Market Timing - When Markets Chop

The trend giveth, but the chop taketh away.

That's an aphorsim I came up with after watching profits I had earned in previously strong markets, frustratingly frittered away once markets began and continued to pull back or move sideways afterwards.

I've seen this scenario play out with most traders and investors, over and over again. The reason it's so common, is because markets almost ALWAYS go through a period of retreat or chop AFTER a strong trend.

Since March 2009 for example, though the bigger trend has been bullishly strong, markets have pulled back every 17-20 days like clockwork. On the Dow, each"counter-trend" retreat has represented declines somewhere between 200-500 points, or a 2-5% giveback (with the Dow at 10K).

(You can learn more about that 20 day cycle here: Market Timing )

The important thing traders should understand, is that same cycle also advances half the time.

If for that reason, traders will buy (I buy double beta ETF's like the DDM, QLD, and SSO) at the 20 day cyclical low (which often occurs near the 30 or 50 day moving average, and then mechanically take profits (or some profits) off the table at the 20 day cyclical high, which occurs some 10-12 day later, they won't have to live through the drawdowns and frustration that come with 10 days of decline that will inevitably follow.

This of course is a very simple, straight forward strategy anyone can follow, remembering that rarely, if ever, do we short the 20 day cycle in a bull market. But once our longer term trend (also another cycle we follow) begins to decline, we'll reverse that strategy, and start making money in a bear market too.

Stock Market Today

Stock markets are approaching the time once more when the intermediate cycle will top out. It happened after 9/19/2009, 10/19/2009, and apparently 11/18/2009. Instead of the 4-6 week bull market advances that we normally see in less agressive long term bullish trends, we are now getting the faster 10-14 day cyclical advances, similar to what we saw in 2003.

The important thing to keep an eye on, is whether the decline periods continue to form that confirming bullish pattern of "higher lows" on the indices price charts. As long as that happens, it's an indication that the longer term trend remains intact.

In 2003, that intermediate cycle bullish trend didn't end -www.themarketforecast.com/HowItWorks.html - for nearly a year after the long term and intermediate cycles formed a cluster in March 2003. We could easily a continuation of this longer term bullish trend last just as long.

Successful Trading In the Stock Market - One Thing

I have been helping people learn to trade/invest for nearly two decades, mostly by showing them when the “time” is right to be owning stocks or funds, and alternatively, when to be short or move to cash.

Those who stick around and take some time to learn, generally get it and do very well, what's puzzling however, are those who stay stuck, and would rather just keep watching.

It seems to me that they are also people who have learned to be “afraid” of taking action in other areas of life too. I can tell by their emails and excuses. Perhaps that's due to unreasonable expectations, or fear from costly past mistakes.

Consequently, they wait, and wait, and wait. They wait until the one time they feel it's perfectly safe to get in.

Unfortunately, that secure “feeling” couldn’t be more wrong. Their waiting has brought them to the precise time when smart money has begun selling their profitable positions to all late comers.

Rather than take responsibilty and USE methods that could really help them take powerful control of their future, many instead will ask if I would just go ahead and handle their money for them. No wonder fund managers make millions.

The amazing thing here too, is that fund managers tell me, as long as they don’t LOSE too much of the clients money, their clients will stay put, year after year, all the while managers keep making their 1-3% on accounts that aren't even growing. It’s crazy.

But it does point out pretty clearly to me, that desire isn’t enough. Learning isn’t enough. Believing in the outcome isn’t enough. Being prodded isn’t enough…

I think successful investing/trading boils down to this one thing: You've got to do “it” as if you had no choice. Do it for real, or die, perhaps.

Maybe like a new skydiver, who was just nudged out of a plane…

Pulling the ripchord to the chute isn’t an option, or something to “think about”, or to learn to do anymore. You just do it. If all goes well, it’s going to be a lot easier next time…

Trading Online

As I stated in this morning's commentary, when short term (yellow line) and momentum cycles (cyan line) are deep in the lower reversal zone (-80 to -100), it's usually a good time to enter a long position.

