Predict the Next Bull or Bear Market and Win

How to Use Key Indicators to Profit in Any Market

Michael Sincere

• Publisher: Adams Media
• Year: 2014
• ISBN:
  9781440571725
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

The secrets to making money--no matter what the market conditions!A fundamental guide to investing, Predict the Next Bull or Bear Market and Win shows you how to build your wealth and protect your investments in an ever-changing market. With author and financial expert Michael Sincere's guidance, you'll learn everything you need to know about the key economic indicators that can help you predict the market's performance and better understand when to sell and when to buy.Unlike competing books that attempt a comprehensive survey of all market indicators, Sincere focuses only on those that make a real impact. His clear, concise strategies show you how to prosper during bull markets, be cautious during sideways markets, and make a profit when the market is going down. Predict the Next Bull or Bear Market and Win thoroughly educates you on the small number of indicators that are essential to a growing portfolio in a tumultuous market. By understanding the right economic indicators, you'll learn how to make money in any kind of market!

CHAPTER 1

Study Underlying Market Conditions

So many people are focused on the performance of individual stocks that they don’t take the time to look at what the overall market is doing. Knowing how to read the market as a whole will help you to prosper during bull markets and protect assets during bear markets.

Often investors do the opposite. They blindly gorge on stocks at the end of a bull market while avoiding the market after it has already hit bottom. If they had taken the time to study the overall market, this might have helped them make better decisions. Imagine being lost in a forest with only a candle. It would be difficult to find your way. If you had better tools such as a GPS, a compass, and a flashlight, it would be much easier to navigate out of the forest. Many of the tools you will read about in this book are similar to a GPS—they’ll show you the best path to follow.

If you are a beginner, it’s important to be aware of underlying market conditions. It is one of the keys to your success as an investor or trader. You will learn how to use clues and tools (i.e., indicators) for guidance. Although there are no guarantees that you will leave the forest unharmed, the probabilities of that happening are higher if you have the right equipment.

Put the Probabilities on Your Side

Jesse Livermore, a trader and author, was the first to discover that to make big money, he had to correctly appraise overall market conditions. He considered it one of his most important discoveries.

In the early 1900s, Livermore was surprised that not even a world war could stop the market from being a bull market. To make money, he said, all a trader needs to know is how to appraise conditions. Livermore used to visit a particular bucket shop (this was similar to a brokerage firm but with fewer regulations). Every time Livermore was there, someone would ask one of the regular customers, Mr. Partridge, what he thought of the market. Mr. Partridge would always give the same answer: “It’s a bull market!” At first, Livermore thought it was funny, but then he made another discovery (which is introduced in the thinly disguised biography about his trading experiences, Reminiscences of a Stock Operator, written by Edwin Lefevre).

“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, ‘Well, you know this is a bull market!’ he really meant to tell them that the big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.”

In other words, if you want to make big money, you must learn how to assess the entire market. Is it easy? No. Is it possible? Yes. By learning how to read the market, you can put the probabilities for success on your side.

There are many other strategies to employ, which we’ll get to later. Basically, it’s a lot easier to buy when the market is strong and moving higher, and sell before the market goes down. Sound like common sense? It is.

Even more important, if you learn how to read the market yourself, you don’t have to depend on acquaintances, neighbors, know-it-all TV commentators, or authors to tell you what to do. Instead, you can rely on your own knowledge, clues, and most important, market indicators.

By learning how to uncover some of those clues, it will be easier to understand the market. There are no magic tricks that will offer instant enlightenment, but if you can learn to look for those clues, then you will be in a good position to profit.

Be a Market Observer

As mentioned previously, one of the most important skills you can develop is to be an astute market observer. By learning how to observe the market, you will gain an edge over other investors and traders, many of whom ignore overall market conditions. By watching the market carefully, you will be more aware of economic changes, world events that affect the market, trend changes, or when a bull or bear market is beginning or ending.

Legendary fund manager Peter Lynch used to go to various companies—in malls, car dealerships, or wherever there were shoppers—to observe whether people were buying its products, and to see which stores at the mall were the most popular. That was how he got some of his best stock ideas. You can use the same skills with the stock market.

Be a Stock Detective

In many ways, to successfully figure out the market, you have to be a stock detective. As in the best mystery stories, when you look for clues there will be many red herrings, wrong turns, and false leads. Even worse, there are many people who will use the media to try to mislead you.

As a stock detective, however, you have to figure out what information is real and what is just hype. It would be nice if this were easy but it’s not. When you participate in the stock market, you enter a very strange world where the rules are different, where logic doesn’t always matter.

Whether you buy individual stocks or index funds, it is a lot easier to earn money when the power of a bull market is behind you. In a bull market, the wind is at your back and you can sail across the ocean with ease. It’s a lot easier to sail, or invest, when the market is carrying you along.

