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If you have been trading or investing for any considerable amount of time, I am sure that you have heard many popular market adages over that period. Just think about it, when was the last time that you heard someone say “bulls make money, bears make money, but pigs get slaughtered?” I must hear that saying at least once a day and so often that I have become immune to hearing it. Today, I’m going to share with you three stock market adages or saying that you can live by. These saying can help to make you money in any market, but more importantly they will help you from making mistakes and losing money. So here are the three market adages to live by:
1. “The best market moves come from failed moves.” This statement has helped me more than any other market adage in my life. When there is a chart pattern or formation that fails, that is the way the market talks to us. For example, I remember back in July 2009 when everyone was still panicking over the credit and housing collapse; there was a bearish head and shoulders top formation which triggered on the chart of the S&P 500 Index. The calculation of the pattern signaled a severe drop was coming for the S&P 500 Index and the major stock indexes. Almost everyone on CNBC and Bloomberg television were talking about it. The popular financial CNBC contributor, Art Cashin was explaining it on CNBC for several days. Even the financial TV anchors were discussing it over and over in detail. The result was, the pattern failed several days after triggering and it created a massive short squeeze to the upside. In fact, the S&P 500 Index gained nearly 100 points in a little over a week’s time. Always watch for failed moves as it will usually lead to fast moves in the other direction of the trend, as you can see in the chart below.
2. When someone says that “it is different this time” be on guard. When it comes to the market, it is never different. How often did you hear in 2005, and 2006 that real estate will never go down again? Even the chairman of the Federal Reserve said that real estate was not going down. Well, we all know what happened in 2007, and 2008 as real estate in the United States tumbled. In fact, housing prices have still not recovered from those sharp declines. The same thing happened in 2000 with the technology stocks. In fact, the NASDAQ Composite which is a tech heavy index is the only major stock index still trading below its 2000 peak. When someone says that “it is different this time” it is best to run for the hills. Remember, even the bible says that “there is nothing new under the sun” so why would the market be any different?
3. “Never short a dull market.” This market adage remains true to this very day, but most people do not understand what the word dull means. The word dull simply means light volume. Just look how difficult it has been to try and short the major stock indexes over the past several years. The trading volumes today are less than they were ten years ago. In fact, the only time volume has picked up or increased is when the stock market was under distribution or in the middle of a correction. Now let me be clear, there can be and are often great short trades out there, but it is very difficult for the layman/inexperienced to sell short the major stock indexes during light volume periods. When the crowd joins in on the trading and the volume picks up it is usually time to sell and possibly short the market. Until then, never short a dull market.
How many times have you heard the saying, buy the rumor and sell the news? What this saying really means is that the good news is already factored into the price of the stock at the time of the announcement. Just think about how often we have seen companies report terrific earnings, only to see the stock price decline sharply after the earnings announcement, it happens all the time.
Here is a slightly different example, do you remember the Federal Reserve announcing its $85 billion a month QE-3 program in mid-September 2012? The major stock indexes were soaring into the day of that announcement. As you all know, the stock market staged a two month correction after the announcement. Obviously, the secret here is not really a secret at all, the institutional money just figured that all of the good news was baked into the cake already. Remember, before the QE-3 announcement the stock market indexes were surging higher on the anticipation that the central bank would continue its easy money policies. The stock market institutions love low interest rates and easy money, so when the announcement was made that the easy money policies would continue from the central bank, the institutional investors locked in the profits. This “buy the rumor sell the news” cycle has been happening for hundreds of years, and will happen until the end of time if you ask me. It happens in all markets, not just the stock market. How often have you seen the latest fad or craze with a pair of shoes, designer pants, or latest electronic device? Once everyone in the public owns those products they become out of style and the price drops dramatically. Well, the stock market works the same way. Below are three ways that you tell when you can sell the news.
1) Sell the news when the public gets involved. Joe Kennedy sold all of his stock holdings in 1929 when the shoe shine boy was giving him a tip to buy a stock. The same thing happened in 2000 when taxi cab drivers were trading stocks on a lap top from the passenger seat. In 2005, the public was buying real estate using sub-prime loans in order to flip the property for a quick profit. We all see how that ended.
2) Sell the news when the price of the stock is very extended from the major moving averages on the charts. If you ever see a stock that has soared higher before a major announcement and is extended from the major moving averages on the chart there is a good chance that this stock will be a sell the news event. Charts will tell you more than you will ever imagine so learn to read them, especially before major announcements.
3) Sell the news when the masses in the public say that price will never go down again. In fact, this happened to Apple Inc (NASDAQ:AAPL) in September 2012. At that time, the stock traded above $700.00 a share and was very extended on the charts. The financial news network CNBC also showed people in the public that said their life savings was only in Apple Inc stock. Many of the people interviewed also said that the stock would never go down again. You can see that Apple Inc was experiencing all of the classic sell the news topping signals. As we all know, the stock declined from over $700.00 a share down below $400.00 a share in the next eight months.
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