Posted by: stockscooter | February 14, 2012

Are You In or Are You Out?

Are You In or Are You Out?

I just read an article on which I felt compelled to comment.  The article was entitled, ”When Should Traders Be In or Out of Markets?”   At first blush, I agree, there certainly are times to be invested or setting safely in cash.  However, I don’t agree with all of the author’s five points.  Let me comment briefly on each one, so as to try and be the angel’s advocate.  My intent is not to bash the author’s beliefs, but to give new insight that is more consistent in nature for protecting your assets.

Accumulation and Distribution Days

For some reason, many think they know what one of these days look like.  As if there is a camera focused on institutional traders and what they are doing each day.  Maybe they have a crystal ball, but I believe a lot of assumption goes into such analysis and data sets.  After all, if an assumed institutional trader is selling big lots, some other institutional trader is buying them.  I double dog dare ya’ to prove which one is smarter.

Uptrends and Downtrends 

Yes, there are up, down and sideway trends in the market. However, this business of using the 50 and 200 day moving average to determine such a fact is not optimal.  By the time you notice you are above the moving average with confirmation, you’ve missed a huge part of the move already.  BTW, if you’re are using a 50 day anything for trading purposes, you might as well hang it up and give your money to homeless person, instead of Wall Street.

Scale in

“Scaling in” refers to accumulating a position with multiple trades over time.  Of course, this is good for portfolio management, which is a longer-term strategy.  But, it really isn’t conducive for trading.  It indicates your analysis isn’t good at determining entry.

Buy Strong Earnings and Sales Growth

These are basically momentum stocks.  If you’re scaling into momentum stocks, by using a 50 day moving average with accumulation days, be ready to live by them and die by them.  By no means is this investing.  It is pure speculation.  In over-priced markets that are backed by weak and shrinking fundamentals, this is surely a grave mistake.

Fundamentals and Technicals

I finally agree with something!  It’s important to combine both analytical disciplines, fundamental and technical before investing.  For example, you may find a great stock fundamentally, but if it and the broad market are about to correct 20%, would you want to take a position just  to see it devalue that much in the short-term? Using technical indicators can help with optimizing entry and exits.

The moral to the story is that there are generalized ideas that have been grafted into individual investor psychology over many years and decades.  These ideas and beliefs may not be justifiable through probability and execution or when synergistically combined into a strategy.  They also may be strategies for bull markets and not for bear markets, for example.  Therefore we need to be careful about what we read and what we believe is the Gospel Truth.  Renewing our minds and thinking for ourselves is crucial, so that we are not lambs lead into the slaughter.  Developing your own analysis and getting comfortable with it over time is optimal.  Believing in any of the typical indicators that you get for free with your brokerage account or touted in an article can be less than optimal.  Take the responsibility of managing your money as serious as a heart attack, because it could just give you one!  Do your own due diligence on strategies and philosophies you intend to implement and don’t listen to friends and relatives or well meaning brokers.  Click on my website (stockscooter.com) for an example of how MACD (12,26,9) and RSI (14) are not your friends!  Good luck.

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