A +200 point up day on the Dow and +38 points on the NASDAQ's a good reason why we like play these "mini-cluster" bottoms when the appear on the Market Forecast charts:

If you bought the QLD or DDM at yesterday's close, or early in the session today, you've got some nice profits to lock in with stop loss protection. Consider using the Donchian channel center line on a 30 minute chart as a first tier stop (39.52), and the bottom of the channel as a second level stop (39.10).

If you haven't subscribed to our service yet, get a 30 day free trial and learn to how to trade the stock market with daily forecasts and trading advice from it's author - Stephen Swanson.

Visit us at: www.themarketforecast.com and www.themarketforecast.com/Video1.html for an introductory video on some very cool stock trading techniques.

History Remembered

Financial Historian on ‘29: ‘Great Crash’ Vs. ‘Break in the Market’

Raising Cash 1929 Style (Everett Digital)

From The Wall Street Journal's MarketBeat, October 28, 2009

By Matt Phillips

[This week] marks 80 years since the best known part of the 1929 stock market collapse, a two-day rout on Oct. 28 and Oct. 29 of that year. The equities crash brought a painful close to the period of unbridled financial optimism that was the 1920s.

To mark the occasion, MarketBeat has been asking financial historians for their thoughts — mini-essays if you will — on how the Great Crash informs the way we think about the current market recovery. Today’s offering comes from Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University:

Because their teachers and their history books said so, most people know that the Great Crash of 1929 caused the Great Depression of the early 1930s. I am not one of these people.

What I know is that the Dow Jones Industrial Average closed at 306 the day before Black Thursday, October 24, 1929, and at 199 on November 13, three weeks later. That drop of 35 percent was the Great Crash. I also know that on April 17, 1930, the day before Good Friday, the Dow closed at 294, or 96 percent of its level before Black Thursday. In other words, almost all of the decline of the crash proper had been undone by a recovery of 48 percent in the Dow between Halloween ‘29 and Easter ‘30. Most people don’t know that, or if they ever did they forgot it.

On Good Friday ‘30, the New York Times referred not to the Great Crash, but to “the break in the market last Fall.” The Times that day also noted that the day before, April 17, “average prices worked higher and a few outstanding issues shot up smartly to new high prices for the year to date,” and that “British interests were investing heavily in these issues.”

The Great Depression began sometime after the spring of 1930, most likely when a lot of banks failed late that year. But the so-called Great Crash a year earlier had almost nothing to do with those bank failures, the first of thousands of bank failures that occurred from late 1930 to March 1933.

What’s interesting from the perspective of 2009 is that from September 12, 2008, the Friday before Lehman, to the low of March 9, 2009, the Dow lost 44 percent. The Great Crash of 2008-09 was actually a greater crash than the Great Crash of 1929. And half a year after the crash lows of last March, the Dow again is up about 50 percent, as it was half a year after October 1929.

Is the market’s recovery since March now giving us a better forecast of what lies ahead than it did in April 1930? Let’s hope so. Let’s hope, too, that people stop exaggerating the effects of “the break in the market” in October ‘29.

Indices rose on the day with momentum and short term cycles that expectedly began turning up. They ended the day right at their resistive 30 day averages (for the Dow it was also its 5 DMA), but based on the lack of selling into the close, we are likely to see some follow through with that line of resistance surpassed today.

That would correlate with the still rising shorter term cycles. Both the 6.5 and 10 day are starting to rise on our Filtered charts, and our regular Forecast charts both show they are in their advancing phase.

From here, it becomes important to see whether the move is going to be joined by a rising intermediate cycle, or whether we'll have a few days where the intermediate cycle simply moves sideways.

If so, that could be a signal of a further intermediate drop, similar to what we had after the 6/25 - 7/1 sideways move. Then, indices found support at their 50 day moving averages but never gained enough strength to vault above their 30 DMA on a closing basis.

Since so many technicians watch that 30 DMA, it's critical that it be reclaimed quickly or traders tend to start selling into the stalled action.

I am still long on this short term up trend.

I have a first level stop on the DDM at the center line of the Donchian channel on a 30 minute chart, and at the center channel line on the 60 minute chart. Should we see some extended upside on the short term today, where the 5 DMA is exceeded and starts to rise, I will begin to watch that as a third level for my stops.

