4 posts tagged “selling”

Our determination of buy/sell points is based on a logical understanding of the structure of the market and of the behavioral patterns of fellow market participants. We are not concerned with waves, angles, astrological configurations, or other such data, which by some magical force are presumed to be satisfactory indicators of future prices.

The purpose of our timing technique is to help facilitate our objective to take the monies of others in a repetitive, consistent fashion that minimizes risk in actual market endeavors. We have no interest in theoretica abstractions in that time so spent can only detract from fulfilling our of objective. At this point, we are attempting only to ensure acceptable accuracy in forecasting changes in the major market averages. The final goal is to develop profit consistency for our stock positions at the percent- age level we have chosen (90 percent minimal) within the average holding period we have decided to use (four to six months).

Because of the upward bias in the specific stocks we utilize, we do not need k the probabilities for accurate timing of the popular averages to be as high as those associated with the specific stocks. As discussed in the previous sections, our 95-percent accuracy rate with individual stock issues needs only around a 78-percent or better accuracy probability relative to the popular averages.

In actual market participation, decisions must be made quickly and without emotion. Our timing technique, therefore, must not be influenced by emotional "subjectivity," and it must be easily and quickly calculated to avoid time lags that would take away from maximizing the number of available opportunities.

Market timing is nothing more than reviewing statistically valid data to derive probabilities for future price moves. Consequently, because of the probability variances at any given time, not all buy/sell points are created equally.

The relative strength of any buy/sell point can be compensated for by altering the "investment level," that is, by varying the percentage allocation between stocks and cash.

At this juncture, our objective is to develop buy/sell points that meet our minimum requirements related to the purchase or sale of specific common stocks. Application to options, index futures and more speculative trading strategies require adjusting our timing probabilities upward from those that are the focus of this discussion.

Our discussion of the technique, at this time, is designed for the process of buying specific stocks, then selling. The basic elements are buy indications that increase the percentage of funds allocated to common stock investment (that is, increasing the investment level), a holding period, and then sell indications that would result in selling specific positions to adjustto a lower investment level.

This buy-to-sell aspect is stressed because you cannot assume the processcan be automatically reversed. That is, the same criteria cannot be used in reverse for short selling with the same degree of accuracy in specifi_cpositions—selling short on sell indications and covering (buying back the short positions) on buy indications. The reason it cannot be reversed automatically is because of the upward bias in the stocks we utilize. For accurate short sale techniques, alterations (to be discussed) are necessary to eliminate this upward bias.

In this discussion, we are going to fully describe the criteria that w_e actually use. Some of the criteria might appear rather complex, and the information to implement exact duplication might be difficult for many investors to obtain. However, after such detailed descriptions, greatly simplified methods within reach of almost all investors will be described. In fact, the basic timing method can be compacted so it takes less than one hour each week without any need for complicated equipment. Nothing is necessary beyond the ability to read.

The factors we use to determine buy/sell points are of two types: essential (or primary) and ancillary. There is only one essential factor, and it must be present for any buy/sell indication. There are twelve ancillary factors; any six (or more) must coincide with the essential factor to have a buy/sell indication.

The two previous factors were designed to isolate specific participants and their ability to effectuate future behavior because of their cash/noncash position. The amount of money in the overall economy is also important and is influenced by the actions of the Federal Reserve.

The figures relating to available money supply are provided weekly by the Federal Reserve and reported by all major financial publications. The money supply calculations include various categories (M-1, M-2, and M-3 being the most popular in gross form). Because of the various components of the money supply categories and changes in the economy, there is an ongoing debate within the financial community as to which measurement (with a myriad of adjustments) is the most accurate. For the purposes of our basic market timing, time and brain cells need not be wasted in agonizing as to which "M" (money supply measure) is chosen. One need only be concerned with sticking with the M originally chosen. We use M-1, which is basically the amount of cash in circulation.

As a criterion in our basic timing method, we compare the gross (not ratio) amount of M-1 to its level four weeks before.

BUY: The amount is increasing. More money is coming into the system, a portion of which can be lured into the stock market in the form of buying demand. In addition, the increased amount of available money helps the overall economy to expand.

SELL: The amount is decreasing. The withdrawal of money from the overall economy creates cash needs, on which investors draw against their stock holdings (because of the liquidity) before selling most other assets. This selling supply can function to depress prices. And the lessened money supply is often a good indication of a coming constriction in the broadly based economy.

