration of the average bull phase is about 28 months, give or take, and the bear phases generally last 15 months.
Use obscure and simple analysis, because if most participants are using the popular 50- and 200-day moving average crossover, you end up following the crowd (remember those sheep).
Another overused study is the Moving Average Convergence/Divergence (MACD) momentum indicator. Some obscure studies are trend lines, cycles, spreads, divergence and point & figure charting.
Our chart this week shows the monthly closes of the Dow Jones industrial average spanning about 15 years.
The Dow is an important bellwether because it is loaded with large multinational companies that are direct beneficiaries of the global economy. If the Dow sneezes, we all get H1N1.
I have placed very long-term trend lines to identify bull and bear conditions. Trend lines are placed joining the lows during price advances and conversely placed to join the peaks during price downtrends. The idea is to join at least three lows in an uptrend or three peaks in a downtrend.
A trend change, or juncture, occurs when any trend line is violated. Caveat: always use a semi-log scale when placing trend lines on long-term charts.
I have identified the bull phase of April 1995 through to February 2001. The bull ended when the Dow broke down under the 1995-2001 trend line. The following down trend ended on or about October 2003 when the Dow broke up above the 2001-2003 down trend line.
The last bull phase is set out in the upward 2002-2008 trend line with the break down signalled in February 2008. The most recent signal was a break above the declining trend line in September 2009 to signal a new bull market.
The only take-away is the slow signals that could be fine-tuned using weekly charts. Have fun, and don't share our little secret.
Bill Carrigan, CIM, is an independent stock-market analyst
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