Credit Card ’s Talk

One of the basic laws of physics states that a body in motion will continue in motion in the direction it is going until interrupted by another force.

That basic physics law also applies to stocks and mutual funds. To see this trend it will be very apparent in a weekly or monthly chart rather than a daily chart. The daily chart shows too much noise (random movement).

In the Friday edition of Investor’s Business Daily you will find 37 weekly charts on the back page of Section 2. One of the common occurrences among these issues is the steady upward progression of price, many with an angle of 30 degrees or more. The up movement of price may have been going on for many months. This is the kind of stock you want to own and even add to your position as it continues upward.

Most brokers talk about dollar cost averaging and mean adding to a stock as it goes down. That is stupid. There is only one right way to dollar cost average and that is when it is going up - NEVER down. Averaging down will put you in the poor house.

Today’s stock market (end of 1999) we see the upward momentum of almost all the major stock averages - the DOW Jones Industrials, the S&P500, the Russell 2000 and many more. Some of these indexes are headed for the stratosphere. No, I have no idea how high or how far is up, but remain 100% invested to take advantage of this runaway bull. The market will tell me when to sell.

For anyone holding individual stocks about the only thing you can do is set a trailing stop-loss order so that when the issue turns you will be out with a nice profit. Don’t try to predict the top because you will sell too soon. Let the stock itself tell you when to get out. The amount of the stop will be up to you, but I like about 10% of Friday’s closing price. Never move the stop down.

There are people who buy mutual funds and put them away and never look to see how they are doing. This is a mistake. You are hurting your financial future if you do not regularly review your funds. Monthly is best, never less that quarterly. Momentum applies here too and even more so because many funds have a bias to a particular sector of the market. There are big caps, small caps, regional, international, value, etc., etc., etc. A policy to enhance your income is to see which sectors or groups are doing best and be invested in a fund that is heavily in that sector.

Mutual funds of a certain sector will run up for months at a time, even years, but when that sector becomes weak you should sell immediately and buy a stronger one. If you are with a discount broker there will be no commission to switch and, of course, you only buy no-load funds. Never blindly buy and hold any fund.

As you become aware of the momentum of various sectors and switch to stay with the strongest you can easily double your current return.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

Every day on CNBC-TV they show a 200-day moving average line superimposed on the stock price history. It seems they give great credence to this manufactured line as it represents 10 months of price action. What is it? Does it really mean anything?

The line represents the addition of the closing prices of that particular stock, mutual fund or index for the past 200 trading sessions that have been added up and divided by 200. That is then placed on the chart at that point. For example if the price of the equity started at zero and went up exactly one point for 200 days the average would be 100. A dot is then place on the chart at 100 even though the equity price is now at 200. Each day the new closing price is added after dropping off price number 1 and the new group is added up and divided by 200. This is done each day. Nothing complicated.

Does this mean anything?

This is considered to be a very useful technical indicator, but like all technical indicators you must understand how to use it. There is one rule for any technical indicator: no single one is a Holy Grail for predicting future price action of a stock, fund or index. WAIT! Don?t throw out the baby with the bath water.

The 200-day MA is not a predictor, but it does establish the current trend of whatever you wish to measure that has a recurring event. You can use it for the average price of housing, cost of gold, global weather temperature, medical costs, etc., etc. that can then be plotted on a chart.

You don?t have to stay with 200 days. You may modify it to any number of days or time periods you wish from two on out past 200. Many technical analysts use 10, 20, 50, 100 and then plot these on the same chart simultaneously to see when one crosses over another. These are called oscillators and thousands of traders use them to determine buy and sell signals.

Because the 200-day MA is composed of 200 price entries it has been determined that it works best when used with something that has many factors represented. In the stock market this is indexes and mutual funds. Mutual funds are composed of many stocks or bonds and the price action of any single equity does not cause a major price swing.

If you will keep in mind that the 200-day MA will show only the major long term trend it can be a very useful investment tool.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870