Read an Excerpt
CHAPTER 1
THE BEAUTY OF PHASES
Would you like to make your financial decisions with a new level of consistency and certainty? What if you no longer had to rely on the talking heads, analysts, financial planners, or your smart next-door neighbor to help you decide when to buy a house, borrow money, change career paths, or get involved in the stock market?
If you are like me, living in a world that moves so randomly that all of the conflicting information flying at us with blinding speed further confuses you, then you seek simplicity and certainty.
Yes, the market is complex. Yet I have spent more than thirty-five years studying both big (macro) and small (micro) trends. The six phases of the market have successfully guided me and, by extension, the thousands of folks I have taught and continue to teach during seminars and webinars, as well as through e-books, my daily blog, and social media. The six phases are as follows: Bullish, Caution, Distribution, Bearish, Recuperation, and Accumulation. I will cover how to identify and use each phase to make money decisions fully in ensuing chapters.
Another way to think about these phases is to see them as six pictures that tell six stories and evoke six different emotions. Each of these six stories/emotions influences every aspect of your life. How money flows directly and indirectly affects us all. The six stories help you identify changes you need to make, when to make them, and how to proceed. Once you identify the time to make a change, each story sets you up with specific guidelines to follow. These guidelines give you the knowledge and the autonomy to make intelligent decisions that could make your and your family's lives a lot better!
Phases in the market cycle occur as inherently as they do in nature. If you know what the phase or cycle is, you have a road map for what to do. We all know that you don't plant when the ground is frozen. Depending upon where they live, most people plant sometime after Mother's Day. This is a guideline of nature.
The same is true with the inherent nature of market phases. If you know which phase the market, any sector of the economy, or the stock of the company you work for is in, you will know when to put money in the bank or stuff it under a mattress. You will know the best time to buy a house and which field of study has potential for your kids to pursue as a career. You will know when to invest (or not). You will understand what your IRA and 401(k) accounts are doing and why. That's the simple power of reading and interpreting these six stories I am calling "phases."
The concept of phases and Moving Averages is not new. Charles Dow, cofounder of Dow Jones & Company and founder of the Wall Street Journal, also invented the Dow Jones Industrial Average (DJIA). He laid the groundwork for technical analysis and was the first to talk about phases. Dow used four: Accumulation, Public Participation, Distribution, and Panic. Richard D. Wyckoff, in 1931, developed the Wyckoff Method, which uses four phases making up cycles for stocks: Accumulation, Markup, Distribution, and Markdown. In 1937, during the Great Depression, Sir John Templeton (known as one of the top stock pickers of all time) pegged four different phases: Pessimism, Skepticism, Optimism, and Euphoria. In 1988, Stan Weinstein wrote his Secrets for Profiting in Bull and Bear Markets. Weinstein uses "Stages": Basing (similar to our Recuperation Phase), Advancing (like the Accumulation Phase), Top Area (similar to our Caution Phase), and Declining (like Distribution). Weinstein uses a 30-week Moving Average for long-term investing. This book widens the time period out to 50- and 200-week Moving Averages (50- and 200-WMAs) for investing and other money decisions.
More recently, Laszlo Birinyi, an investment professional, identified four phases: Reluctance, Digestion, Acceptance, and Exuberance. Chuck Dukas, in The TRENDadvisor Guide to Breakthrough Profits: A Proven System for Building Wealth in the Financial Markets, writes about six market phases: Bullish, Warning, Distribution, Bearish, Recovery, and Accumulation. Dukas likewise employs the 50- and 200-period Moving Averages. Many other traders have used the 50- and the 200-day Simple Moving Averages to make trading and investing decisions. For example, William O'Neil, founder of Investor's Business Daily and author of How to Make Money Selling Stocks Short, chiefly uses the 50- and 200-day and -week Moving Averages to determine how poorly or strongly a company's stock is behaving.
Compiling from the masters, I take the concept of phases and Moving Averages to another level. As each of these mentors talks about phases referring to stocks and the financial markets, I show you how to use the phase's road map to gauge how and when to make all money decisions. I point out six specific instruments that represent the most salient features of the U.S. economy and show you how to identify each phase, which helps you make informed money decisions. Furthermore, I identify the corresponding human emotions tied to each cycle or phase.
