20 or 30 years ago there was only one rule for investing… “Buy and Hold”. I learned it in the eighth grade from my father and taught it to my children, but they don’t use it and neither do I really.
Here’s the old rule… You bought your Proctor & Gamble (PG) or General Electric stock (GE) and you held it until you needed it.
You collected that dividend and didn’t worry about the price. The stocks went up and down, but we didn’t have portfolio monitors, monthly statement – they came quarterly – or an online account to look up the price or performance once a week.
You only cared about two points, the
I don’t need to tell you that those times are gone.
There are now three classes of investors.
It doesn’t matter whether you’re trading zero day to expiration options or holding on to those Proctor & Gamble shares to get that quarterly mailbox money dividend, every investor needs a set of rules.
Over the next 5-10 weeks, we’ll go through the set of rules that I’ve put together over the last 35 years of investing. The rules are simple, they can be applied to any investment – Stock, mutual fund or ETF – and following them will help you increase your long-term portfolio returns.
Follow these commandments and your job as an investors will become easier and more profitable.
Let’s hit the First Commandment today…
One of the oldest clichés or sayings in the investing world, “The trend is your friend” is also one of the easiest rules to follow for the average investor and will make a huge difference in the performance of your portfolio over time.
Perhaps Sir Isaac Newton put it best with his First Law of Motion which states that “a body in motion tends to stay in motion.”
Sure, I’m simplifying the situation, but the simple fact of the matter is that stocks that are in a strong trend tend to remain that way until an “opposing force” acts upon them.
In the investing world, that “opposing force” tends to be an earnings announcement, catastrophic event in the market or some other “unusual” event.
My point is that stocks trend more than 80% of the time. They trade in a range the other 20% of the time. Pin down the 80% and the rest is easy.
it’s easy enough to look at a chart to gauge if a stock is in a strong trend higher or lower but being the numbers guy that I am I prefer to quantify the “trend”.
This, of course, gives our quantified models the ability to search through more than 8,000 stocks each day to find stocks that are in a trend, either bullish or bearish.
Our historical testing has resulted in an algorithm that is able to detect a stock’s trend by measuring the slope of the 50-day moving average over certain periods of time to tell whether a stock is trending higher.
Of course, I took this data one step further to test the effectiveness of the “trend is your friend” rule and found the following that is now my “Rule” for trading the trend.
It really is that simple.
Given this, every investor, even short-term traders, should always maintain an eye on a stock’s trend as a reversal in that critical 50-day moving average almost always identify a turning point for the stock that will affect its future performance.
In the name of “keeping it simple”, this is a list of companies that intermediate-term to long-term investors should consider as a strong trend investment.
Each of these companies are trading with a bullish 50-day moving average – as measured by my quantitative model – and above their respective 200-day moving average. This technical combination suggests that each of these stocks should be trading higher for the next 4-6 week and further.
With the same nod to simplicity, the following five stocks are trading with a bearish 50-day moving average, suggesting that the trend is “unfriendly”. In addition, each stock is trading below its 200-day moving average, another technical mark against them.
Following the simple rules, these stocks are likely to continue their bearish trend for the next 4-6 weeks or longer. The list should serve as a warning if you are holding one of these companies’ stock.
