Yes, one can time the market!; IBD 50 lists outperform on gainers and decliners

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The media pundits say it is impossible to time the markets.   By making investing appear complex and beyond most people, they protect their jobs and the jobs of many financial advisers.   I have been able to use a few simple indicators to keep me out of the major market declines.   I protected my pension from the 2000-2002 and 2008 declines. Below is a chart showing the periods when the GMI was on a sell signal (in red) versus a buy signal (green) since 2006.   The GMI, a collection of six indicators,   has helped me to get out of the market during the major declines.   Yes, there are   times when the GMI gets whip-sawed, but only for a few days.   I so not mind going to cash and then re-entering on a new buy signal in my trading accounts.   The problem is that my pension plan prevents me from market timing.   They want me to ride the market down in a large decline.   I refuse to do so. Below is a graph of the GMI signals as they apply to the QQQ. Click on it to enlarge.   Judge for yourself if you would have preferred to be out of the market or more defensive during the periods of red days. You can also check out the strategy of using GMI signals to trade QLD the past two years here.

GMIQQQperfOne of my perspicacious honors students questioned my analysis of the IBD 50 stock lists’ performance during the period since the last GMI buy signal, which I posted a few weeks ago.   He suggested that while the IBD 50 stock lists might have had more large gainers than the stocks in the major indexes, perhaps the IBD 50 lists also had more big decliners.   So, I am re-posting below the table I posted a few weeks ago, with the addition of a new column (in red) showing the percentage of the IBD stocks that declined 10% or more in the study period. The data do not support his hypothesis.   I found that 2%-10% of the stocks in the IBD 50 lists declined 10% or more, not very different than   the NASDAQ 100 stocks (8%), but a little more than the Dow 30 (0%) and the S&P 500 stocks (3%).   Furthermore, there were very few of the IBD 50 stocks that declined as much as 15%. So we are left with the conclusion that the IBD 50 stock lists were much more likely to contain stocks that had large gains (more than 20% or 30%)   but are not more likely to have large decliners. Thus, the IBD 50 lists were more likely to contain stocks that outperformed, at least during the period I studied.   Nevertheless, I do know, and IBD has said this, that the IBD type   growth stocks do tend to decline more than other non-growth stocks during major declining markets.

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Finally, here is this week’s GMI table. While all but one of my indicators are positive, I am aware that investor sentiment is getting quite optimistic.   (But the Worden T2108 is only 48%!) Until this extreme bullishness translates into low GMI readings, I remain 100% invested in mutual funds in my conservative university pension accounts.

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GMI based strategy using 3X ETF’s beats IBD 50 stocks

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I decided to look at how IBD 50 stocks have performed during the time since September 4, when the GMI issued the   buy signal, that is still in effect. I examined seven IBD 50 lists that had been published, beginning with the one from 2/7/3013.   Using TC2000 I computed the percentage of the stocks in each IBD list that   has advanced in the period from 9/4 through Friday’s close on 11/22.   I compared these results to how stocks in three major indexes (S&P 500, Dow 30 and NASDAQ 100) performed during the same period. Finally, I looked at how their respective index ETF’s performed during the same period.   I hypothesized that the IBD 50 stocks, which are picked based on the IBD   growth stock strategy, would outperform most other stocks. I was surprised by some of the results.GMIperf11232013

As this table   shows, the percentage of stocks in the IBD 50 lists that have gained at all since 9/4, ranged from 76% to 82%. In comparison, 87% of the S&P 500 stocks have gained, 80% of the NASDAQ 100 stocks and 90% of the Dow 30. Thus, IBD 50 stocks as a whole were no more likely to rise than were the stocks in these indexes.

The superiority of the IBD 50 stocks began to show up when I looked at the likelihood of having larger gains.   The percentage of IBD 50 stock lists that advanced 10% or more since 9/4 ranged from 54%-62%, much better than the stocks in the three market indexes (37%-45%). The IBD 50 stocks did even better at higher levels of gains.   Gains of 20% or more were found in 16%-32% of the IBD 50 stock lists and in no more than 14% of the stocks in the major indexes.   Finally, gains of 30% or more were found in a small minority of the IBD 50 lists   (8%-14%) but were very rare in the stocks in the general indexes (0%-3%).

Thus, while IBD 50 stocks were not more likely to have gained (at all) as the stocks in the three market indexes studied, they excelled   in their likelihood of having larger gains.But that is not the full story.

What would have happened if during this same period, one simply had bought a major index ETF instead of searching for better returns by buying individual stocks?   At the bottom of the table are the performance of some major index ETF’s during this same period. Simply buying and holding the SPY would have yielded a return of +9.1%. The DIA was up +7.5% and the QQQ was up 9.5%.   The majority of the IBD 50 stocks would have beaten these returns, if one had been able to identify in advance which of the the 54% to 64% of the IBD 50 stocks would gain at least 10%.   However, the 2X leveraged QQQ ETF, QLD, advanced 20% and the two 3x leveraged ETF’s, TQQQ and UPRO,   gained 30%!

Thus, by merely buying and holding TQQQ or UPRO on 9/4, one would have beaten about 90% of the stocks in the IBD 50.   And who is so good a stock picker that s/he could have identified in advance the 4 to 7 stocks out of 50 in on one these IBD50 lists that would have beaten the strategy of just buying and holding the 3X ETF’s? Over the past few years I have had to repeatedly learn the lesson that when the GMI issues a buy signal, I should begin accumulating QLD or TQQQ instead of trying to find the rare stock that will eventually beat them. (Yes, I know that the leveraged ETF’s can fall more quickly, but it is much easier for me to focus on   just the action of one market index and to exit quickly when its trend turns.)…

I have added a new and exciting book   by Alan Ellman to the list of books to the right of this post. Alan has been teaching folks how to earn income from their portfolios by selling covered calls.   Now Alan has turned his attention to teaching high school and college students the basics of stocks investing and how to build a sound retirement.   The book is a great introduction for persons who want to learn about both fundamental and technical analysis of stocks. It also has a chapter   for young and old investors that explains the ins and outs of taxes.   This book will be added to the   required reading for my students next semester. By the way, I was honored to write   the Foreword for the book and I receive no compensation from its sales, but if you order it from my site, my son and webmaster will benefit. This book would be a great gift for anyone in our lives whom we want to introduce to the stock market….

Now for the GMI:

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20th day of QQQ short term up-trend; How daily MACD histogram predicted decline

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IBD now calls the “Uptrend under pressure.’ Meanwhile, I had already closed out my position in TQQQ earlier in the week.   Why?   I posted last Sunday night that I saw technical weakening in the QQQ, based on its diminishing stochastics and MACD histogram.   Both indicators have continued to weaken.   I want to show you, how the MACD histogram can illustrate something not seen in the price itself.   This daily chart of the QQQ shows the MACD histogram below it.   Note that in a 9 day period before Thursday’s decline,   it looks to the naked eye like the price of QQQ remained level.   At the same time, the MACD histogram was showing marked weakening!   (The histogram plots the difference between the MACD and its signal line, which are both plotted on the histogram chart. When the histogram turns red, it means the MACD has fallen below its signal line.) The histogram actually turned red on Wednesday.

While my indicators show the QQQ remains in   short and longer term up-trends, I did not want to own a 3X leveraged bullish QQQ ETF while the MACD histogram (and stochastics, not shown) was falling. Many suggest the MACD is a lagging indicator–not to me, or Judy, who taught me this!   I will consider going back   into TQQQ again when the histogram starts rising. Both the QQQ MACD histogram and stochastics were recently added to the indicators I count and post daily in the GMI-2 figure to the right.

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