INVESTING RULES                          <<Back to investing homepage

Indications of a Long-Term Market Decline

• Oil/Utilities Prices Jump-  Oil is perhaps THE most powerful commodity on this earth.  Every industry uses oil in one fashion or another.  If oil prices increase, every industry's costs increase, decreasing profits.  Perhaps the only industry whose profits are not hindered by higher oil prices are the oil companies themselves.
• Consumer Spending Declines-  With fewer bucks circulating through businesses, there occurs less growth which increases inventories among companies, causing layoffs.  Layoffs escalate the problem starting a snowball effect.
• Interest Rates Increase-  With higher interest rates, fewer money is borrowed for expansion of businesses.  Also, investors may transfer their money out of stocks into bonds or other less volatile investments with higher interest rates.
• Volume of Bonds Increase-  Probably if this occurs, investors are selling some of their stock and putting their money into bonds since bonds usually have a constant yield.
• Volume of Utilities and Safe Stocks Jump-  One technical indicator is volume.  If investors buy into more secure stocks, this indicates that investors are a little uneasy with current prices of the more volatile stocks such as technology.  They are probably selling their stocks in technologies in order to invest into the safer stocks.
• Blue Chips begin to fall when smaller company stocks continue to climb-  This is a strange phenomena because one would think that the smaller companies will lose money first due to economies of scale.  However, the larger companies' prices fall first while the smaller companies' prices remain steady.  Likewise, when the market begins to turn bullish, the larger companies are the first ones to begin to climb.  Large are Leaders, Small are Laggards.
• “Odd-lot, Short-sales” index is low and increasing-  I'm not exactly sure what this index is, but it is another indicator.
• Cash position lower than normal-  Again, another indicator.

Buying Opportunity Indicators

• CANSLIM Test-  Buy only stocks that pass O'Neill's CANSLIM test (from book How to Make Money in Stocks)
      C-  Current Quarter EPS > 25%
      A-  Annual Earnings Increases
      N-  New Highs
      S-  Shares Outstanding < 25 Million
      L-  Leader RSI > 80%
      I-  Institutional Ownership Increasing (Mutual Funds like the stock)
      M-  Market Direction
• Stochastics-  If stockastics are below 20, especially if NASDAQ Stockastic is below 20 and price of stock has quit going down
• RSI-  If Relative Strength Index is below 25.
• Line of Resistance-  If line of resistance is broken where it closes above it
• Closes Higher than open-  Technically, if, after a sharp decline, the stock closes higher than it opens 2 days in a row
• New Highs-  If stock is making new highs for the year or new highs after a bear market for the first time and accompanied by a big increase in volume (avoid after 10% increase from previous high)
• Volume increases-  If, during a sideways trend, volume is virtually nil and then jumps 100% in one day
• P/E and EPS-  If the price is below the product of 5 year minimum average of P/E ratio times next year’s estimated EPS by analysts (P < P/E X EPS)
• Leaders-  Buy stocks that continue to go up or remain when market is going down—they are leaders
• Margin-  Buy on margin ONLY the first 2 years after a bear market (never buy on margin during a bear market)
• Age-  The best performers are hi-tech growth stocks 5-10 years old (1-2 years old are also great performers)

Selling Opportunity Indicators

• Stochastics-  If stochastics exceed 80, especially if NASDAQ Stockastic exceeds 80 simultaneously
• RSI-  If RSI is above 75
• Line of Support-  If stock closes below support line
• Closes Lower than open-  If, after a sharp increase, stock closes lower than it opened 2 days in a row
• Safety net-  If the stock closes 10% below the price you bought it.  That way, if it continues to tumble, you can buy it again for much cheaper.
• Volume increase-  If stock closes for higher volume increase than on any previous up days and DOW shows stalling action (3-5 days later is high)
• Price increases at higher rate-  If stock closes for higher increase than on any previous up days, usually peak is near.  One would think that these stocks have high momentum in a situation like this one, and will continue to climb higher for a while longer.  However, many times the opposite action of impulses is the best
• Stock Splits more than 2 for 1-  If stock splits 3 for 1 or 5 for 1.  For some odd reason, these high stock splits usually kill the momentum of the stock because with more shares in one's possession, more selling of the stock occurs.
• Get rid of Losers-  Sell worst performing stocks first
• 25% Profits-  After 20% profits unless it has been less than 8 weeks (stocks usually have a correction period about every 25% increase)
• Opposite of the masses-  If there’s an overabundance of optimism
• Bear Market-  Sell short ONLY during a bear market with large number of shares outstanding (very tricky)
• Seasonal-  Stocks generally go down in January

Rules for Trading

1. Discipline

2. Do NOT invest more than you can afford to lose  (i.e.  If you lose all of the investment, will you lose your shirt too?)

3. Invest only in stocks that pass the CANSLIM Test.  Your odds are much better.

4. Remove emotion from your trading.  Be objective.  When you buy a stock, immediately set a price you will sell if it closes that low (about 10%), and set a goal price.  As the stock goes up, increase the floor price (price you are willing to sell at).

5. Don’t invest for the quick buck.  If the risk outweighs the gain, stay out.  Be patient.

6. Don’t be greedy.  Look at the glass that is half full.  If you make money on a transaction, be happy, even if the stock keeps climbing.

7. Sell after about a 20% increase

8. The key to making money is to LIMIT YOUR LOSSES!!!

Quotes to Inspire

 “Never, Never, Never Give Up.”  Churchill

“It’s amazing how much you learn when you lose a couple hundred thousand dollars of your own money.”  Unknown

“When a door closes, a window opens.”  Mary Kay Ash

“Fail Forward.”  [Learn from your mistakes]  Unknown

“Many people think that someday they will wake up in the morning and be instantly rich.  They are half right.  Eventually they will wake up.”  Thomas Edison