THOMPKINS FINANCIAL ADVISORY SERVICE |
WHEN TO BUY (MARKET TIMING) |
This activity (determining the day that the market should be entered - market timing) is implemented using five simple daily moving averages (two short term, one intermediate term and two long term) and a composite indicator. A moving average smoothes out the day to day price fluctuation of a security (mutual funds, stocks, bonds, etc.) and the longer the moving average the greater the smoothing. We use the moving averages to establish the direction in which the market is trending (up, down or sideways). In the case of a buy signal, we are looking for a market that is trending upward and the opposite is case for a sell signal. We use trend analysis to tell us when to get in an out of the market because our research has led us to the conclusion that 85% or more of all stocks and mutual funds issued or managed by American Companies move in the same direction most of the time. The exception to this statement are the Gold, Precious Metal and Bonds which usually move in the opposite direction. Therefore, the probability of making a handsome profit is greatly improved if we buy when the market exhibits a rising trend and sell when the market exhibits a declining trend. The composite indicator measures market breadth and indicates the broadness of the market trend (It can be equated to a rising tide which lifts all ships). The composite indicator is derived using the ratio between the number of stocks making new lows for the year and the total number of issues for the day. The composite indicator oscillates between zero and one and very low readings indicate that the market advance is very broad in scope whereas high readings indicate that the market decline is very broad. The moving averages and the composite indicator are calculated and graphed for each of the three indices (NYSE, NASDAQ, AMEX). Based on the closing price of each index relative to its associated five moving averages and the value of the corresponding composite indicator, a buy signal is determined. We are looking for two of the three indices to exhibit a rising trend and two of the three composite indicators to reflect a broad market advance which indicate that a large number of stocks are participating in the up trend. Since this is a trend following system, our entry into the market will not be at the exact bottom (the market would have advanced from its lowest point); however, our system is designed such that only a small part of the market advance will be missed. . |
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