“Stock Market” is a term that is used to refer both to the physical location for buying and selling stocks, and to the overall activity of the market within a certain country. When you hear “The stock market was down today,” it refers to the combined activity of many stock exchanges.

The major exchanges in the US are the New York Stock Exchange (NYSE), the American Stock Exchange (Amex), and NASDAQ.

The correct term for the physical location for trading stocks is the “Stock Exchange.” A country may have many different stock exchanges. Usually a particular company’s stocks are traded on only 1 exchange, although large corporations may be listed in several.

Investing Around The World

There are stock exchanges located throughout the world, and it is possible to buy or sell stocks on any of them. The only restriction is the oparating hours of each exchange. Both the NYSE and NASDAQ, for example, operate from 9:30 am to 4:00 pm Eastern Time, Monday through Friday.

Other exchanges have similar opening hours based on their local time. When you trade on the Hong Kong Stock Exchange, your order will be executed sometime between 9:30 pm and 4:00 am New York time.

The locations of the major stock exchanges of the world are:

Japan (Tokyo Stock Exchange)

India (Bombay Stock Exchange)

Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange)

the People’s Republic of China (Shanghai Stock Exchange)

United States.

Stock Market Fluctuations

The economic health of a country will strongly influence its stock market. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downturns in the economy. When inflation and unemployment are rising, stock prices are usually falling.

Stock price fluctuations are also driven by supply and demand, which in turn are dependent to a great degree on investor psychology. Seeing a stock price rise rapidly can cause investors to jump on the bandwagon, and this rush to buy drives the price up even faster. A falling price can have a similar effect in the other direction. These are short-term fluctuations. Stock prices tend to normalize after such runs.

The stock exchange is only 1 of many opportunities for people to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.

FOREX: World’s Largest Market

The FOREX is the biggest (in terms of value) investment market in the world. FOREX traders buy 1 currency against another and can profit from small changes in currency value. Most FOREX trades are entered and exited in 1 24-hour span, and traders have to keep a close watch on the market in order to make profitable trades.

The Futures Market

The Futures Market is a market of contracts to buy and sell certain goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value.

Most investors in the futures market are not interested in the actual goods — only in the profit that can be realized from trading the contracts.

The Options Market

The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. These options can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.

Stocks: Low Risk, Long-Term

All 3 of these markets are considered quite risky without considerable knowledge and experience. They also require close monitoring of market movements. Stocks, on the other hand, are less risky because movements of the market are usually more gradual. Although short-term investment strategies are possible, most people view stocks as long-term investments.

Visit FOREX Trading to learn more. Ron King is a full-time researcher, writer, and web developer. Copyright 2005 Ron King. This article may be reprinted if the resource box is left intact.

Article Source: http://EzineArticles.com/?expert=Ron_King

Fundamental analysis.

Fundamentals analysis says the best way to predict the future trends of a stock is to understand the financial figures of the underlying company. The fundamental analyst would calculate a theoretical value of the company using cash flow analysis, recent dividends and earnings, future dividends and earnings projections plus a host of other economic numbers. If the current stock price is lower than the calculated value, a trader who uses fundamental analysis would buy this stock.

This writer has the opinion that fundamental analysis is difficult to master for it to be useful as a forecasting tool. Understanding and analyzing balance sheets and profit and loss accounts is not enough. You will need to analyze the micro and macroeconomic picture as well. Often you will need to be have the same knowledge equivalent to senior-management of a company you want to analyze – minus the leadership and management skills.

Take the example of Google’s free 2 GB e-mail service. How much does it cost them? Probably about $2 yearly for each customer. Assuming 100 million internet users sign up, the advertising revenues from this segment alone would provide a tidy profit. It is the analyst job to provide a good educated-guess of this number. More importantly, this new signings will provide a customer base to challenge Yahoo and Microsoft. With Google’s dominance in the search engine market, the data mining of such a huge pool of internet users will provide them with an edge in deciding future strategies over its two nearest rivals. Try translating this to what can Google earn in the next two quarters.

One of the better tools is the Z-Score, developed by Edward Altman, a financial economist and professor at New York University’s Stern School of Business, in 1968 to predict corporate bankruptcies within a two-year period. This formula has a 70-plus percent accuracy rate

Technical analysis.

The “price action discounts everything” premise is central to charting, also known as technical analysis. Technical analysis uses graphic representations for prices and makes uses of various quantitative techniques to forecast price trends.

A technician makes profits in any market by having positions in line with the price trend. When the trend is up, then buy. Conversely, when the trend is down, then look to sell. Technical analysis is not an exact science, but it is easy to learn and effective.

Technical analysis is a good starting point for beginners. The foundation should include classical technical analysis, Japanese candlesticks, trendlines, RSI, MACD, ADX, stochastics and moving averages. Learners can complete these core topics within three to six months. With constant practice, you should be able to independently analyze and identify the current trends in the stock market.