In essence, whichever of those lines is highest is my first stop level, and whichever is lowest is my last.

As you can see, short term (yellow) and momentum (cyan) lines are pointing up today. Play it long with stops as described.

How bad was the 2007-2008 bear market?

"When equities bottomed in November 2008, the MSCI World index had fallen 55% –– a global loss of USD 21 trillion, or USD 21,000 for every individual in the developed world. This statement appears in the Credit Suisse Global Investment Returns Yearbook 2009. The Yearbook is a comprehensive and authoritative analysis of total returns since 1900 for stocks, bonds, cash, foreign exchange and inflation in 17 national stock markets and three worldwide indexes, covering Europe, North America, Asia, and Africa.

"In the Yearbook, the authors, Elroy Dimson, Paul Marsh and Mike Staunton, of London Business School point out that the last decade has been the lost decade for equity investors. Since 2000, the MSCI World index has lost a third of its value in real (inflation-adjusted) terms, while the major markets all gave negative returns of an annualized 

–4% to –6%."

Of course, the November 2008 low of about 7,450 wasn't the U.S. market low of the last two years--by March 9, 2009 the Dow Jones Industrial Average had dropped another 1,000 points to around 6,470. 

Read the entire articled at: 

http://docs.google.com/gview?a=v&q=cache:mxzWh0CxOJUJ:www.london.edu/newsandevents/pressreleases/pressreleases.do%3Fsection%3DEditRelease%26mode%3DgetAttachment%26releaseId%3D62%26attachmentID%3D54+worldwide+stock+market+losses&hl=en&gl=us&sig=AFQjCNHUAWkzCKkeJwKC_UUoceZUeEzChw

Many of you have been getting better results than those quoted here. Email us at support@TheMarketForecast.com and tell us how you did during the downturn.

Once more, something happening to our server... so I'll post end of day results here.

Thanks for your patience,
Steve

Server's are still down. Here's the end of day charts.

Steve

With servers down right now, I'll up date the main INDU chart here for now...

Steve

Morning Webinar

For those of you attending the morning webinars, Steve didn't record this morning's session. He has decided to give you an additional session on the Monday following the last scheduled webinar, so although we don't have access to today's information, we will have another opportunity to learn.

Recognition goes to Dick in this afternoon's advanced training webinar--great trade today!

Avoid Overtrading

Steve has mentioned this before and reiterated it in yesterday's afternoon webinar. Overtrading in the middle of the day during choppy markets, or during low volume periods, will hurt your profits. (See my post from yesterday--I had to get back in the market during the late afternoon in order to make back what I gave up in two bad trades during the chop.)

Here are the 4 trades from this morning's session in the S&P 500 e-minis.

					Net Profit
#	Type	Date/Time	Symbol	Price	Cum Net Prof
1	Buy	8/11/2009 8:33	ESU09	$1,000.75	$101.00
	Sell	8/11/2009 8:35	ESU09	$1,001.00
2	Sell	8/11/2009 8:38	ESU09	$1,000.50	$476.00
	Buy	8/11/2009 8:40	ESU09	$999.50
3	Sell	8/11/2009 8:44	ESU09	$998.75	$851.00
	Buy	8/11/2009 8:48	ESU09	$997.00
4	Sell	8/11/2009 9:00	ESU09	$996.25	$351.00
	Buy	8/11/2009 9:01	ESU09	$995.50
					$1,779.00

Were there more trades I could have taken? Probably one or two; but it's much more enjoyable and profitable to be patient, wait out the midday chop, then take a look at what may be setting up in the afternoon session.

After the market close:

I didn't take any other trades today. Steve and I spent some time discussing the webinars and video we are putting together, then I got busy shooting a couple of new airsoft guns with my 11-year-old son and just didn't spend much time watching the market. (By the way, having a friendly impromptu airsoft battle with a bunch of the neighborhood kids is a great way to have fun and bond with your own kids.)

There were a couple of trades I might have taken, but I missed them entirely or took a look at the market after the move was well underway. I refused to chase profits; I've done that one too many times before.