How do you identify a phase? We all learned how to read a bar chart in school. This process is no different, except it comes with the sensibility of a special education teacher. I rehash the same elementary school lessons you learned about reading bar charts and show you how to apply this knowledge to making sound financial decisions. Reading bar charts is just like reading a compass. A compass has two needles. We all know how to look at those two needles on a compass to see which way is north, south, east, and west. All the bar charts I illustrate have two lines. Like a compass, those two lines will help you identify the direction, cycle, and/or phase of the economy. Those lines will serve as your compass so you always know when to make the most appropriate financial decisions.
Identifying the phase of six different bar charts will give you all the information you need. You will have as much, if not more, expertise about making financial decisions as the professional analysts and fund managers have. No more disconnect because of a lack of understanding that leads to fear. Fear is a result of confusion. If you prepare for the bad and the good phases, there is no need for fear. Being prepared to cut back or push forward as needed because you can read the phases yourself is empowering on so many levels. Regardless of your income level, it's easier to improve your life when you can make educated decisions.
I am a special-education-teacher-turned-trader who still teaches. I manage money and trade recommendations in a state of calm because I know what's before me and what that implies for the future. I can't control what happens, but I can and do control my attitude about what is and what will be. I make all my financial decisions based on these six stories.
In this book, I illustrate the simplest way for you to do the same. It begins by first identifying which of the six phases any aspect of the economy, the market, or a company is in at that moment. The formula is as easy as reading two lines on a chart.
CHAPTER 2
MOVING AVERAGES — A UNIVERSAL LANGUAGE PLANT YOUR MONEY TREE
Everything you need to learn to take you from a state of confusion to a state of empowerment begins with two basic concepts: Moving Averages and phases.
What's So Important about Averages?
Try going a day without some thought about an average. Average calories you should eat per day; average temperature for the month in your town or the place you want to go to visit. Or, for you baseball aficionados, how about batting averages? Have you thought recently about the average life span of a man versus a woman? Perhaps the average life span of different breeds of dogs might influence which breed you will adopt. Have you ever tried to buy anything on credit? That's right, you are financially judged on your average credit score. Do you have a child about to go to college? If so, I'll bet you are thinking about the average SAT score that he or she will need before applying to schools.
Merriam-Webster's Dictionary defines an average as "the sum of a list of numbers divided by the number of numbers in the list; a number expressing the central or typical value in a set of data."
The basic premise of this chapter is to familiarize you with Moving Averages. Given a time series, such as daily stock market prices or yearly temperatures, people often want to create a smoother series. This helps show underlying trends or perhaps periodic behavior. These mathematically based averages have a statistically high probability of taking lagging data to predict future movement.
Before I cover the basic and simple premise of Moving Averages, I'd like to tell you a little bit about Newton's laws of motion, railway engineering, and how simple physics is a concept we all know intimately because we live with it every day, and it impacts everything we have come to take for granted. Nothing I cover in this chapter is new to anyone. We all learned about Newton's laws in our early grades in school. Some of us might have been paying closer attention; therefore, I dedicate this chapter to those who may have snoozed through physics classes thinking, "What does any of this have to do with my life?"
The truth is that the simple concepts of physics work their way into our lives in multiple ways. The creation of the internet is largely due to physics. Without physics, there would be no smartphones, laptops, microwave popcorn, beer foam, architecture, mining, and fuel consumption — hence, nothing to power planes, trains, and automobiles.
I am not suggesting we need to become physicists to grasp the concept of Moving Averages and phases; yet it is important that you accept simple physics as the cornerstone of understanding Moving Averages. From there, we have the necessary framework to identify all of the market phases. After all, isn't it comforting to know that what I am offering you in its simplest form is based on math and science that goes back hundreds (if not thousands) of years? Would you want to put your faith is something that has not been proven over time?
Laws of Motion
Sir Isaac Newton (1643–1727), an English physicist and mathematician, formulated three basic ideas about motion — his three laws of motion. Newton's laws are very important because they tie into almost everything we see in everyday life. A perfect example is driving a car. In order for a car to move, there must be friction between the wheels and the ground. The wheels exert a force on the ground because they are spinning, and the ground creates a reaction force on the wheels. This force pushes the car forward. So thank Newton's law of action and reaction every time you drive!
Newton's first law states that an object at rest tends to stay at rest, and an object in motion tends to stay in motion. If there is a lack of motion, nothing will change until something or someone applies force to engender motion. Furthermore, Newton gathered that once one applies the necessary force to put something into motion, that something will move in that specific direction until another, stronger force stops that motion.