Most users of stock charts may only focus on daily charts. However, if users pay equal attention to weekly as well as monthly charts, the picture is intuitively more complete. This is equivalent to understanding how the short, medium and long-term investors are viewing the markets, after all three main types of investors form the market. A handful of stock charting software has this feature of showing say, the relative strength index for the daily, weekly and monthly values on a single screen.

One last point - no single method in technical analysis is sufficient for real-world investing. For example, even if you master Elliott Wave Theory or Gann techniques, by itself it would bring more heartache and disappointment. Often, you will need knowledge from other disciplines and sources to improve your overall investing skills.

Some tips for successful investing in stock markets.

1. Investing is a business. The rules of running a profitable business are the same as investing in stock markets.

2. Learn to spot your own mistakes fast. When a mistake is made, exit your position and live to fight any day. The faster you realize your own mistake and the faster you react will reduce your losses, hence increasing your chances of winning in the long run. A useful method is using a 10% stop loss exit strategy. If you are long, and your stock price goes down by 10%, exit. If this same stock reverses and starts to surge, take this as your mistake of not identifying a more accurate (lower) entry point.

3. Understand yourself inside out. What makes you happy, sad, excited, depressed, ecstatic - the whole spectrum of human emotions are merely states of the mind. This is easier said than done but you have to keep improving your own control mechanisms.

4. Learn the methods of successful fund managers – diversification, emotional detachment and having realistic expectations. Investing is a marathon not a sprint.

5. Money management skills. Whether the amount is $10,000 or $10 billion, the same rules apply. There are plenty of sources of information on this subject from the internet.

6. Learn technical analysis.

The main thrust of this article is to avoid making mistakes that will cost you dearly. How you prepare yourself for bear markets, sideways markets and market crashes are vital to your success.

There are no secrets in investing – no magic formula, no discovery of some useful ancient secrets. Just knowledge, hard work, common sense and discipline will serve you well in the years ahead. This verse from a 2500-years-old text is a useful reminder:

“Those who know do not speak,
Those who speak do not know.”

- Tao Te Ching, 56th verse

Stan Seecrets’ Postulate: “There are two types of people in the world – those who know what they don’t know and those who don’t know what they don’t know.”

You may freely reprint this article provided you publish it in its entirety, including the author’s bio and activating the link to the URL below.

The author, Stan Seecrets, is a veteran software developer with 25+ years experience at (http://www.seecrets.biz) which specializes in protecting digital assets. He has developed real-time prices delivery systems and has witnessed stock markets collapse of 1987 and 2000/2001 in real-time. You can contact him via email (Stan at Seecrets.biz).

© Copyright 2005, Stan Seecrets. All rights reserved.

Article Source: http://EzineArticles.com/?expert=Stan_Seecrets

Over 80% of all individual investors lose money in any given span of ten years. This figure is likely to be higher, given most people’s reluctance to reveal their losses. This article provides a broad outline of this financial landscape. It reflects the author’s personal views as an individual investor and author of a stock charting software with the experiences learned from the University of H.K. (hard knocks). Do not consider this article as any form of financial advice. Financial advice are available from licensed individuals and companies as required by law in your respective country.

Investment is a statistics game. You win sometimes and you lose most of the time. To stay ahead, all you have to do is to make sure that your gains are more than your losses. More importantly, how to limit losses and reduce the mistakes will be crucial in successful investing.

Take a typical fund manager. Out of ten positions, the fund manager may only win 40% of the time. Say, this manager makes an average return of 20% for each position. The rest are mistakes, but this manager capped the losses at 10% each. Do the simple math, and lo and behold, this manager is ahead with gains. This is a simple example – professional fund managers use complex variations of this simple theme.

Another example is the venture capitalist. Say, out of ten ventures, only one succeeded. The successful venture could yield returns of 2000%, perhaps more. The other nine ventures failed miserably and these investments are written off. Using this model, the venture capitalist is still ahead.

Headlines, the media, advertising hype.
Most of us are familiar with this typical headline: “Whiz kid makes stock picks that outperform the market than most fund managers”. When such stories becomes headline news on the popular media, it is likely that they appear towards the end of a great bull market. Stories like these typify the misconception that anyone can pick stocks at random and win all the time.

Perhaps, a more tantalizing advertisement with “How I make 2600% (annualized) on a winning trade” may make us interested. Any seasoned investor will be able to provide a handful of trades that has spectacular performance like 50% in a week. Annualize this and it works out to be 2600% a year. However such trades are few. There is no one in the world that has such a method or strategy that is consistent and sustainable.

It is prudent to treat media reports with a critical mind and skepticism. Rationalizing the possible reasons on why the story appears may provide some useful and not so obvious insights. For example, if you have a large position in a stock, then obviously you will only sing praises on why it will outperform its peers to encourage more buying momentum. The author remembers an analyst private statement: “I can write fantastic merits about a stock, conversely I can also write some damning things as well”.

