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Everything you need to know to understand and profit from the unwritten rules of Wall Street
Investors have long relied on unofficial rules--"Buy on the rumor, sell on the news," for example--to help with their decision-making. Stock Market Rules, Third Edition, analyzes fifty of these maxims to tell you ...
Everything you need to know to understand and profit from the unwritten rules of Wall Street
Investors have long relied on unofficial rules--"Buy on the rumor, sell on the news," for example--to help with their decision-making. Stock Market Rules, Third Edition, analyzes fifty of these maxims to tell you which really work, which used to work but don't anymore, and which are and always have been dangerously wrong.
Beyond just explaining these rules, however, market veteran Michael Sheimo uses them to help you grasp the finer points of stock trading. Examples include:
Revised, updated, and packed with valuable information and analysis on how to profit in today's fast-moving markets, Stock Market Rules, Third Edition reveals the real truth behind what everyone is saying. It will provide you with market-proven techniques and insights that will dramatically improve your investing knowledge, confidence, and results.
Get Information Before You Invest, Not After
Most of the complicated aspects of our lives could be improved by gathering information before taking action. Asking why and digging deeper for information is an inconvenience because it calls for analysis, thought, and the formation of a conclusion. These activities take time and energy, and they can often lead to confusion and frustration. To avoid these problems, we mainly depend on the wisdom of others or adopt a shoot-from-the-hip approach to investing.
Depending entirely on the wisdom of others or shooting from the hip can lead to many misunderstandings. Misunderstandings cause bad timing and poor strategies. Investment advice can be helpful, but it can be even more useful as a point of reference, a second opinion, rather than being accepted as the only approach.
In the stock market, the odds of doing well are improved for the investor who becomes familiar with the current action of the market and the particular stock of interest. Becoming familiar with the action can be accomplished by asking why: Why is the market making this move? Why is the stock an attractive purchase now?
The stock market is a continuous auction, with the same product being bought and sold every business day. If there are more buyers than sellers, the market and prices of individual stocks rise. If there are more sellers than buyers, prices fall. It's that simple.
But if it's so simple, then why does it seem so complicated? Why are all these investors buying and selling stock? If they're investors, shouldn't they all be buying and holding stock for its investment value? Why are people surprised when the stock market drops a few hundred points? Does a severe market correction mean the economy will take a nosedive? The newscasters always say the stock market forecasts the economic situation six months to a year away. So what gives?
The most important fact to remember is that the stock market always trades in anticipation of future events. Often, investors are looking ahead six to 12 months, but (and here's the kicker) not always. If the Dow Industrial Average is down 50 points or more, the major, professional investors couldn't care less about what might happen in six to 12 months. They are concerned only with what might happen in the more immediate future, that being the next 10 minutes. The faster the market drops, the shorter their focus becomes. The believers of doom and gloom busily pat themselves on the back for being correct, and those who know better take a more moderate stance. Thankfully, it usually takes more than an over-correction in the market to cause an economic recession.
Real, Imagined, and Fabricated Factors
A real factor motivating stock market buyers or sellers is money—specifically, the availability of money. Money availability, as it changes with a movement of the interest rates or the earnings of corporations.
An imagined factor can be the respected opinion of an economist or market analyst as to the current strength or weakness of the stock market.
A fabricated factor is the merciless hammering of computerized sell programs. The sells are often implemented with the intent of testing market strength by pushing the market down as far as possible. "As far as possible" is a point that is reached when buyers enter the scene and stop the decline; that point is called support.
On June 2, 2001, these factors came into play and made a turn in the Primary Trend of the Dow Industrial Average and other major indexes. The Dow dropped 3,101 points before reaching support and starting the recovery. It did a retracement to the 10,635 level, turned and started down again, this time dropping to the 7,423 point level (Figure 1-1).
Dow Industrial Average, 2001 to 2004
Investors who noticed the turn in the stock market by observing the daily decline in the Dow Industrial and Transportation Averages, and who listened to the market opinions given by many analysts before June, would likely have taken some protective action. Market anticipation had been fueled by interest in tech stocks. Once the tech stock bubble came to a sudden halt, so did the market rally. The market correction was more severe than expected due to strong selling effects of programmed trading. Some would say the market became oversold, as shown by a quick recovery.
Nasdaq and Standard & Poor's 500 Indexes
These indexes (Figure 1-2) performed a similar maneuver, turning, going flat, and then starting a downtrend. All three indexes showed a similar trend, with frequent secondary rallies. All three groups of stocks turned and crossed the trend line in the fall of 2002. The following year had a strong uptrend for the majority of stocks.
STOCK MOVES: DOWN
Buying a car, a computer, or a new television, only to see it on sale the following week, can be a big source of irritation. Of course, the same holds true for stocks. To pay $52 a share one day, then to hear some negative news and see a price of $42 the next week, is not a pleasant experience. If the investor's research and selection are valid, the price will probably recover and move to new highs. But the price damage on the way down can be difficult to endure. An interesting phenomenon can occur with a stock price that appears to keep on dropping.