I'd rather walk away with my gains and wait until the session tomorrow morning, so I traded a total of only 35 minutes this morning, then spent a few minutes glancing at the market this afternoon. About 3-1/2 to 4 points in less than an hour of trading today--I really enjoy using Steve's methods.

I will not be posting my trades every day. I don't day trade every day. But I promise that when I do choose to post them, I will post the good, the bad and the ugly--winners and losers. No holding back, because the point is to help everyone learn something from the experience.

The lessons from yesterday and today?
1. Steer clear of midday choppiness.
2. Avoid overtrading.
3. Be patient.
4. Have fun!

Today's Trades

Steve suggested I post the trades I did in the S&P 500 e-mini contracts today. You will notice that I was up about 3 points in the morning, then got impatient and gave it away during the light volume chop. In two trades I was stopped out with a 1-1/2 point loss each time.

I made it up in the afternoon to end the day up more than 6 points net of commissions. This is a report you can generate in TradeStation. If you want assistance finding and generating it, send Steve the request via email and he will cover it in the next webinar.

					Net Profit &
#	Type	Date/Time	Symbol	Price	Cum Net Prof
1	Sell	8/10/2009 8:47	ESU09	$1,004.75	$726.00
	Buy	8/10/2009 8:48	ESU09	$1,003.25
2	Buy	8/10/2009 8:52	ESU09	$1,004.75	$351.00
	Sell	8/10/2009 8:56	ESU09	$1,005.50
3	Sell	8/10/2009 9:00	ESU09	$1,004.50	$226.00
	Buy	8/10/2009 9:00	ESU09	$1,004.00
4	Buy	8/10/2009 9:22	ESU09	$1,004.75	$226.00
	Sell	8/10/2009 9:25	ESU09	$1,005.25
5	Sell	8/10/2009 9:33	ESU09	$1,006.25	$101.00
	Buy	8/10/2009 9:37	ESU09	$1,006.00
6	Sell	8/10/2009 9:56	ESU09	$1,005.75	($774.00)
	Buy	8/10/2009 10:04	ESU09	$1,007.25
7	Buy	8/10/2009 10:04	ESU09	$1,007.25	($774.00)
	Sell	8/10/2009 10:18	ESU09	$1,005.75
8	Sell	8/10/2009 10:18	ESU09	$1,005.75	$1,226.00
	Buy	8/10/2009 11:30	ESU09	$1,003.25
9	Sell	8/10/2009 12:56	ESU09	$1,001.50	$1,101.00
	Buy	8/10/2009 13:22	ESU09	$999.25
10	Buy	8/10/2009 13:56	ESU09	$1,001.50	$726.00
	Sell	8/10/2009 14:03	ESU09	$1,003.00
					$3,135.00

Some quick notes from the training session this morning:

Use the 5-day Moving Average on your daily charts for clear exit signals. Set your stops below the 5-day MA.

Use the 8/8 crossover on daily and intraday charts to do the same thing.

Use stop-loss orders; stopping out is your pay day. The 5-period Moving Average is valid for all time frames, but for more flexibility on intraday charts use the Donchian channel to avoid getting stopped out too quickly.

Use stop-losses instead of taking profits quickly. Ride the bull as long as you can, because he will try to buck you off. The market maker is doing that: he'll take the price back down to stop you out before he takes the price up.

In addition to intraday trades for short-term profits, be sure to trade the intermediate chart. This will prevent you from missing nice trending trades, even when you can't sit and watch the market intraday.

Keep in mind that our double-beta ETFs are leveraged plays, up and down. Leverage is great when it's going your way, but set your stops and get out when reversals come.

Your position size should never put you in a situation to lose more than 1% of your portfolio. Plan your trade size and stop-loss orders accordingly.

Use an intraday chart even if you can’t get real-time data--the 8/8 crossover will give you nice signals on getting back into a trend.

12th Straight Day

The NASDAQ rose for the 12th straight day today, gaining 47 points to close at 1973.60. The index is up an impressive 12.4% from its close of 1756.03 on July 10.

The Dow Jones Industrial Average rose 188 points in today's trading, retaking the 9000 level for the first time since January. The Dow closed today at 9069.29, a gain for the Big Board of almost 923 points since July 10, when it closed at 8146.52.  That's a gain of 11.3% in nine trading sessions.