Market gurus, financial astrology, divination.
Joseph Granville, a market technician, started his newsletter (Gransville Market Letter) in 1963 and is still going strong at age 80+. He was accurate to predict the market decline in 1976 but was wrong in 1982 and 1995. Given the statistical nature of investing, he had his successful calls and his fair share of blunders as well. The redeeming feature of this man must be his willingness to apologize for his mistakes.

Why do people continue to subscribe to his newsletter? This author suspects that his loyal customers are those who can form their own opinions and views on the market but, they are receptive to a different perspective or viewpoint they may have missed in their own analyzes.

It is the same with other reputable market gurus. It seemed the media and the public are intolerant of their success rates as being not good enough. The forecasts of these market gurus should be treated like a tsunami early warning system. Nine times out of ten, the warning turns out to be false and people accept it and go own with their normal lives. Every warning is taken seriously and the costs of taking precautions are minimal. When a warning turns out to be accurate, it will save lives. It should be the same with these market gurus’ predictions of market crashes. Investors just have to prepare themselves as they would with an impending tsunami warning.

After seeing a BBC program on Membrane theory, 11-dimensional worlds and parallel universes, financial astrology, feng-shui and other methods of divination may have some merit. This author encourages investors to have open-minds and more importantly, understand the strengths and weaknesses of any method. By capitalizing on the strengths, one can indeed enjoy the benefits.

The concluding part 2 will provide an outline of fundamental analysis, technical analysis plus some tips on successful investing.

You may freely reprint this article provided you publish it in its entirety, including the author’s bio and activating the link to the URL below.

The author, Stan Seecrets, is a veteran software developer with 25+ years experience at (http://www.seecrets.biz) which specializes in protecting digital assets. He has developed real-time prices delivery systems and has witnessed stock markets collapse of 1987 and 2000/2001 in real-time. You can contact him via email (Stan at Seecrets.biz).

© Copyright 2005, Stan Seecrets. All rights reserved.

Article Source: http://EzineArticles.com/?expert=Stan_Seecrets

I was out of town this weekend in Southern NJ, Atlantic City to be exact. After finishing my business at the convention center, I traveled back to the newest casino, the Borgata where I was staying for the night. I don’t consider myself a gambler and have never enjoyed losing money at the tables. When I do gamble, my preferred games have always been craps and blackjack. Until recently, I had never played at a poker table in a casino environment but I enjoy the game of poker and have only played in backyard and basement games with old buddies. Many people consider the game of poker pure luck but this is not an accurate observation. Many factors run parallel with the game of poker and the game of stock market investing. Luck may play a part but rules, odds and money management are the largest components of the two entities.

When investing in the stock market, it is essential to have a sound set of rules or a system that has been tested in real time, no back testing or historical testing needed. After the system has been tested, the investor needs to follow rules in order to preserve capital and cut losses. The investor must also consider the odds of his/her stock making a gain or making a loss. Price objectives and targets should be a large part of every investor’s system. With proper money management and calculated expectancy, the investor should aim to trade only in situations where the odds are in his/her favor. In a strong bull market, it may not be wise to start shorting many stocks; the odds of making a big gain with this strategy could be very low. Another major component that works its way into investing is psychology and/or human emotion. Stocks are made up of human character traits, similar to the type of people that own them. Some stocks are risky and volatile while other stocks are conservative and predictable. The market repeats cycles and specific chart patterns because humans repeat their actions and character tendencies.

Now, back to the poker table; as I sat down and started to play, my first goal was to become familiar with the character traits of the players around me. With 10 players at the table, I had plenty of time to evaluate the people I was playing with, without risking a great deal of money. After several rounds of play, I was aware that the gentleman to my right would only bet high odd hands and would fold every other hand. He was very edgy and nervous and folded his cards with force when he was angry. The gentleman to the left would also play hands with high odds but I did see him call bets with some hands that were risky with lower odds. One gentleman across the table was the bluffer and always had a smirk on his face with a pair of dark glasses. I challenged this man on several occasions and paid to see his cards because I felt he had nothing. More times than not, I was right and still beat him with an average hand. I could go on but you understand the point I am trying to make: all poker players and investors bring their emotions to the table.

I won’t get into the exact rules of playing poker but I can tell you that only two players are required to bet per round while the other eight can view their first two cards without risking a cent. My game of choice is Texas Hold’em, the current craze across the country and one that excites me when I am in the environment. The two players required to bet represent the big and small blinds. If you are the dealer or anoy other players at the table, you can view your first two cards for free without an bet. If the hand is weak, you can fold and keep your gambling stake.