As the price declines, investors will appear to buy up shares at perceived bargain prices. If enough of these bargain hunters appear, they can stop the price drop, but sellers might overpower them. Bottom is where the price stops declining and goes flat or begins to retrace its upward trend. The bottom shown in the chart in Figure 1-1 was reached at 7,552.1 in the Dow Industrial Average on March 12, 2003.
On Sale, Limited Time Only
Many investors consider a market "dip," "pullback," "correction," or "bear market" a buying opportunity. The price is lower, the stock's on sale. The reasons for a price decline can be serious; lower earnings or estimates are predicted, credit ratings are lowered, or a possible lawsuit or tax problem has developed. The reason for a price decline might not be so serious: market correction, profit taking, employee stock distribution, or no news-related reason at all. Whatever the reason for a stock price move, it can be worthwhile to find out why it is moving before investing.
Information about a stock in question can be obtained from the news media, the Internet, or by calling the company directly. Calling the company might be difficult if hundreds of other investors are trying to do the same thing. Often calling the stockbroker or checking a news service on a computer will provide the answer. Learning why a stock is declining in price can enable the investor to form a strategy of buy, hold, or sell.
STOCK MOVES: SIDEWAYS
Again, ask questions and search for answers. Why isn't the stock price moving? If other similar stocks and the market are doing well, there is a reason for a lack of movement in a given stock. Has there been bad news recently that has created a lack of investor interest, or is the stock currently a gem waiting to be discovered?
Although rare, undiscovered gems can experience dramatic price surges with even a small amount of publicity. Some investors follow a strategy of seeking out these gems, but often they end up with well-run companies that the market doesn't like. Usually they are basically good companies with limited growth potential. Major investors search for companies with
Excerpted from STOCK MARKET RULES by Michael D. Sheimo. Copyright © 2005 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
PART I: Research
1. Get Information Before You Invest, Not After
2. Price Doubling Is Easier at Low Prices
3. Good Companies Buy Their Own Stock
4. Heavy Volume, the Price Rises—Light Volume, the Price Falls
5. Watch the Bellwethers
PART II: Analysis
6. It's Always a Bull Market
7. Look for Divergence in Trends
8. A Trend Remains in Force Until It Changes
9. Look for Insider Trading
10. Know the Best Type of Order
11. Institutions Show Where the Action Is Now
12. It Depends on Support and Resistance
13. There Is a Bear Market Coming
PART III: Strategy
14. Invest According to Objectives
15. Sell the Losers and Let the Winners Run
16. Buy Low, Sell High
17. Buy High, Sell Higher
18. Sell High, Buy Low
19. Never Short the Trend
20. Make Winners Win Big
21. Buy on the Rumor, Sell on the News
22. Buy the Stock That Splits
23. Buy on Weakness, Sell on Strength
24. It's Better to Average Up Than Down
25. Buy on Monday, Sell on Friday
26. Buy Stock Cheaper with Dollar Cost Averaging
27. The Perfect Hedge Is Short Against the Box
28. Diversification Is the Key to Portfolio Management
PART IV: Trading
29. Never Short a Dull Market
30. It's Best to Trade at the Market
31. Never Buy a Stock Because It Has a Low Price
32. Buy the Dips
33. Order Modifications Might Cause Delay
34. Avoid Overtrading
PART V: Good Ideas
35. Follow a Few Stocks Well
36. Never Get Married to a Stock
37. Act Quickly, Study at Leisure
38. Records Can Make Money
39. Invest in What You Know Best
PART VI: Caution
40. Give Stop Orders Wiggle Room
41. Indicators Can Meet Overriding Factors
42. Beware the Penny Stock
43. Be Wary of Stock Ideas from a Neighbor
44. Heavily Margined, Heavily Watched
45. Beware the Triple Witching Hour
PART VII: Surprises
46. Avoid Heavy Positions in Thinly Traded Stocks
47. Fraud Is Unpredictable
48. There's (Almost) Always a Santa Claus Rally
49. A Stock Price Splits When It Gets Too High
50. Join the Club
Posted July 19, 2005
Absolutely terrific...Stock Market Rules, (Third Edition), analyzes and explains fifty axioms (the rules) to tell you those which really work, the ones which used to work but don't anymore, as well as the axioms which are now and always have been terribly wrong. Beyond merely explaining these rules, Michael D. Sheimo uses them to help the reader learn about stock trading. This is extremely helpful to the beginning investor, as well as the investor who's been at it for a while. Filled with useful information and analysis on how to invest in today's fast-moving markets, Stock Market Rules, (3rd Edition) reveals the truth of what has been said and is still being said. It provides techniques and ideas that can improve your investing confidence and results. Here are a few of the gems: Rule #3: Good Companies Buy Their Own Stock (not necessarily) Rule #2: Price Doubling Is Easier At Lower Prices (just not so) Rule #9: Look For Insider Trading (you can too, Martha) This book is excellent now as it was in the past and will be in the future. The short, quick, clever chapters are easy to read and memorable.
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