The QLD closed today at $44.42, up 26.5% from July 10. The DDM is up 23.8%, closing at $32.92.  We recommend these double-beta ETFs for trading the market.

As Steve put it in this morning's commentary, "ride the bull for as long as possible by keeping stops underneath the rising 5 day moving average for short term trades, and an 8 or 10 day average for intermediate trend positions."

EBRI's Annual Retirement Confidence Survey

According to the Employee Benefit Research Institute (EBRI):

"Workers who say they are very confident about having enough money for a comfortable retirement this year hit the lowest level in 2009 (13 percent) since the Retirement Confidence Survey started asking the question in 1993, continuing a two-year decline. Retirees also posted a new low in confidence about having a financially secure retirement, with only 20 percent now saying they are very confident (down from 41 percent in 2007)."

EBRI also says less than half of those surveyed have any idea how much money they will need to retire comfortably:

"Many workers still do not have a good idea of how much they need to save for retirement.  Only 44 percent of workers report they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire—and an equal proportion (44 percent) simply guess at how much they will need for a comfortable retirement."

Unfortunately, an astounding 53% have less than $25,000 in savings and investment. Fully 76% of those responding to the survey reported having less than $100,000 put away for retirement.  So, regardless of how much they think they need, few respondents have much at all put aside for retirement.

There has never been a more urgent need for successful investing to rebuild the account values ravaged by last year's market decline.

Read the entire report at 

http://www.ebri.org/pdf/briefspdf/EBRI_IB_4-2009_RCS1.pdf

Trade the Trend

Very powerful training session this morning. One point that hit home is we must trade with the trend. Fighting the trend is like swimming upstream in a swift river.

The question all investors need to answer for themselves is this: Which trend do I want to follow? Short-, intermediate- or long-term trend?

Steve showed us how to use the 5-day moving average and the price channel as stops in the current intermediate trend, and how the 5-day gives us a great exit point during the initial phase of this intermediate advance. The price channel will give us more lattitude when the short-term cycle chop begins.

DDM and QLD Continue to Move Up, Are You? Paper Trade to Gain Confidence.

From this morning's commentary:

"We don't trade against the magenta line (intermediate), even when shorter term cycles look like they are due to decline. We use their weakness instead, to add to long positions...The reason is that big money keeps buying the dips...when I start pointing out how an intermediate cycle has been in a 4-5 week decline that typically only lasts 4-6 weeks, then you have to be ready knowing that some kind of alarm is going to be triggered inside the institutional brain, and they are going to wake up and push the buy button. It happens all the time, several times a year."

Shares of the DDM, our preferred Dow double-beta tracking stock, are up $5.31, or 20%, from their July 10 close. Shares of the QLD, the NASDAQ double-beta tracking stock we use, are up $6.75 (19.2%) during the same period.

Some of you are still on the sidelines during this nice market rally. We had a question from a student some time ago that merits repeating here. She came up after a live training session and asked, "How do I get over the fear of making a bad decision?"

"Through learning and practice," we replied. She was involved in learning already, so we went on to discuss paper trading, and how important it is to use paper trading tools available through your discount broker to practice everything you learn about investing BEFORE you commit any money to a new technique or strategy. Repetition anchors your understanding and leads to confidence.

We hope you are actively investing, and if not, that you are paper trading the insights Steve provides on the site each day. Once you have the confidence that you understand how to invest properly, then you can commit money to the market without fear. You'll never look back.

Already we've had very nice feedback from subscribers who are enrolled in Steve's current training series, which began yesterday. If you would like to take advantage of this opportunity, contact us through the website at TheMarketForecast.com. The first session yesterday is available in the archive for attendees to review.

Are You Conventional?

We recently discussed the flaws in using only history to make investing decisions. Stock market prediction is particularly difficult when investors compound the error using shaky assumptions. Writing in the weekend Wall Street Journal, Tom Lauricella discusses one typical mistake:

"Even though stocks are down about 40% from their peak, the conventional wisdom is that investors should have stuck to their long-term plan and not responded to the market downdraft. But a growing number of advisers think that's foolish...'Historically we know there are periods where you could lose a decade's worth of returns,' says David Lucca, a partner at Dallas-based Rhoads Lucca Capital Management. 'Why would you follow the conventional wisdom?'...