Here is where it gets interesting; if I have a decent hand, I can decide to call the larger blind and see the next three cards on the flop, which is still a low risk investment. If the flop doesn’t provide me with the cards I need, I can immediately cut my losses short by folding and wait for the next game. The same is true in investing; I can cut a loss short and wait for the next opportunity without risking the farm if I realize an immediate loss. If the cards are good and my probabilities of winning the hand are high, I can call the bet or raise the bet. A fourth and fifth card (the turn and the river) are placed on the table after the flop and betting continues with each round. Again, I can decide if I would like to call, raise or cut my losses short. The connection I am trying to make with investing in the stock market and playing poker relates directly to cutting losses short (capital preservation and money management) and my odds of winning the game (in the stock market this could be called expectancy).

In my opinion, the best game to play at the casino is $1-$2 no limit style. This means that the blinds are held to a minimum and it will only cost you a couple of dollars to see the flop in many cases. The “no-limit” aspect allows your upside potential to be unlimited which carries through to investing. If you cut losses short and ride your winner, the up-side potential in investing can also be unlimited, especially when using options (but that is for another discussion). Last night, I could see my first two cards for free, eight out of every ten hands and I could fold if they were no good. If they were good, I put money on the table after my idea. In the real world, the world of stock investing, you should always put money after your best ideas. The ensuing gain or loss will tell you if you are right. Again, for the umpteenth time in this article, the most important part of both games is cutting losses short and moving on without mixing emotions into the decisions.

All investors and poker players bring emotions to the table, some people control them better while other people employ better systems and understand the odds on a higher level. The bottom line is to understand the situation around you and to use a sound system to raise your odds. Never bet a hand that represents a low chance of winning and never ride a loss that could multiply overnight. Cut losses short and get out of the game and wait for the next opportunity because they are always around the corner.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Article Source: http://EzineArticles.com/?expert=Chris_Perruna

Let’s take the NASDAQ composite. It is made up of a basket of shares, the largest and most well traded stocks and an average of these stocks figures go into making the NASDAQ composite. Remember that word “average.”

As with ANY average you will always have shares outperforming and under performing the average. Do a research . Now with all the doom and gloom about how low these markets are heading.

How it is impossible to make money as a bull in this market would you be surprised by these numbers?

26 stocks in the markets have made over a 200% return this year! 7 of these stocks have gone on to make over a 500% return this year! 3 of these stocks have gone on to make over a 1000% return this year!I have had some huge success with stocks such as:

MOVI +84%

ALLY +67%

THQ +59%

So it’s not all doom and gloom.

When the market averages turn sour - You now have to trade the small cap momentum stocks!

Didn’t CNN say this is a bear market and there was no money to be made by the bulls? Well seems like someone is wrong.

Bottom line: Market conditions are tough. The big cap stocks are falling far and hard. Mutual funds are losing buckets full of public money. The public are switching off the stock market in their droves as those market darlings they held last year are sinking lower and lower.
But you are doing the wrong thing. Completely the wrong thing!

In a run away bull market you want to be INVESTING in the

BIG CAP Momentum stocks. There simply is no better or easier
way to make a lot of money.

But when the market averages turn sour you have to change your strategy. You now have to trade the small cap momentum stocks! his is where the money is being made now. The last thing you want to do now is leave your hard earned money invested in Yahoo, SUNW, QComm in the hope they’ll bounce back.

It won’t happen in our lifetime. Yahoo and a host of other high flying stocks in the 2000 bull market have had their day in the sun. It will not be repeated! Their bubble burst a long time ago. If you can’t stomach the stock market any-more then get out!

If you are willing to give it another shot with a slightly different
approach then order MSTS now and start trading in those small cap momentum stocks. This is where the money is!

How long can the market keep heading lower? Well I hate to
keep repeating myself but the fact is noone knows. Some bear
markets in the past have lasted over five years. Does it look as if the markets can head higher from here? Do general conditions warrant a new bull market cycle? I see absolutely no sign of that.

Keep your ears closed and trade what you see. Right now I see lower markets ahead. Keep out of the large cap stocks.

Mark Crisp
The Momentum Stock Trader
http://www.stressfreetrading.com

Article Source: http://EzineArticles.com/?expert=Mark_Crisp

The new high/new low ratio (NH-NL) ratio has been around for many years but different investors use this indicator in different ways. Some investors plot the ratio on a chart using the number zero as a neutral designation with positive numbers equaling more new highs than new lows and a negative number equaling more new lows than new highs based on a specified period of time. I have developed and used the NH-NL ratio in a completely different way from some of the more popular methods. I started to follow stocks making new highs while reading the paper Investor’s Business Daily many years ago. I didn’t use the news highs as an indicator but I only studied stocks to buy from the list. As I became a more experienced investor, I subconsciously started to gauge the market while noting if the new highs were increasing or decreasing. After the stock market bubble burst in 2000, I started to record the difference between the daily new highs and the daily new lows. I would enter them into an excel sheet along with the price and volume of the major market indices and study their relationship. Within two years, I was convinced that the major market tops and bottoms could be located easily by aggressively studying the price and volume of the major indices and studying the ups and downs of the NH-NL ratio. The general market indices often give investors false moves in all directions and many market services and investors have developed new indicators to help assess the market to try and pinpoint turning points without great success. Many of these secondary indicators are successful in showing the investor if the market is weak or strong but they fail to pinpoint the strength or weakness of a turning point with great accuracy. Many of these secondary indicators give false signals along with the general market indices.

