“Don’t be afraid to take a big step when one is indicated. You can’t cross a chasm in two small steps.” – David Lloyd George
There’s an old market adage MMF and I generally agree with: The trend is your friend.
The idea is simple: More often than not, tomorrow will be a lot like today and next week a lot like this week.
Studies show that about 70% of the time — no matter what measuring device you use — a trend will tend to continue. That means that when stocks have been heading up, chances are better than even that they’ll continue to head in that direction. The same logic can be applied to a downtrend.
Only fools and drunk fishermen swim against the tide. But making money on the market is not as simple as betting on a trend. That’s because you can’t know beforehand when a trend is done trending. If you wait too long to climb aboard, you may find yourself hopping on just when the train comes to a stop and starts backing up and racing the other way.
Trend experts try to deal with this problem. They study market movements and try to figure out systems for knowing when a trend is beginning, when it’s cresting, and when it’s about to end.
One of the most successful trend analysts is Ned Davis, the author of “Being Right or Making Money”. One of the ways Ned determines the market’s future course is by looking at the 40-week (or 200-day) moving average (the average price over the last 40 weeks or 200 trading sessions). If the market is trading higher than its moving average over roughly the last 40 weeks, the trend is bullish. If the market is trading lower, the trend is down.
To be sure, Ned tracks more than just this one moving average to get a consensus picture. But it is not only a pretty good indicator, it’s also easy for you to use yourself.
Here’s how to do it.
Simply visit http://www.Yahoo.com and click on Yahoo!Finance. Once at the site, you’ll find it is easy to navigate. Call up a one-year chart either for a major index or for an individual stock, and then click to get a moving average. The moving average is shown on the chart as a solid line so you can tell if the index or stock is trading above or below it.
Not long ago, Ned Davis turned bullish, because his reading of the market’s recent price action has been positive. In other words, the prices of most stocks — and that includes most sectors in the U.S. and most stock markets around the world — have been trending higher in terms of their moving averages.
Steve Sjuggerud, ETR’s resident stock expert, believes stocks are overpriced right now. But on the basis of Ned’s reading, he is nonetheless recommending to readers of his newsletter that they increase the percentage of stock that they hold in their investment portfolios.
You may or may not agree with his conclusion. One way to decide whether now is the time for you to get bullish is to keep your eye on the moving averages yourself. If you don’t want to do that but are willing to make a move in that direction, I recommend a conservative move.
For me, that means increasing my stock portfolio from 2% to 4% or 5%. If you already have 25% or more in the market, I’d stay put for a while. When the market tanks to 4,000, we can see how Ned’s charts look and get back in big-time after the trend is going the other way.