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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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What happened to my golfing partner and most other investors who left good jobs to trade the stock market for a livingMood of the Media: This one you have to do on your own, but it is easy. I do it by simply watching CNBC and CNN as often as I can and especially after a market decline or surge. I want to see who is being paraded out to see if their mood is the same as the Advisory Sentiment Indicator. If insider behavior is opposite, look for a turn. In July 2002, I turned short-term bullish based on my analysis of The Vital Few versus The Trivial Many. I thought we would have a good trading rally until early September when I thought the rally would then end because of institutional tax loss selling that usually begins in early September and ends on October 31, but I needed a trigger to get me to act on my short-term bullishness. I observed CNBCs Maria Bartiromo advising viewers to learn how to sell short. I then had everything I needed to make a low-risk trade, buying the exchange-traded fund SPY, which mirrors the action of the S&P 500. I sold the SPYs at an 11 percent profit the first week of September. The Vital Few versus The Trivial Many worked like a charm. Mood of Friends and Acquaintances: Again, you are on your own, but this, too, is very easy. Just identify who among your friends is very emotional, especially when it comes to money. I have maintained contacts with a few stockbrokers whom I have known for years. I usually call them at important turning points to ask them the mood of their customers. It is amazing how frightened they are at the bottom and ebullient they can be at the top. When I was a stockbroker with E.F. Hutton in New York, I had a client that was always wrong at decision time. I used to call him and tell him about a stock I liked. If he liked the idea, I never offered it to my clients, including him. If he did not like the idea, I aggressively marketed the stock. Even the other brokers would ask me to call my reverse indicator to see if he liked their ideas. My client was a very nice man, but his wife had left him, he had trouble with his kids, and he always complained about his job. When he finally closed his account after he had lost his job, the other brokers and I had a party in his honor. We were depressed for him and us. Pay attention (again stay aware and be observant) to what people are saying about the stock market at cocktail parties, in stores, wherever people gather and talk. It could be very helpful. This is old advice, but when the person who shines your shoes tells you he is making money in the stock market, or starts to ask you questions about the stock market, watch out. When you find a good reverse indicator, nurture that person and stay in contact. He or she will come in handy at turning points. In March 2000, the height of the technology bubble, I noticed that insiders were selling huge dollar amounts of these stocks. Like everyone else, I thought the new economy was truly a once in a lifetime event, though the insider selling in the stocks that I owned troubled me. Two experiences caused me to sell out in April. I live in a private golf course community in southwest Reno. Wednesday was Ladies Day so I went over to play at a local municipal golf course. I was teamed up with a young man who was walking while I drove a cart. While we were waiting at the second tee, he asked me what I did for a living. When I told him that I monitored insider trading for institutions, he seemed very interested and went on tell me that he was a day trader and had quit his job as an accountant for Grant Thornton. I asked him how he was doing. He told me he was making $3,000 a week buying options on technology stocks. He said his grandmother had died and had left him $200,000. I told him he was making an unsustainable return and advised him to be careful and reminded him of a few stock market bubbles such as: the conglomerate boom and bust in the late 1960s, the boom and bust of real estate investment trusts in the early 1970s, and the oil and gas stock crash in the early 1980s. He looked at me like I was a dinosaur and did not comment. For the rest of the afternoon, I just focused on golf. A month later, my wife and I were enjoying a four-day stay at the Green Valley Spa in St. George, Utah. We love this spa because they know how to pamper you, and we enjoy hiking the surrounding mountains with other spa guests. There were three walks every day of varying length and difficulty. Maria went on the most grueling, and I went on the easiest one. I love to talk and the slow pace was just fine with me. On the second day, I was walking near the back with a woman named Sarah and her daughter Kim, who was probably in her early thirties. During the walk, they asked what I did. I replied that I monitored insider trading for institutions. Kim seemed especially interested. She told me she had left her full-time career as an electrical engineer and was trading the stock market for a living. She added that her mother helped her with the analysis. I asked Kim about her experience with the market and she told me that she and her mother had started investing in 1998 and had done quite well. I asked her where she got information on the stock market and individual stocks. They both talked about how great CNBC was for new ideas and were avid readers of Fortune magazine and Barrons. They also had obtained many good ideas from the Internet, especially The Street.Com. I told Kim and Sarah that I had been a guest on The Nightly Business Report and CNBC many times as well as having had in terviews in Fortune, Barrons, and TheStreet.Com. I wanted them to know that I was a seasoned professional, and