Gold Price

The stock market, as with any other market, is constantly in competition with other investments. Gold, because of its history and physical nature relative to paper money, is a good indicator of relative popularity. Real estate, collectibles, and other "hard" commodities could probably be substituted for our gold criterion; but we have selected gold for its liquidity (with the metal being actively traded in markets throughout the world).

Again using a four-week comparison, we simply look at the net change in price for our indication. We use spot prices, but futures can be substituted as long as the same contract month is being compared.

BUY: Gold is up in price. This can be a good indication that stocks have become unpopular and undervalued. When the gold price declines and the metal disappoints investors, their buying demand can more easily shift to the stock market.

SELL: Gold is down in price. This can indicate stocks have become overvalued and can precede a reversal in investor sentiment, creating increased selling supply in the stock market.

Bonds

There is an inverse relationship between bond prices and interest rates. Higher bond prices mean lower interest rates, and lower bond prices equal higher interest rates.

There is also generally a very strong, direct correlation between stock and bond prices. Higher bond prices are usually accompanied by higher stock prices, lower bond prices by lower stock prices. The bond/stock price relationship is logical. Higher interest rates (lower bond prices) increase corporate costs borrowing and as such function to reduce earnings. Higher interest rates, because of the increased cost of capital, tend to slow the overall economy which can adversely affect corporate sales and consequently have a negative effect on corporate profitability. Within market structure, higher rates increase the cost of margin buying, which reduces buying demand.

Periods during which stock and bond prices diverge usually involve high levels of investor emotionalism. If sentiment is extremely pessimistic, high-quality bonds become viewed as safe havens and buying demand increases, adding price support for bonds while stocks falter. Conversely, during periods of extreme euphoria, bonds can become viewed as providing returns too low relative to stocks, creating selling supply in the bond market; this lowers bond prices while stock prices are advancing.

Our concern with the bond market in our timing model is the most common, direct price relationship. Using a four-week comparison period, our indication for this criterion is the next change in bond price down or up—we are not concerned with the magnitude of the differential. We use long-term U.S. Treasury bonds.

BUY: Bond prices are down. Interest rates have moved higher, probably depressing stock prices and making a price reversal more likely.

SELL: Bond prices are up. Interest rates have moved lower, possibly having an unsustainable elevating effect on stock prices and increasing the chance for a reversal.

Our previous criteria were designed to get a general idea as to our opponent's ability to participate in the market (cash or the lack of it), as well as some insight into the effect of alternative investment types.

We will now turn our attention to what is actually happening within the stock market. The two most important variables are price and volume. If volume is increasing as prices are advancing, it is indicative of an expanding number of buyers coming into the market. This can also indicate that the buyers are depleting their power and will eventually no longer be able to maintain price support. Conversely, if volume is expanding as stock prices are declining, it indicates that those selling out will eventually lose their force (depleting selling supply), which can allow prices to reverse.

In calculating this criterion, we want to know if the cumulative volum_e over the last 20 trading days is greater or less than the cumulative trading volume of the preceding 20 trading days. This is accomplished by adding up the total volume on the New York Stock Exchange over the last 20 trading days and comparing the total with the volume the preceding 20 days. Forty days of data are needed. Calculating this criterion takes only a couple of minutes: adding the newest day and deleting the latest in an ongoing total. For most indications all you need to do is look at a chart of recent volume (available in most major financial publications) by which significant changes in volume can be quickly and easily identified.

For this criterion to be given any consideration, volume must have increased. The amount of the increase is of no concern. If the volume has decreased, this criterion is not considered to have given any indication.

For the price component of this criterion, the net change (plus or minus) of a popular average will suffice. The amount of the change is of no concern, just the direction. Using a four-week comparison period, we use the New York Stock Exchange Index because of the large number of issues forming the measurement. The Standard & Poors 500, Dow Jones Industrials, or other popular averages could be substituted.

BUY: Volume is increasing as prices have declined—an indication that selling supply is being depleted.

SELL. Volume is increasing as prices are advancing—an indication that buying demand is being depleted.

NO INDICATION: Volume has decreased.

Volatility

The faster prices are going down, the faster sellers are getting out, and the higher the probability that the excess selling supply will soon diminish and allow buying demand (higher prices) to dominate. The faster prices are going up, the faster buyers are using up their money supply, and the higher the probability that selling supply can soon dominate to push prices lower.

