Investor Spotlight

Monitor and Respect 50 day/200 day Simple Moving Average Lines

Institutions account for over 75% of the total daily trading volume in the US stock market. Most of institutional trading occurs with algorithmic trading by computers. These computers are programmed to scale up or scale down gradually with their stock purchases. We as retail traders and investors do not have these tools to work with. Our advantage lies in being very nimble. We can get in and get out of the market faster than the institutions can. This does require a lot of discipline and holding our emotions in check. Being data driven is the key to preserving your portfolio and profiting in the market. Institutions can not hide their purchases or disposition of stocks. It shows up as either buying volume with the price escalating or selling volume with the price depressing.

One of the simplest indicator that I teach my students is the 50 day and a 200 day simple moving averages plotted on any stock or index charts. Institutions support the Growth Stocks that they are interested in when it touches the 50 day sma(simple moving average). That is also the ideal time for us as retail investors to scale up with our purchases to be in synch with the institutions. Same holds true if the stock or index plummets down the 50 day sma. That is also the time for us as retail investors to scale down our positions. This ought to be all figured out initially with a well thought out Trade Plan for the Stock. It helps in keeping emotions in check and allow your trading system to take control instead.

200 day sma is even more critical for us as retail traders. That's the area that we don't want to be in as a Growth Stock investor. Losses - capital as well as emotional - mount up and it becomes very difficult to recoup those losses. Once the index or stock reaches that level, it can get even lower with institutions covering their short bets on stocks with options. It is best to leave it up to the hedge funds that are "Value Investors" to prop up the stocks and the indexes. For retail investors like us, the best approach is to be defensive and start migrating to CASH as the stock and the indexes begin to slice past the 50 day sma.

Market Outlook

Conditions in the market has taken a turn for the worse in the last 6 weeks. Selling by the institutions has not subsided yet and currently the leading Growth Stock index $QQQ is all the way down to the 400 day sma. We are down by -14.48% since the high reached on October 1st. We have given up all the gains made this year and the $SPY is down -1.50% for the year to date. Its best to stay in CASH for now until the hedge funds that are "Value Investors" come in and start deploying their cash out of the defensive dividend paying $XLP (Consumer Staples) and $XLU (Utilities) sectors into the new leading Growth Stocks.

Where are we headed for the next 6 weeks before year end? We have to be open minded and look at the data. Market could continue selling off and head down to the Feb 9th low. That would be a further loss of - 5% of $QQQ. The 50 day sma is already rolling over and it would head down and start slicing lower below the 200 day sma at that time. In the year 2000 during the dot com bubble burst and the financial crises of 2008/2009, $QQQ got down to $26.30. That would be very painful. It took us 18 years to recoup all our losses from the 2000 dot com bubble. If you were 50 years of age in the year 2000, you can imagine how you would feel if you turned 68 now and be exactly where you were with your portfolio when you were 50.

Ouch ! Ouch ! Ouch!

We also have to be open to another scenario where by the institutions could decide to come back in the market with full force. They may do that to do the window dressing to show their clients that it is worth giving them your money to manage and justify charging you 1% to 1.5% fees. January of this year, $QQQ did manage to perform +9.74% within 4 weeks. We have to be open minded with both scenarios to play out and act accordingly. Right now it is best to be in CASH and let the institutions lead the way. The best thing for retail investors to do now is continue building a strong actionable stock watch list every week. Monitor the performance of the stocks on the watchlist against the leading Growth Stock index $QQQ.

Performance of My 22 Stocks on My Watch List

Its always a good idea to compare the performance of Growth Stocks on your watch list against the performance of the leading Growth Stock index $QQQ. I had posted 8 retail stocks and 14 stocks in health Care sector as possible candidates to initiate a trade once the selling begins to cease. 3 of the retail names - $DG, $FIVE and $OLLI have been taken off the list and 2 of the health care stocks - $EHC and $ILMN as well. They are trading below the 50 day sma currently. Rest of the 9 stocks are hovering around the 20 day sma(weekly chart) while the $QQQ is dragged down all the way to the 400 day sma. These are the stocks that are being help up by the institutions. Here are the results of this weeks performance compared to the $QQQ:

8 Retail stocks : ... - 2.41%

14 health Care stocks: ... - 2.74%

$QQQ : ... - 4.95%

My stocks held up better than the index and stayed close to the 20 day sma. They also have a high RS ratings too. This helps me in making sure that I have only the strongest stocks that are favoured by the institutions. Its all about getting the odds in your favour.

Mentoring Program

Retail traders should never have to suffer a -40% loss that they suffered during the 1987 mid October "Market Crash" or -50% loss during the 2000 dot com bubble or the -58% loss during the last 2009 financial crises. I have learnt that the hedge funds and mutual funds are not equipped to nor can they completely get out of the market during a crash. Its not like they can park their money in a checking account like we can.

Would you like to learn:

How to read the signals that the market gives you so as to avoid the market crash we had in 1987, 2000 and 2008/2009. Learn how to avoid -40% to -50% loss of your portfolio during such a market crash.
How to consistently Outperform the Market like I do?

Schedule a FREE 30 minutes of "Discovery Call" with us to see if you qualify for our program.