With several years of serious study under my belt using my method of the NH-NL ratio, I have accurately protected my money during downturns and have accurately guided my buys when the market has reversed and started a new sustained up-trend (not a head fake).

How do I use my NH-NL ratio?

I start by recording the daily new highs and new lows from Investors Business Daily (my preference) but you could use any free or paid service on the web. Over the past five years, I have developed key levels that the market must reached or violate to trigger certain actions. I am not pulling any of these numbers from thin air as they are all based on actual experience and have not been derived from back testing. For a market to convince me that it is following through and is starting a new up-trend, it must present me with a minimum of 500 new highs per day on a consistent basis. When a week ends, I add the weekly NH-NL totals and divide by the number of active trading days to get the weekly average. The average must have a minimum of 500 stocks per day for me to consider risking over 50% of my cash in new positions (the new leaders). Once the weekly averages reach 800-1,000+ stocks per day, we know that the market is in a full fledged rally and you can start to commit your entire trading stake and use margin. In 2003, the market gave numerous instances when the new highs topped 1,000-1,200 stocks per day, a very impressive amount. When the market shows strength like this, the trend has become obvious and you must have your money working for you by following the trend. Keep in mind that 75% of all listed stocks will follow the general trend of the market.

Recently in September and October of 2005, the NH-NL ratio has been negative, meaning that we are seeing more new lows than new highs. When this type of action happens, you must lock in profits and move your cash to the sidelines. It is not safe to invest on the long side of the market when the ratio is negative. Often times, a bear market may be forming when the ratio weakens and turns negative. If the market confirms a bear market or down-trend, it can be an opportune time to make money shorting stocks or using advanced strategies with options (I only recommend this for advanced and experienced traders). You must determine f the market is in a down-trend or if it is trading sideways. If it is trading sideways, it will be better to pull your cash to the sidelines and wait for a direction to form (either up or down). This article is being written and published on October 25, 2005, the first day after the NH-NL ratio has turned back to the positive side after 13 consecutive days of a negative ratio. The past two weeks have averaged negative ratios with some days only reaching 15 quality new high stocks. This type of weak action could signal a bottom in the market as we get ready to form a new rally. The most crucial indicator to watch over the next few weeks will be the NH-NL ratio to see if it can continue to gain strength and increase the new highs to 500 or more stocks per day. If this happens, the current indication that a rally has formed on the major indices will be confirmed and you can start to commit more than 50% of your trading stake to new leaders breaking out of sound bases or stocks moving higher from establish support areas.

As I look back at my archived hard copies of IBD, I can see the strength and weakness that this ratio gave us throughout 2002 and 2003. I am reminded how the ratio went from negative territory in September of 2002 to a positive ratio in October of 2002. After reaching positive territory, the new high ratio soared into the 800-1,100 range in the first six months of 2003 as we were in a strong bull market, the strongest year since the bubble burst. I don’t know what next month or next year holds for investors, but you can get a good idea by tracking this indicator as it turns back to the positive side after a very poor October (2005). I once wrote about the Halloween indicator and I am now convinced that it has some validity, especially if this NH-NL ratio confirms another rally as October draws to a close.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We offer an extended no obligation monthly trial period starting immediately with two free weeks. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Article Source: http://EzineArticles.com/?expert=Chris_Perruna

Several days ago, the Commerce Department reported that May’s factory orders had increased by a 2.9 percent. This was well covered by ‘the press’, as it was to be a positive influence on ‘the market’ (yes, the quotes are intentional…..you’ll see why). The enthusiasm was understandable - the $394 billion in orders of manufactured goods is the highest level seen since the current calculation method was adopted. Although being skeptical can be wise, the figure was (and is) a clue that the economy is on a solid footing. However, too many times there’s a disconnect between what ’should’ be the result of a piece of economic data, and what actually occurs. The economy isn’t the market. Investors can’t buy shares in factory orders……they can only buy (or sell) stocks. Regardless of how strong or weak the economy is, one only makes money by buying low and selling high. So with that, we put together a study of some of the economic indicators that are treated as if they affect stocks, but really may not.

Gross Domestic Product

The chart below plots a monthly S&P 500 against a quarterly Gross Domestic Product growth figure. Keep in mind that we’re comparing apples to oranges, at least to a small degree. The S&P index should generally go higher, while the GDP percentage growth rate should stay somewhere in between 0 and 5 percent. In other words, the two won’t move in tandem. What we’re trying to illustrate is the connection between good and bad economic data, and the stock market.