"'The wiser thing is to be prudent,' he says. 'To say I don't care what happens to my money today, maybe in ten years it will be better, doesn't make any sense.'"

Read the full article at

http://online.wsj.com/article/SB124795660287062371.html

What are We Seeing in the Markets?

Nice bullish move in the market today, up 3% on the Dow and 3.5% on the NASDAQ. If you're trading the ETFs, the DDM was up 6.25% and the QLD finished up just under 6.6% for the session.

Following this morning's commentary we were looking for the indices to "push through their still resistive 30 and 50 (on the Dow) moving averages...Once those averages are surpassed, significant automated buying kicks in, and a renewed intermediate up trend can grow some legs." After the Dow blasted through those moving averages to trade at about 8500 within 30 minutes after the opening bell, the market never looked back, closing at 8616.21.

But let's go back to last week. In the commentary for both Thursday and Friday Steve took a slightly bearish posture, stressing that the moving averages were providing stiff resistance. However, he indicated we would see the intermediate weakness ending when the market broke above the 5-day moving average. On Monday he also emphasized that continued weakness was "not a given, because the Dow's long-term cycle is still rising" and the intermediate cycle was deep in the reversal zone.

In Friday afternoon trading on our 30-minute chart of the Dow we had a nice bullish crossover with the market trading above 8120. It was a good time to be long in a short-term trade and the market advanced another 25 points through the closing bell. Much to our pleasure, that signal has not reversed, indicating we should be on the long side of the market through this 500-point move.

If you missed that signal, you had another good shot on Monday. On the daily chart of the Dow the market pushed through the 5-day moving average, which had been so unyielding, above 8200. That signal got you into a 400-point move.

If you missed that one, too, be patient. We don't chase profits. Short-term and momentum cycle dips are good re-entry points for getting into a rally that you missed the first time. And remember we can make money in both directions.

(While the NASDAQ and Dow have each been up approximately 5.7% during the time we are discussing, the QLD is up almost 11.4% and the DDM is up about 12%.)

Is this the start of a bullish intermediate cycle? Steve says,"[F]or now, what we are seeing could be considered a short term cycle rally with the POTENTIAL to turn into a full intermediate advance but we want volume to confirm as well."

So far, so good. Stay tuned.

The Problem Most Investors Face Using History to Predict the Stock Market

Good information is critically important to making decisions about your investing. The problem is, there is so much "noise" out there that it can be difficult to focus on the few things that will be the most helpful to you. So the default setting for most investors is to look at history.

The history of the market: what happened last year, the last 10 years. The history of the stock you're considering buying: the most recent quarterly earnings, last year's results, how much it's up (or down) in the past five years.

Unfortunately, that type of history will not make you a better investor. How many times have we been told that "past results do not guarantee future performance"?

This is why at The Market Forecast we ignore almost all news--it concerns itself with what has already happened. And it's not useful, because we can't change it or act on it. We want to know what's going to happen next. Read the news for entertainment, not stock market prediction.

Jason Zweig of The Wall Street Journal reveals one of the greatest pitfalls of relying on history: What if the accepted history is just plain wrong?

He writes that even though U.S. stocks as a whole have underperformed the long bond for the past 5, 10, 15, 20 and 25 years,

"Still, brokers and financial planners keep reminding us, there's almost never been a 30-year period since 1802 when stocks have underperformed bonds.

"These true believers rely on the gospel of 'Stocks for the Long Run', the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania that was first published in 1994.

"Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: Ever since Thomas Jefferson was in the White House, stocks have generated a 'remarkably constant' average return of nearly 7% a year after inflation. (Adding inflation at 3% yields the commonly cited 10% annual stock return.) And, declared Prof. Siegel, 'the risks of holding stocks decrease over time'."

"There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid...The 1802-to-1870 stock indexes are rotten with methodological flaws.

