WHERE THERE IS MOMENTUM, THERE IS MONEY

IF YOU WANT TO HEAR THE MUSIC, YOU MUST JUMP ON THE BANDWAGON.
(JUST JUMP OFF AS SOON AS THEY QUIT PLAYING)

With the stock market in a uptrend, it is time to move the money back into position. Two sectors that appear to be poised for continued gains are the software sector and the formerly battered semiconductor sector. Both of these sectors are tracked as indices, and both of these sectors have ETFs (exchange-traded funds) that are available for purchase.

SOFTWARE SECTOR

This sector is showing short-term strength. This sector trades as an i-share on the AMEX (American Stock Exchange)under the symbol IGV. Its current price is $40.92.

SEMICONDUCTOR SECTOR

This sector also has momentum. It currently trades at $61.77 and its symbol is IGW. It may make sense to wait for a pullback to to $58-59 to purchase.

WHERE THERE IS MOMENTUM, THERE IS MONEY

NOTE: This is reprinted from the August 2005 Newsletter. But it is timely as the the market is in a positive mode.

Studies show that 70 to 80% of a stock’s movement can be attributed to the movement of the overall market and the movement in the particular stock’s sector. Yet most analysts concentrate their efforts on analyzing a stock’s fundamental indicia. And most portfolio strategists just conjure up newer quantitatively derived strategies for portfolio diversification. So most of what you read or hear about a stock from the analysts only influences 20-30% of its movement. How would you like a doctor that could only cure 20% of your ailments or a fire department that would only respond to 30% of fire alarms?

DIVERSIFICATION IS FOR THOSE WHO DON'T KNOW WHAT THEY ARE DOING-WARREN BUFFETT

Diversification is a mantra in the financial services industry. Talk to nearly any broker or financial planner and they will tell you to just buy and hold a basket of stocks, bonds, cash instruments and maybe throw in a few alternative investments like managed futures, REITS (Real Estate Investment Trusts) and foreign equities. Some will do well sometimes, some will do poorly sometimes. But if you hang on long enough, we can guarantee that your investments will regress to the mean.

The author will be the first to say that buying investments based upon their fundamentals or holding a diversified portfolio is better than a poorer strategy, or no strategy at all. But if there were a way to buy the best performing investments at the best times, wouldn’t you like to try it?

Here is one way to do it:

1. When the market is moving forward, you are fully invested in stocks. When the market is reversing course, move to wealth preservation strategies. I am sure some readers are thinking ‘Yeah, right smart guy. How can you tell when the market is going to move up?’ The simple answer is you cannot predict when it will go up or down. But you can employ technical indicators that are trend tracking and trend following. You stay invested until these technical indicators reverse to negative.
2. Within all markets, some sectors will outperform others. Find the best sectors and find the best performing stocks in those sectors.
3. When you find the best stocks in those sectors find the best price points to buy, sell, and plot stop loss points. On this last point, proper implementation of stop loss orders is key to a good strategy. It sounds counterintuitive, but knowing when to cut losses is as important (if not more important) as knowing what to buy. Here is why:
a. If you are buying good stocks in a moving market, you are almost sure to get gains that beat, or at least equal, market-equivalent gains. If you do it well, you will substantially exceed the relevant indices.
b. Despite your best efforts, some of your picks will lose money. That is inevitable. Just keep your losses very small and put your money elsewhere. Being a stock trader is like managing a major league baseball club. The season stretches from April to October. You are bound to lose some games, but consistently win more than you lose and you will keep your job and your club will make the playoffs.
c. Put in stop losses and be mechanical about them. The author usually sets stop loss orders at 7% below the purchase price, or a point on the chart where short-term price support will break down. No exceptions. Also, when you have good gains in a stock, raise the stop-loss price to keep your profits.


EVERY DAY ABOVE SAND IS A GOOD DAY IN THE DESERT OF THE REAL!


IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The author may or may not buy or sell securities discussed in this newsletter.