This theory also applies to Moving Averages and the movement of prices in the stock market. A stock that doesn't move up or down very much will stay at rest until something compels it to move. For instance, if an analyst says to buy or sell a stock because the company's earnings are far beyond or below expectations or the company is being bought by another company, these factors can become the "force" that puts the stock in motion.
Newton's second law says that the acceleration of an object relates to the applied force or magnitude of the force, and there will be different accelerations (changes in motion) depending upon the size or mass of that object. This is a pertinent law for physics but has little to do with our purposes in describing Moving Averages.
The third law states that for every action (force), there is an equal and opposite reaction (force). This is easy to picture; when air rushes out of a balloon, the opposite reaction is that the balloon flies up.
The third law relates to an event that could have an opposite and equal force on the market's action. For instance, war breaking out could act as the balloon mentioned here. Hence, if the reaction is to force the market into fear, the action will be that the market participants rush out of the market. With a Moving Average, the reaction to a watershed event may force the price to test, surge through, or break down from that Moving Average.
Trains and Moving Averages
Fascination with trains has never been my thing, aside from dreaming about a romantic train ride through a cityscape such as the one depicted in the 1983 film Risky Business, starring Tom Cruise. For me, that was the best scene in the film. Through photography, music, and editing, the director created an almost abstract world.
My purpose here is to take what many may perceive as an abstract concept and reshape it into something concrete and incredibly easy to use. After all my years in the investment business, I've concluded that the simplest way to empower someone in making objective, informed, and sound decisions about most financial concerns is to look at two Simple Moving Averages (SMA). A Simple Moving Average is the average of a stock's closing prices (minute, hour, day, week, or month) over a certain period. The shorter-term SMAs are faster to respond to market action than the longer-term SMAs. For this book, I primarily use 50- and 200-week Moving Averages (50-and 200-WMAs).
Using trains to explore simple physics will make Moving Averages concrete, sexy, and, well, something we all can pleasurably and easily imagine.
Two concepts to consider regarding trains and physics:
1. If an object is moving, it has momentum (speed); consequently, increasing mass, velocity, or both increases momentum.
2. Trains vary in mass; mass coupled with the direction and angle of the slope the train is traveling on will determine whether it will pick up or lose momentum.
A freight train is typically massive. When you see one moving along the tracks parallel to your car as you drive, compared to the speed you are traveling, it looks like the train is barely moving. But that train has built up momentum so it can keep moving. As the engine (front of the train) starts moving, it pulls on the first car before it feels the weight of the third car or any behind it. This gives the engine its own momentum plus that of the second car to begin pulling the third. This continues down the length of the train, using the constantly increasing overall momentum until all of the cars are moving.
Now imagine two trains moving — one with 200 cars, and the other with 50 cars. If momentum is a measure of mass in motion, then a 200-car freight train will have a different speed from one with 50 cars. Why? Because momentum equals mass times velocity.
If scientists calculate momentum by multiplying the mass of an object by the velocity of the object, it provides an indication of how hard it would be to stop the object. The longer the freight train, the longer it takes to stop. Therefore, an engineer of an Amtrak train applies the brakes long before the train arrives at the station to ensure the train will come to a halt at the station, while the engineer of a small-scale train at an amusement park applies brakes just moments before entering the station.
Do you remember Newton's first law of physics? It said that without interference, any object moving would continue moving.
That idea applies to momentum as well. The momentum of an object will never change if left alone.
What Do Trains, Sir Isaac Newton, Mass, Momentum, and Speeds (Velocity) Have to Do with Moving Averages?
A Moving Average is the most widely used indicator (datasets that use statistical formulas that tell you about the health of different markets, groups, and related stocks). Moving Averages smooth out price action over time, and by taking the average closing price for the last 50- or 200-week periods, you can more readily identify a trend or phase. From past price action, it becomes more statistically viable to forecast future price action.
Before I go any further, the term technical analysis refers to multiple methodologies for forecasting the direction of prices through the study of past market data, primarily price and volume. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time.
Forecasting direction is naturally open to interpretation. Experienced investors who use technical analysis will use a variety of indicators in addition to Moving Averages. For our purposes, I have found that simple is not only better for a novice but also the easiest way to understand how one makes predictions. The constant blast of information available goes beyond overkill. Then add interpretations or "opinions" and it leaves you feeling numb, confused, and alienated.
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Excerpted from "Plant Your Money Tree"
by .
Copyright © 2019 Michele Schneider.
Excerpted by permission of Rowman & Littlefield Publishing Group, Inc.
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