"Another emperor of the late bull market, it seems, has turned out to have no clothes."

Read the entire article at

http://finance.yahoo.com/news/Does-StockMarket-Data-Really-wallstreet-2749436021.html?x=0&.v=4

So, which history do we use?

Cycle analysis is the only tool we have found to be accurate in predicting the markets. Then we confirm with a handful of useful technical indicators, including the 5-, 30- and 50-day moving averages, along with volume. And we employ our crossovers for intraday and short-term trades.

That's it. Everything else is just noise, or entertainment.

Only 25%?

Earlier we wrote that only 25% of stocks outperformed the market.  William J. Bernstein writing in Money Magazine provides further information:

"In fact, researchers at the investment management firm Dimensional Fund Advisors found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago's CRSP total equity market database (see the chart).

"As for the bottom 75% of stocks in the U.S. market, they collectively generated annual losses of around 2% over the past 29 years."

Read the entire article here:

http://money.cnn.com/2009/05/09/magazines/moneymag/stock-strategies.moneymag/index.htm

A Quick Summary of the Year to Date

From Steve's Commentary for July 6 at The Market Forecast:

"[W]e had two incredibly sloped intermediate moves during our first six months of trading this year. If you followed only the intermediate cycle and just played it twice, using the DXD in the January-February decline, you gained about 46%. Since the March 6th lows, the DDM rose to a high with gains of 70%. That's a whopping 116% so far this year. If you add to that the ability to trade many of the shorter term swings in between those moves, the returns go much higher.

"But don't worry if all the news kept you out too long, or you struggled with taking profits too early, or you are just learning how to play both sides of the market. The important thing for everyone here, is that you didn't get slaughtered by the bear side of the markets as did just about everyone else. You've managed to be profitable during an historic time when most investors were left holding the bag at the top, and who are still down some 40% from where they were in October 2007 (even after the recent recovery rally).

"Best of all, there is plenty of big swing action remaining and our cycle work should keep us on the right side so we can do it all again!"

Exactly what is Steve talking about?  

First, our cycle charts tell us what is coming next. They are great for predicting the market.

Second, we use simple technical indicators to confirm market moves. We'll include a 5, 30 and 50 day moving average to define key support and resistance levels. Throw in Steve's favorite short-term crossover, along with a couple of tools he has refined, for intraday trading confirmations.

And third, we use Exchange Traded Funds (ETFs) to take advantage of moves up and down. Why ETFs? To keep it simple.  

Many investors are spending valuable time trying to identify good stocks that will outperform the market. It's time-consuming work.  

The fact is, research shows that only 25% of stocks beat the market on average. Even fewer are real "home runs". And a full 75% of stocks fail to keep up with the market. We don't like those odds.

Think about those facts. If a rising market lifts good stocks and the poor ones fail to keep pace, why waste time looking for the home run stocks? Simply trade the market that lifts those stocks!  

If you want to outperform a bullish move, trade the "double-beta" ETF tied to that index. Double-beta shares are designed to move up twice as fast as the underlying index. Is the market turning, heading down? Trade the double-beta ETF intended to move up twice as fast as its underlying index is falling.

We'd rather identify market direction, correctly forecast reversals and re-entry points for profitable trades, and then trade the entire index with the corresponding ETF.

We recommend the DDM, QLD, SSO, FAS for bullish markets moving up. The first three are double-beta shares tied to the Dow, the NASDAQ, and the S&P 500, respectively. As for the FAS, that one is a triple-beta ETF intended to move up three times as fast as the Russell 1000 Financial Index.

We recommend the DXD, QID, SDS, FAZ for bearish markets moving down.  Like their counterparts above, the first three are double-beta shares tied to the Dow, the NASDAQ, and the S&P 500, respectively. The key difference is that they are designed to move up when the underlying index moves down. The FAZ is a triple-beta ETF intended to move up three times as fast as the Russell 1000 Financial Index is moving down.

Caution:  These ETFs are not "buy-and-hold" ETFs.  They are intended for trading.  Learn to do it right and you should see great results.

Remember to paper trade any new strategy or tools to become familiar with them and ensure you are trading profitably.

