Signs of Market Topping?

Here comes another possibly futile exercise in chart reading.

All four major indexs, the dows, s&p, nasdaq and nyse composite are showing signs of selling off with increase volume.

Perhaps, at the very least, it is time to take profits on stalwart or slow grower stocks, particular those that are on leverage.

Notes from Chapter 5, "The Defensive Investor and Common Stock"

One of my favourite book is "The Intelligent Investor" and chapter 5 describe principles that a defensive investor (one who wish to be free from worry, in other words, passive) should look for.

4 rules were prescribed

1. Diversification of between 10-30 securities
2. Companies involved should be large and modestly-financed. This means a certain amount of market capitalization and manageable debts
3. A long record of dividend payments. 20 years might be a good start.
4. PE of average earnings of less than 25, no more than 20 for the Trailing-Twelve-Months (TTM) PE. Note the term "average earnings." Earnings tend to fluctuate all the time, hence an average PE might make more sense especially when a company might have only 1 good year out of 5.

The idea of Dollar Cost Averaging (DCA) is also broached, with almost guaranteed satisfactory return at the end of such implement, despite liquidating on a bad year.

The excellent commentary by Jason Zweig talks about the danger of "buying what you know" (made famous by Peter Lynch) without making the necessary research. Complacency in buying stocks, especially if it is something familiar to you, is nefarious as an investor.

DCA into index funds is stressed once again, as disciplined buying will enable one to have gains even during the worst bear market.

Calling Market Tops? I won't try.

Lying among my favored "The Intelligent Investor," "One Up on Wall Street," and many others is a book on momentum investing, "How to Make Money in Stocks" by the legendary William O'Neil. Mr O'Neil is a mentor to David Ryan, multiple winner of the U.S Investing Championship.

In summary, this book talks about

• various chart patterns that will lead to an explosive increase in prices (cup with handle, tight flag, etc)
• stocks that react accordingly usually have the attributes of C.A.N.S.L.I.M

What is more interesting to me is that the book claims to be able to tell market topping just before a major decline. Re-reading what was said in 2000-March, it cited 3 days (not consecutive) of warning signs. The only takeaway for me is to be careful of dojis, and stay focus on volume increases (even though the example wasn't really obvious!) that result in a drop... this is highly confusing and definitely happening all the time.

The 3 indexs, SP500, DJ and NASDAQ is lay down below:

I can only note that towards the end of July, the Nasdaq and DJ were inversely correlated.
On the whole, I could only point out 2-August as a possible red flag.
August 8-10 was extremely worrisome, but like how the market will often make a mockery of us, August 11 was a bullish movement.

Volume for the past two weeks wasn't spectacular, the last trading day, 19-Aug, was a typical hammer but there wasn't any discernible trend going on.

Predicting market movement is as tough as nails.

Self Doubt

Very few of us can beat the index. Yet much of us spend a lot of time analyzing companies, looking at stock charts and reading news, in an effort to move closer to our goals.

Once, a dear friend asked me, “What is your investment target?” I don’t have much positive traits but I think my honesty outweighs my humility, and I replied that I simply have no idea.

I do not have a quantifiable target, nor do I have a relative target. What that means is that I do not have a numerical target for returns (i.e. “I want 15% returns this year!”), nor am I seeking a >2% return better than the index.

I am only 10 months into this game and I am too early to set a target.  Even legendary investors have years, at times consecutively, have lost to the index, or even worse, lost money.

So why am I,

… son of labourers with no experience in investing,

… not financially trained (I had a diploma in a computing field, and a degree in liberal arts),

… not in the finance industry

... a lowly paid IT-support staff in a local university, with no insider knowledge in the finance or financial education industry,

… having no dealings with people of finance or high social standing

…doing in the stock market?

There are numerous times that I questioned my investing abilities.

“What if I am wrong?”

There are times earlier that I do capitulate and suffer from “break-even-itis” (selling at break even prices and proceed to watch the stock soar).

My friends had berated me for being negative. Will I able to get a grip during a bear market?

Investing is a testy proposition. The stock market can taunt you, rock your confidence, and sour your moods. 

You can feel like the loneliest person around.   

Your friends will question your intelligence. 

You go home to your loved ones and wondered if you can ever repay the faith or effort they have invest in you.

I can only have faith.