Our Top Stock-Market Signal
Says "Buy"
By Dr. Steve Sjuggerud
Tuesday, May 12, 2009
Get ready. Our top stock market signal is just about to flash a "buy."
And this is big news because going back to the 1920s, this signal's track record is fantastic...
In fact, the last time this signal flashed was December 2007. Back then it said "GET OUT OF STOCKS." It hasn't wavered since... The signal has stood its ground, saying "stay out of stocks," since 2007. Don't you wish you had paid attention to it?
Here's the secret to the market-beating success of this signal: It has a history of keeping you out of the big downturns in stock prices. The signal captures most of the uptrend as well.
Let me share this signal's incredible track record. Our "baseline" is the overall stock market – the S&P 500 Index. This index has compounded at 5% a year since 1926, not including dividends. (Yes, it's true... Most people think the stock market has done better than that. But the recent bear market reduced the historical return.)
When the signal said "be in stocks" – two-thirds of the time – stocks rose at a compound rate of 11% per year (again, not including dividends).
The other third of the time, when the signal said "be OUT of stocks," stocks actually compounded at a negative 6% per year.
This incredibly simple idea comes down to one question: Are stocks above or below their recent average prices?
If stocks are above their recent average, then you want to own them. If they're below it, then you don't want to own them.
When the S&P 500 Index is above its 45-week moving average, stocks compound at an astounding 11% annual rate. And when stocks are below it, they lose money at 6% per year.
Here's a simple graph showing how much money you'd have made since the beginning of 2000 following this system, versus the index. We own stocks above the moving average and move to cash earning 3% (just to keep the math easy) when stocks are below the moving average.
The blue line is the money in our little "system." You're in cash when the blue line goes "straight." The black line is your money if you just held the market (not including dividends).
You can see a few things right away...
The first is, you did significantly better than buy and hold. Most importantly, you cut your losses in the two big falls – the one from 2000 to 2003 and the one from 2007 to today.
With results like these, why doesn't everyone simply own stocks when they're above the line?
Before I go on... there is one small issue here that can eat into your returns... something called "whipsaws." That's when the market crosses over the line one week and then crosses back the next week. The argument goes that the transaction costs associated with jumping in and out on these false signals would eat up your excess gains.
This worry has merit, but you can nearly get rid of whipsaws quite easily by increasing the threshold it takes to get into a trade. When you raise the threshold to enter the trade to 2% above the moving average, you cut the whipsaws down by over 80%.
And even though you've made it tougher to get into a trade, the amazing part is, you don't affect your results much. In this example, not only would you have ended up with more money, but you'd have had far fewer transactions, meaning lower costs.
You might disagree with this system. You might say it's too simple or dumb. But it's worked darn well over the last 80 years... and over the last decade.
And right now, this signal is about to say "buy" – because the old high data points are about to drop out of the 45-week average, and low ones will replace them.
Remember, when it says "buy" stocks rise at 11%+ a year... Ignore it at your own risk.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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THIS POPULAR STOCK IS PRIMED FOR A FALL
Check Family Dollar Stores (FDO) on Yahoo Finance and you'll see nothing but bullish comments and articles.
FDO sells the cheapest stuff in America. Its stores are in the "less desirable" parts of town. Much like the secondary-education sector, folks flocked to FDO last year as a "recession play." Shares gained as much as 80%. Nowadays, just about every analyst and investor loves the stock. Those people are going to lose...
To win in the market, you always have to make the hard trade... the trade that sounds crazy to the average investor. The problem with buying FDO right now is that it's so utterly obvious. It was a great idea last year, when nobody saw rough times on the horizon. Now that everyone "knows" about FDO, it's a sure loser... at least in the short term.
Another dark cloud over the camp of FDO bulls: The stock is declining on huge trading volume and rallying on weak trading volume... and the rally looks "toppy." It's secondary education all over again...
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The post office wants two more pennies for your thoughts. The price of a first-class stamp for mailing a letter – or paying a bill – climbed to 44 cents Monday, though folks who planned ahead and stocked up on Forever stamps will still be paying the lower rate.
It's the third straight year rates have gone up in May under a new system that allows annual increases as long as they don't exceed the rate of inflation for the year before.
The Postal Service, which does not get a taxpayer subsidy for its operations, lost $2.8 billion last year and is already $2.3 billion in the hole just halfway through this year.
– AP
A woman took a package to the post office to mail and was told it would cost $2.40 for fast delivery or $1.30 for slower service.
"There is no hurry," she told the clerk, "just so the package is delivered in my lifetime."
The postmaster glanced at her and said, "That will be $2.40, please."
– Anonymous
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