Take a look at the chart first, then read our thoughts immediately below that. By the way, the raw GDP figures are represented by the thin blue line. It’s a little erratic, so to smooth it out, we’ve applied a 4 period (one year) moving average of the quarterly GDP figure - that’s the red line.

S&P 500 (monthly) versus Gross Domestic Product change (quarterly) http://www.bluegrassportfolio.com/images/070705spvsgdp.gif

Generally speaking, the GDP figure was a pretty lousy tool, if you were using it to forecast stock market growth. In area 1, we see a major economic contraction in the early 90’s. We saw the S&P 500 pull back by about 50 points during that period, although the dip actually occurred before the GDP news was released. Interestingly, that ‘horrible’ GDP figure led to a full market recovery, and then another 50 point rally before the uptrend was even tested. In area 2, a GDP that topped 6 percent in late 1999/early 2000 was going to usher in the new era of stock gains, right? Wrong! Stocks got crushed a few days later….and kept getting crushed for more than a year. In area 3, the fallout from the bear market meant a negative growth rate by the end of 2001. That could persist for years, right? Wrong again. The market hit a bottom just after that, and we’re well off the lows that occurred in the shadow of that economic contraction.

The point is, just because the media says something doesn’t make it true. It might matter for a few minutes, which is great for short-term trades. But it would be inaccurate to say that it even matters in terms of days, and it certainly can’t matter for long-term charts. If anything, the GDP figure could be used as a contrarian indicator…..at least when it hits its extremes. This is why more and more folks are abandoning traditional logic when it comes to their portfolios. Paying attention solely to charts is not without its flaws, but technical analysis would have gotten you out of the market in early 2000, and back into the market in 2003. The ultimate economic indicator (GDP) would have been well behind the market trend in most cases.

Unemployment

Let’s look at another well covered economic indicator……unemployment. This data is released monthly, instead of quarterly. But like the GDP data, it’s a percentage that will fluctuate (between 3 and . Again, we’re not going to look for the market to mirror the unemployment figure. We just want to see if there’s a correlation between employment and the stock market. Like above, the S&P 500 appears above, while the unemployment rate is in blue. Take a look, then read below for our thoughts here.

S&P 500 (monthly) versus Unemployment rate (monthly) http://www.bluegrassportfolio.com/images/070705spvsunemp.gif

See anything familiar? Employment was at it strongest in area 2, right before stocks nose-dived. Employment was at its recent worst in area 3, right as the market ended the bear market. I highlighted a high and low unemployment range in area 1, only because neither seemed to affect the market during that period. Like the GDP figure, unemployment data is almost better suited to be a contrarian indicator. There is one thing worth mentioning, though, that is evident with this chart. While the unemployment rates at the ‘extreme’ ends of spectrum was often a sign of a reversals, there is a nice correlation between the direction of the unemployment line and the direction of the market. The two typically move in opposite directions, regardless of what the current unemployment level is. In that sense, logic has at least a small role.

Bottom Line

Maybe you’re wondering why all the chatter about economic data in the first place. The answer is, simply to highlight the reality that the economy isn’t the market. Too many investors assume there’s a certain cause-and-effect relationship between one and the other. There’s a relationship, but it’s usually not the one that seems most reasonable. Hopefully the graphs above have helped make that point. That’s why we focus so much on charts, and are increasingly hesitant to incorporate economic data in the traditional way. Just something to think about the next time you’re tempted to respond to economic news.

James Brumley is the chief analyst at Bluegrass Portfolio Management. After spending time as a broker, he established an independent investment research firm. He now manages portfolios, and you’ll find his market commentary and analysis on several financial websites. See all of his analysis at http://bluegrassportfolio.com/

Article Source: http://EzineArticles.com/?expert=James_Brumley

The Dow TheoryCharles H. Dow
Robert Rhea
E. George Schaefer
Richard Russell
The Dow Theory Today

Charles H. Dow

It is interesting and amazing to note that not until Charles Dow started compiling the Dow Jones Industrial and Dow Jones Rail Index and started writing about the stock market a little over a hundred years ago, stock speculation was regarded merely as a game for the rich or as gambling for the brave. Sure, there were the tape readers, but the majority of the public regarded Wall Street as a source of excitement - the entertainment provided freely (unless you were on the wrong side) by figures such as Cornelius Vanderbilt, Jay Gould, and the infamous Daniel Drew.

In a series of stunning editorials for the Wall Street Journal at the turn of the century, Dow laid out the foundation of his own theory on the stock market. Among them were:

The market is always to be considered as having three movements, all going on at the same time.
The first thing to consider is the value of the stock in which the speculator proposes to trade, the second the direction of the main movement, and the third the direction of the secondary movement (i.e. stocks fluctuate together, but prices are controlled by values in the long run).
There are three phases to both a primary bull market and a primary bear market (not to be confused with the three movements mentioned above).
The formation of a “line” in the averages indicates accumulation or distribution
The market represents a serious well-considered effort on the part of far-sighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future.
The method of making money in stocks, according to Dow, was to study basic conditions and exercise enough patience to capture the major movements. One of the few speculators who discovered this relatively new concept of making money on Wall Street at the time was Jesse Livermore. He was able to accomplish this only through trial and error and the making and losing of several fortunes.