In the past, we have incorporated beta measurements as one of our volatility criterion, but these calculations were time-consuming and difficult for many investors. We are now substituting a very simple measure of volatility rather than the more time-consuming beta comparisons. The simplified method can be applied without any loss of accuracy.

Remember that, by confining specific investment interest to the stocks that qualify for our Master List, we are effectively participating in a market within a market. When purchasing stocks, we would prefer to invest in those that will outperform the market. When selling, we want to get out when the chances are that our stocks will go down at a faster pace than the overall market. Consequently, it is to our benefit to have some idea as to how the stocks we follow are doing relative to the broadly based market. If our stocks are relatively depressed, to us they represent better values. If our stocks are relatively overvalued, they would appear more vulnerable to decline.

To determine the relative over- or underpricing, we compare the percentage price change of the stocks we monitor to the percentage price change of the NYSE Composite Average. Any other broadly based market "average" could be substituted for the NYSE Composite.

Using a four-week comparison, the percentage of advance/decline of the popular average selected is calculated and compared with the average percentage advance/decline of the stocks we follow. Whether this ancillary criteria develops a buy or sell indication depends on what direction the popular average being followed has taken.

If the NYSE Composite has declined.

BUY: If the stocks we follow have declined more than the Composite average.

NO INDICATION: If our stocks advanced or declined less than the Composite.

If the NYSE Composite has advanced.

SELL: If the stocks we follow have advanced more than the Composite average.

NO INDICATION: If our stocks declined or advanced less than the Composite.

Many investors are unaware that the brokerage firm, upon which they rely for advice and/or the placement of orders, is often a direct market participant and as such is potentially a direct competitor. Brokerage firm_s, on a corporate level as well as through individual officers and employees, are often actively involved in the market on their own behalf.

The reasoning of those who ponder the merits (or lack of them) of broker participation generally gravitates toward one of two categories:

• It is good. After all, if the broker is so convinced of the merits of a particular stock that he or she purchased it, it seems only ethical to share this reasoning with the clientele. And, if a broker suggests a stock, it is an indication of demonstrated good faith that the broker has placed monies alongside those of his or her clientele. If the broker is wrong, all will suffer. Such personal participation may influence the broker to be more astute and work harder in stock selection to ensure success.
• It is bad. If a broker has a position in a stock and then recommends the stock to customers, the broker faces a potential conflict of interest. The broker's clientele could be used to support the price of the stock the broker owns. That is, the clientele, through their buying, will help increase the price of the stock and may even end up conveniently buying the stock owned by the broker at an elevated price.

There are many scholarly (and not so scholarly) discourses as to which line of reasoning is more accurate. The usual compromise is to advise clients (generally in the form of very small print on the bottom of a research report) if the broker has a position in the stock, so that clientscan make up their own minds about the potential advantages or disadvantages.

Such research reports are designed to aid both individual and institutional clientele in becoming informed as to the investment merits of a particular stock. They are sales tools. Naturally, if the brokerage firm owns the stock, the research report is generally favorable.

From our perspective, it makes no difference whether the involvement of brokerage firms as direct market participants is good or bad. We are only concerned that it exists. It is a factor in the market environment thatcan influence supply/demand, and as such it can provide opportunity for profit.

If large brokerage firms concentrate their own buying and/or the efforts of their sales force on a particular stock or stock group, you know you have buyers regardless of the ethical motivation behind the buying. With the influx of buyers, you can be reasonably assured the demand will be greater than the supply, and consequently you can expect the price ofthe stock to be pushed higher, thereby allowing a more propitious selling opportunity.

The major effect of brokerage activities is on buying, not selling, for various reasons. The negative is not as easy to sell as the positive. It is much easier to call clients and state something should be bought because of _optimistic prospects, than it is to tell them that a stock they own is not worth owning and should be sold. From the standpoint of the broker, if the client has bought something previously and it is up, them keeping the profitable position (albeit a paper position) reinforces the broker's ability. Conversely, if the broker has placed the client in a position that is losing, it can fit the "long-term" category with no acute realization of loss as long as the position is held. Also, selling might not be emphasized by a brokerage firm because the stock might be that of a corporate client of the brokerage firm. The brokerage firm might either be receiving fees to handle a corporation's offering of new securities or have the corporation as a client through its pension fund and/or managing personnel. In such instances, suggesting selling the corporate client's stock would be an obvious business blunder.