Last night, I taught a 3 hour continuing education class. The title was The 5 Essential Principles of Successful Stock Market Investing.
I made the opening remark that if you don’t know these 5 principles and you are not implementing them, you cannot succeed. But, if you do know these 5 principles and implement all 5, you really cannot fail!
The 5 Essential Principles are: 1. Always know what kind of market you’re in. 2. Know what to buy. 3. Know when to buy. 4. Know when to sell, and 5. Have a specific investment goal.
The first is to know what kind of market we are in, and there are 3 possible choices. We are either in a Bull, Bear, or transitioning market. A Bull Market exists when these conditions are in place. The market’s price, usually the S&P 500 Stock Market Index is up-trending, as evidenced by the use of 2 simple moving averages. If a 50-day and 200-day moving average for the price of the 500 are both up-trending, with the 50-day trending above the up-trending 200-day… you’ve got a Bull Market going on.
Conversely, when the price of the 500 is down-trending, and the 50 and 200-day moving averages are both down-trending, with the down-trending 50-day below the down-trending 200-day… you can be pretty sure there’s a Bear Market going on.
A transitioning market will always have these 5 characteristics about them. First, the price of the S&P 500 will pierce its own 50-day moving average to the downside. Two, the 50-day moving average will cease to trend upwardly, and commence to turn down. Three, the 50-day moving average will decline down thru the 200-day moving average of the price. Fourth, the price will decline down through its 200-day moving average. And fifthly, the 200-day moving average will also roll over, and commence to trend downwardly. There is a common sixth characteristic, but it is not necessary. Often the price will rise again, up through its now down-trending 50-day moving average, all the way back up to its now down-trending 200-day moving average, but will not be able to successfully rise above its 200-day average, and from there, roll back over, and commence to decline rather precipitously. This action serves as a confirmation of a newly emerged Bear Market.
The transition from a Bear to a Bull Market is the opposite. First, the price of the index will rise up through its down-trending moving average. Second, the 50-day moving average will begin to turn up. Third, price will proceed to advance up through its own down-trending 200-day moving average. Fourth, the now rising 50-day moving average will rise up through a still down-trending 200-day moving average. Fifth, the 200-day moving average will reverse course and become an up-trending line. At that point, price, and its 50 and 200-day moving averages will now be up-trending once again… and, a newly emerging Bull Market will have been given birth. Sixth, and again, not necessary, but price will often decline again, and find that its newly up-trending 200-day moving average becomes a place of price support where it launches back from off of, and serves as a confirmation that the Bull is back.
Next, I’ll elucidate upon what to buy.
Here’s to your successful investing!
Harold F Crowell