William P. Hamilton

William P. Hamilton, Dow’s understudy and the fourth editor of the Wall Street Journal, continued Dow’s legacy after his death in 1903. The Dow Theory as interpreted by Hamilton forms the basis of all modern technical analysis today. He wrote about the Dow Theory for the Wall Street Journal for more than 20 years. His additions to the Theory included:

The Averages discount everything
The primary trend cannot be manipulated
Both the Industrials and Rails (the modern day Transports) must confirm each other in order for the signal to have authority
The Theory is not infallible. If someone did find such a system, then he
or she will own the world in relatively short order and speculation as we know it will not exist.
Determining the trend by spotting “higher highs” or “lower lows”

Hamilton’s predictions of the trends were uncannily accurate, even as he developed a wide following from his editorials. A major reason why he was accurate almost all the time was his lack of a writing schedule - choosing only to write when he had something to say about the market, sometimes going for weeks without writing a single word.

The one significant time when he erred was in late 1925 and early 1926 when he erroneously labeled a serious secondary reaction in a primary bull market as a bear market. Followers of Hamilton lost heavily during that period, as the market bottomed out in March 1926 (Industrials 135.20 and Rails 102.41) and was getting ready to resume its long advance that would not end (tragically) until September 1929.

Even so, Hamilton would always be remembered for penning the following editorial on October 25, 1929, just days before the crash. His words proved prophetic - calling for the beginning of a new primary bear market. Part of his now-famous editorial is reproduced below:

A Turn in the Tide - October 25, 1929

On the late Charles H. Dow’s well known method of reading the stock market movement from the Dow-Jones averages, the twenty railroad stocks on Wednesday, October 23 confirmed a bearish indication given by the industrials two days before. Together the averages gave the signal for a bear market in stocks after a major bull market with the unprecedented duration of almost six years. It is noteworthy that Barron’s and the Dow-Jones NEWS service on October 21 pointed out the significance of the industrial signal, given subsequent confirmation by the railroad average.

Hamilton passed away six weeks after he wrote the above editorial. It is a
tragedy that probably not a great number of people at the Wall Street Journal or Barron’s today have even heard of the Dow Theory, let alone have a complete understanding of it.

Robert Rhea
The next great Dow theorist, Robert Rhea, initially stumbled upon the Dow Theory during his endeavor to find “a system” for helping him make money in the stock market. In his attempts to disprove the theory, he became a convert. Rhea was a very serious student, and he was able to utilize the Dow Theory as interpreted by Hamilton to his advantage, buying and holding stocks in 1921, and basically holding them until late 1928 (he reversed his short position when he realized Hamilton’s advice was incorrect in early 1926), missing only the final blowoff phase. He also “played” the short side successfully during the subsequent deflation. In 1932, he began publishing his newsletter based on the Dow Theory, called the “Dow Theory Comment.”

Rhea called the bottom of the stock market in July 1932 almost to the exact day and the subsequent top in 1937. On July 21, 1932, with the Industrials at 46.50 and the Rails at 16.76, Rhea instructed his broker to tell his friends “the Dow Theory implied heavy buying for the first time in over three years.” Further, on July 25, 1932, Rhea sent a memo to 50 correspondents, part of which is reproduced below:

The declines of both Rail and Industrial averages between early March and midsummer were without precedent. The thirty-five year record of the averages shows a fairly uniform recovery after every major primary action, and such recoveries average around 50% of the ground lost on the decline; are seldom less than a third and more than two thirds. Such recovery periods tend to run to about 40 days, but are sometimes only three weeks - and occasionally three months.

The time element is in favor of a normal reaction at this time - because the slideoff was normal (the normal time interval of major declines being about 100 days).

The market gave the unusual picture of hovering near the lows for more than seven weeks, and might be said to have made a “line” during the latter weeks of that period.

Because of all these things, and because the volume tended to diminish on recessions and increase on rallies during the ten days preceding July 21, almost any one trading on the Dow Theory would have bought stocks on July 19th. Those who did not, had a clean cut signal again on the 21st. Since that date the implications of the averages have been uniformly bullish, and it is reasonable to expect that a normal secondary will be completed, even though the primary trend may not have changed to “bull”. So much for the speculative viewpoint.

Followers of Rhea who bought stocks during that period and held until 1937 made a fortune.

E. George Schaefer
In July 1949, with the Dow Jones Industrials registering a low at 161.60 and with the country in the midst of a severe recession, a new primary bull market was born. E. George Schaefer, a Dow Theory disciple for more than 20 years, started his newsletter writing career near that time, calling his subscribers to load up on common stocks in June 1949. He remained steadfastly bullish in the great corrections of 1953 and 1957 and cautiously bullish since 1960 until the final top in 1966.