Markets Bounce Back in Q2

The market has posted its best quarter since the fourth quarter of 2003.  The Dow Jones Industrial Average gained 838.08 points during the last three months to its June 30 closing of 8447, up 11% from April 1.  And while the market is still down 3.8% year-to-date, it has advanced 29% from the 12-year low hit on March 9. 

But that's only part of the story for the second quarter of 2009.  Trading the DDM, ProShares' double-beta Dow tracking stock, and using The Market Forecast, we are up 58% since our cluster low in early March.

The S&P 500 was up 15% during the second quarter.  The NASDAQ was up more than 19%.    

So what's the performance of the SSO, ProShares' double-beta S&P 500 tracking stock?  Up about 76% from the cluster low on The Market Forecast Chart.  

And the QLD, ProShares' double-beta NASDAQ tracking stock, was up over 85% since our cluster low in early March. It's been an exciting time to be in the market.

Just as important, markets don't have to move up--we can take profits in downturns.  We look for continued opportunities to profit in the months ahead.

On days like today, when short term cycles are in the upper reversal zone, and the market has been rising for the past several days, keep an eye on the resistance points - which in this case is the 30 DMA for the Dow.

It ran smack into that average in the first hour of trade and reversed downward.

You'll see the break below the 8/8 crossover average on the 15 and 30 minute charts when that happens, and that will be a decent entry into the DXD for an intra-day or longer - inverse Dow play. Today it added nearly a buck within an hour of that event.

Steve

We keep seeing financial writers express their "Aha" moments in major publications. Writing under the headline "Buy-and-Hold Stock Strategy Can Be a Big Loser in a Bear Market", Matt Krantz of USA Today says:

"Buy shares of good companies and hang on. That's the way millions of investors have been trained to almost religiously invest for the long haul. Even Warren Buffett likes to say his favorite holding period is forever. But this seemingly common-sense approach, which has worked remarkably well over the decades for patient investors, proved extremely treacherous during the bear market. Investors holding onto some well-known stocks saying "they will come back" often found themselves holding onto stocks with next to no value...

"The market's vicious kicking the life out of stocks has been a brutal wake-up call for investors who long held out faith that holding on is the only way to go."

Read the entire article at

http://www.usatoday.com/money/perfi/stocks/2009-06-28-buy-and-hold-stock-strategy-investing_N.htm

An Interesting Take on Investing

This is an interesting take on investing offered by professional manager Mohamed El-Erian, the CEO and co-CIO of Pacific Investment Management Co. (the world's largest bond investor) in a June 11 interview with Jennifer Schonberger of The Motley Fool. In the interview he discusses the three elements of his new approach to investing for today's markets.

"The first element of the strategy is to be forward-looking rather than backward-looking.

'That speaks to asset allocation and geographical exposures,' El-Erian said.

The second element is that the road forward will be mired with sharp turns and bumps. As a result, investors must position their portfolios to benefit from cyclical trends.

'That bumpiness constitutes an additional challenge for buy and holds, which is to make sure that people can in fact hold -- because when you have a very bumpy journey, there is a temptation to stop holding at the wrong time,' he said.

'So there has to be a much more responsive element of the portfolio that is looking to capture not long-term secular and structural trends, but looking to catch shorter-term cyclical and technical trends,' he said.

The third element of El-Erian's plan is conscious risk management, which gets at diversification. In the past, El-Erian said, one of the problems with the buy-and-hold strategy was that it encouraged people to think that diversification was sufficient for risk mitigation.

'That's no longer the case. Diversification is necessary, but it's not sufficient,' he said. It's necessary because it's the best method for mitigation of risk, but it's not sufficient because, as El-Erian points out, you can have years, such as last year, in which all the correlations go against you. Therefore, he said, buy and hold needs to be supplemented with much more responsive risk management.

'It's not enough to say I'm going to be able to buy and hold simply because I'm diversified. One has to go a few steps further and ask what does it look like when I'm actually buying and holding?' he said.

Building on that, El-Erian said a portfolio should be constructed such that only part of it is held for the 'long term,' which he defines 'long term' [sic] as three to five years, max -- because it's difficult to forecast what happens much beyond that."