then advised them to be careful because I had a sense that the market seemed very similar to the early 1980s when oil was $40 a barrel and analysts saw no negatives to further price rises. I shared the story about the dentists in Florida who were selling or closing their practices to move to Houston to drill for oil and gas as well. Again, I got the what a dinosaur! look, so I sighed lightly, changed the subject, and moved ahead to talk to another person. Later that evening, I told Maria that I thought we were facing a technology bubble and told her about my talk with Sarah and Kim. That prompted Maria to ask me if she should sell out, following my advice the next day. When I returned to my office in Reno, I held a meeting with my staff. We had two administrative assistants, three insider analysts, my secretary, and a programmer. I told them about the fellow I had played golf with a month earlier and advised them to be very careful and to build cash reserves, adding that in the 1980s, some of the brokers in my office in Florida had been making $25,000 a month focusing on oil and gas stocks for their clients. After the oil bubble broke, some of them were seen driving cabs around South Florida. The staff was amused and Michael, my senior analyst, pointed out that we would never know what happened to my golfing partner and most other investors who left good jobs to trade the stock market for a living. Eighteen months later in September 2001, I visited some clients in New York. The market had been in a long decline, and the technology bubble had popped with most of these stocks in well-defined downtrends. After a couple of days of conferences, I took the red-eye back to Reno. When I got out of the baggage area at 3:00 in the morning, I walked to an area designated for taxis. One pulled up and I got into the back. The driver seemed young and intelligent, but I was exhausted and closed my eyes for a quick nap during the 20-minute drive to my home. Trying to make small talk, he looked at me through his rear view mirror and asked what I did. As usual, I said, I monitor insider trading for institutions. The young man replied, I thought it was you. Dont you remember me? We played a round of golf about a year and a half ago. I looked at him incredulously and asked him what had happened. For the rest of the trip, he went on to explain how he had been killed in the market trading tech stocks. He told me he had only $20,000 left and had developed a stomach ulcer to add to his misery. He was driving a cab to regain his health and would never buy another stock again, he said. He was looking forward to getting back to being an accountant. The next day I told Maria and my staff about the taxi driver. It was incredible that my prediction for this young man had come true and that it took such a short period for it to happen. I never found out what happened to Sarah and her daughter Kim. I can only hope that their ultimate fate was better than my one-day golfing friends. I am sure you get the point. It is very important to listen to your friends and people you meet at random. When you see a trend developing and acknowledge that you think the same, you should start to look hard at your own position. Most likely, you are part of The Trivial Many. It is okay to be part of the masses sometimes, but not okay to do it unknowingly. Once you recognize you are hooked, you then can check the other indicators to see if the pieces fit. If insiders are negative and investment advisors and the public are bullish, follow The Vital Few; sell your stocks and be prepared to sit patiently on the sidelines until the odds of success are once again in your favor. State of the Stock Market: This is the final piece you need to know. The easiest and least expensive way to determine the state of the market is to go into BigCharts.com and look at a five-year history of the Dow Jones Industrial Average. A picture is worth a thousand words. You can easily see if the Dow is in an uptrend or downtrend by studying the chart and comparing its current price to the overall trend of its average price for 200 days. Any stockbroker, full service or discount, can easily tell you what the Dows 200-day moving average is. If the 200-day average is rising and the current price is above the 200-day line, the market is in an uptrend. If the current price is below the 200-day line and the line is heading down, then the overall market is in a downtrend. A simple way to see if the stock market is oversold or overbought is to check the Dows current price relative to its average over the past 200 days. If the current price is 10 percent to 20 percent in either direction of its 200-day moving average, it is either overbought or oversold, depending on the direction of current prices. Most technical analysts consider the market to be deeply oversold or overbought when the current price is more than 20 percent away from its current reading. A technical indicator that I have used for years to help me know when the broad stock market is oversold or overbought is the Commodity Channel Indicator (CCI). Although the CCI was originally designed for commodities, I have found it works very well with stocks and major indexes. The CCI usually oscillates between +200 and -200. Daily readings outside these ranges imply moderately overbought/oversold conditions. Weekly readings outside these ranges imply deeply overbought/oversold conditions. I created my Magic T subscription service for the individual investor based on suggestions from readers who figured they could save time and money by reading my weekly analysis of the five Magic T ingredients discussed earlier. You can check out my subscription service on magict.info, and I am happy to send back copies for your review. |
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