If you can determine that overall market conditions are changing, and a bear market is near, you will want to protect yourself. Being in a bear market is similar to getting caught in the middle of the ocean with lightning, rain, and fog, when the wind is blowing right in your face.

Bottom Line

Follow the market and the market trend.

Is This Market Timing?

Some of you might think that avoiding bear markets sounds suspiciously like the strategy of market timing. Perhaps you heard that market timing doesn’t work. It’s true that it’s extremely difficult to consistently time the market. In fact, timing the market each day or week is primarily for short-term traders.

On the other hand, if you can stay in the market during the majority of a bull market and avoid or reduce exposure in bear markets, that’s being smart. Reducing or limiting risk makes sense.

It’s also true that people are slow to react to market conditions. Most investors, including some pros, do not get out of bear markets in time and are also slow to enter bull markets. It’s human nature. Because of our emotions, we tend to do what feels right, but it may not be the right strategy.

As you’ll learn later, when the market is soaring so high it appears as if the stock market is giving away free money, you should be cautious. While other investors are gobbling up stocks and making money, you are slowly selling. Although you will never time it perfectly, by observing the overall market as well as investor behavior, you will learn to recognize some of the warning signs of an impending bear market. (Note: A red warning light should flash for you when it’s too easy to make money in the market.)

Conversely, during those times when investors are frightened of the market and are panic selling, you will be looking to buy. Although it’s rare for you to catch the exact low of the market, one of your goals is to determine when it’s safe to buy again. The only way to know is by evaluating underlying market conditions.

In the next chapter we’ll look at the characteristics of a bull market—that is, when the market generally goes up.

CHAPTER 2

Characteristics of a Bull Market

In this chapter, you will learn how a bull market starts and develops, the clues and signals that tell you how long it will continue, and the signs that it is ultimately coming to an end.

Bull Market: When Wall Street Throws a Party

Bull markets are profitable for nearly everyone. Brokerage firms are pleased because investors are putting more money into the market and generating commission dollars for the brokers. Money managers are pleased because they earn substantial returns and receive huge end-of-year bonuses.

Wall Street firms hire more employees to handle the new accounts, and underwriters launch new initial public offerings (IPOs). Individual investors are delighted because the value of their 401(k)s and IRAs rise, which makes them feel wealthier. Businesses are happy because consumers spend more money, boosting the economy. It seems as if every investment strategy works, from buy-and-hold to short-term trading.

During a bull market, almost everyone is in a stock-buying mood, often for no reason except that everyone else is buying. During these times, the major indexes (as well as most individual stocks) go up, sometimes dramatically.

Overall, investors are optimistic about their personal finances, and if the bull market goes high enough, some will brag about how much money they’re making. When the stock board has turned to green (it’s red in down markets), it seems that no matter which stock you buy, it’s going up.

During a bull market, if you invest in an index ETF or index mutual fund that mimics the major market indexes such as the S&P 500 or Dow 30, you can make money, sometimes lots of money. If you look at a stock chart of a trending market, you will see that the trend is pointing in one direction: up (for bull markets).

Market Mastery

Exchange-traded funds are designed to track a specific market index. The index ETFs discussed in this book track the major, broad-based market indexes such as S&P 500 (SPY), Dow Jones Industrial Average (DIA), Nasdaq-100 (QQQ), and Russell 2000 (IWM).

Although the market doesn’t rally every day, selloffs don’t last long in a bull market. In fact, when there is a selloff, those connected to the financial markets say that it is a “healthy” pullback, an opportunity to buy at bargain prices. They suggest that the “market needs time to digest its gains.”

During a bull market, there is usually positive news on TV and in the newspapers. Negative news (such as that a company has an earnings miss) is forgotten by the next day. The higher the market goes, the more enthusiastic people get about the market. Those who work and play on Wall Street are in a party mood because their livelihood depends on the market going higher.

Perhaps the only people who despise bull markets are short-sellers, that is, people who make money when the market goes down.

How Does a Bull Market Start?

Not every bull market is the same. For example, some bull markets are exciting and fun, while others move up so slowly it’s barely noticeable. The market rises on the hope and enthusiasm that the economy will continue to get better. This optimism could be in response to a new technology, a housing boom, or the Federal Reserve (the Fed) keeping interest rates low. Whatever the reason, the market goes higher.

To follow the path of a bull market, you must look at what came before. More than likely, before the bull market started there was a bear or sideways market. After a bear market, the market often goes sideways for a long time; it could take months or years before it comes back to its previous high. (I consider a sideways market to be one in which no new multi-month highs or lows are made and support and resistance levels are not broken. You will learn about support and resistance levels later.)

Therefore, giving a single answer to the question “How does a bull market start?” is impossible. What we can say is that in every big decline eventually there is a bottom, after which the market starts to recover, or at least does not s...