PART 1. MARKET TIMING BASICS:

Sounds like a lecture series out of macro-economics 101. If this is too basic for you, don't get offended, just come back another day when we get a little deeper into the nuts and bolts.

This little series will not attempt to give an in depth analysis of all of the things that go into timing a particular stock, fund family or market index, but It will touch on the most important aspects. I'll tell you how I pick those sectors I think are ideal for positive growth, near term, or conversely for dramatic selloffs which can be even more profitable.


Some of the things we will discuss...

1. Cycles in any market

2.Sector and Industry Group cyclical activity

4. How to "detrend" data to get a clear picture of the true cyclical nature of any issue.

4. How to evaluate a single stock or an entire sector or Industry for growth potential.

3. Simple techniques for mechanically timing any issue or market.

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Cycles:

All stocks, funds, indices, sectors, Industries and whole markets go through cycles. If you ask the experts there are 100 year cycles, 30 year cycles, nine year cycles, 4 year presidential cycles, annual seasonal cycles and hundreds more that all overlap; superimpose themselves in an algebraic sum and difference amalgamation that seemingly masks their original nature so completely that fast Fourier transforms have a difficult time reconstructing the original underlying elements. That's far too complicated for the average investor to even think about and is one of the reasons that most investors get turned off with technical analysis.

We don't care. We want to know something far more basic. Are we at a top, a bottom, riding a rising wave of price or plunging down the other side of the precipice. Seems like an easy job. It's not all that difficult, but you have to understand and accept that you are not going to be right all the time. If you can beat 60% right, you will end up a winner, and there is no reason anybody can't do that.

Why do we care about cycles?

If you divide stock price into a wheel or clock, we would like to start our investment at the 6 o'clock position and moving clockwise sell out, (or short), at 12 o'clock and rebuy at 6 o'clock to start the cycle all over again.

Look at price action on a long term chart of any stock and you will see this same scenario played out over and over again. Sometimes it's hard to pick out the clock positions because of outside "noise", or a stock that seemingly climbs forever but a detailed look will show you these cycle changes. Sometimes it is easier to see a pattern of what looks like 2 steps forward and one step back repeated over and over in the life of a stock. This is really just the stock wheel or "cycle" in another form. The other thing that gets in the way of our perception is the overall market when you look at an individual stock or sector. Most times the stock or sector can be moving in tandem with a rising market or forward or flat in a dropping market. This just confuses the appearance of the profit wheel. A sector that is going sideways is actually showing growth if the entire rest of the market is declining and will recover faster once the rest of the market recovers and begins to grow again.

Why are there cycles at all?....Why don't prices just keep going up?

Because the nature of any market, at least in a Western economy, is based on the most primitive of economic forces....

I don't care if we are talking pork bellies or Microsoft stock, it's all the same thing. Supply and demand are easy ones to grasp....most of us picked this principle up in 8th grade or so. There is a finite, (usually), amount of inventory that is available. When there is a lot around, it's cheap; when supply dries up it gets expensive to get some. WOW...that's pretty deep isn't it?


The other elements are more subtle, but equally easy to grasp. The markets are a psychological beast. That's because it is made up of investors who put their own emotions into it, (and I don't care whether you are a college freshman investing your first $1000, or a money manager with $50 Mil under your belt, it's all the same).


The markets, any markets, oscillate between greed and fear fueling supply and demand. Some times these things are in sync and support one another; while at other times they are completely out of phase and it is seemingly impossible to figure market direction unless you dig a little deeper.

Let's follow the progression of a stock that is just starting out with its first public offering or IPO.

First, market makers froth up the stock prior to the IPO hoping for a combination of good press, a favorable market, a lot of external hype and hope and a tremendous amount of pressure selling from within their ranks to insure the offering is well received and over-subscribed by the time it hits the street.

Smart money, if it is a good offering, (notice I didn't say quality company or 0-60 profitable), get in before it ever appears on the trading tickers. People who have bought at this level ARE NOT long term investors. They DO NOT have loyalty to the company or the concept. They WILL be gone as soon as their greed gland has been sated. Look at most any stock chart that is less than two years old. With most all of these you will see the same pattern if the stock has any "story" at all.

If the issue really has any merit after some period of base building, (6 months to two years), where the stock shows it really is worthy of producing profits, growth or renewed hope for shareholders, a slow but steady return to initial highs. If its a lousy company, it never comes back, but we are looking for a quality stock.

This is where the stock can form the fabled cup, or cup and handle pattern. This is nothing more then the stock achieving old highs by proving itself with real earnings and growth. The handle retreats we see are many times the result of those early investors breathing a sigh of relief and "dumping" their stock to get even, (with a sigh of relief). If only they knew, this is the time when the stock can REALLY grow and is the time they really should be considering buying more!! let's face it, if this stock was a junker that over the course of two years has pulled itself out of the trash; produced real earnings; earned the respect of the institutionals and PROVED the hype, isn't it now worthy of a purchase? ....isn't this why you bought it in the first place?


Next report.....How the cycle "wheel" turns with mature stocks, funds and markets.....I'll add this section in the next day or two....

GO TO SECTION 2

USING THE CYCLE "CLOCK" TO TIME SECTORS, FUNDS AND INDUSTRIES