Schaefer believed that Hamilton strayed away from Dow’s original principle of investing in “values” and that Rhea spent most of his life improvising Hamilton’s “system” of trying to trade the markets when 95% of the population just cannot duplicate what the emotional-less professional traders can do. He also emphasized that some of the “rules” that Hamilton and Rhea developed did not apply to the more modern and more emotional markets of today (such as the claim that secondary reactions tend to retrace one-third to two-thirds of the preceding primary swings). The best course of action was to buy “great values” and staying fully invested through the primary trend.

In his 1960 book “How I Helped More than 10,000 Investors to Profit in Stocks,” Schaefer stated:

As noted before, my extremely bullish market letters of June and July, 1949, appeared just a few days and weeks after the low day of 161.60 was registered on June 13, 1949 by the Dow-Jones Industrials. Since that time, and for the next 11 years, my letters have been consistently bullish on the Primary Trend. The stock market has borne me out, and I would say that the majority of my readers have benefited as they stayed fully-invested in the way I have counseled.

Schaefer also developed some additional technical tools and made additional
observations along with his study of the Dow Theory. Among them are:

The 50% retracement concept
The yield cycle
The ratio of short interest to daily volume
The study of odd-lot trading
The 200-day investment line (the 200-day simple moving average)
Schaefer turned bearish at the most opportune time in 1966 and became bullish in gold and gold mining shares shortly afterwards. He was, however, too early with his bullish calls when he asked his subscribers to buy them in 1974. Gold immediately proceeded to suffer a huge short-term correction. The losses may have broken him since he committed suicide shortly afterwards. From thereon, the Dow Theory torch was passed on to Richard Russell.

Richard Russell
Richard Russell was another Dow Theorist who stumbled upon the Dow Theory during a quest to find useful literature regarding the stock market. He became a convert after reading the writings of Robert Rhea. Russell decided to follow in the footsteps of Rhea and Schaefer - establishing his newsletter “Dow Theory Letters” in 1958, partly inspired by the extreme bearishness of the public during the great correction of late 1957 (Russell was bullish at the time).

He also urged subscribers to sell at the top in February 1966, and he rightly turned bullish in December 1974. Following are excerpts from his newsletter during those periods.

February 10, 1966 (two days after the final top) - While Russell mentioned that although technical conditions are getting weaker, there is no indication that the bull market was over yet. However, on the simultaneous decline of the Dow Jones 40 Bond Average and the Dow Jones Utility Average, he commented: “In the present … instance the 40 Bonds turned down in February, 1965. The real decline in Utilities began in April, 1965. Therefore, the joint decline in both components can be said to have started in April, 1965, nine months ago. Based on past history, the decline of Utilities and Bonds together should be taken as a warning of dangerous monetary conditions ahead as well as a warning of unsatisfactory stock market conditions. At very least, the shaded areas identify periods in which informed investment money is distributing or leaving the market.”

Russell began his February 22, 1966 newsletter with the following paragraph: I dislike emphasizing “the drama of the marketplace” (in contrast with the cold, analytic approach), but it does seem to me that 1966 is shaping up as a most exciting year for market students. Not since 1907 has a booming economy run head-on into a monetary crisis, but I believe there is a reasonable chance that 1966 will see just that type of situation repeated. Furthermore, the monetary squeeze is occurring at a time when (unlike 1907) few businessmen, economists or Governmental leaders have the foggiest idea of the overall situation or the vaguest notion of how to deal with it. What we are seeing is an explosive demand for money from all sectors of the economy with a “built in” booster of $1 billion a month for the Vietnam war - all this in the face of world money markets which are literally “panting for breath.”

Note that these were very strong comments since the public was very enthusiastic about the stock market at that time. In fact, according to Russell in the same newsletter, mutual fund purchases by the public in December 1965 were the highest of any December in history. At the same time, the initial offering by the newly-formed Manhattan Fund (headed by Gerald Tsai) was nearly five times oversubscribed. 1966 was a very speculative period, indeed.

The period during late 1974 was a world full of contrasts to that of early 1966. Pessimism was prevalent. The Dow Jones Industrials was selling at a P/E ratio of 6 and at below book value. Some subscribers canceled their subscriptions of Dow Theory Letters after Russell’s special report on December 20, 1974 - thinking that Russell had clearly gone out of his mind. Part of that newsletter is reproduced below:

Now this is how I view it. I think the odds are probably better than 50/ 50 that the Dow and most shares hit a bottom in December 1974. I put this thesis together with a number of other facts. As you will see in a later section, the unweighted NYSE average is now down around 77% from the high. In 1929-32 the unweighted NYSE average went 12% further on the downside - to an 89% loss. I feel that most shares have now discounted all the forthcoming bad news, and I am including recession-depression conditions in 1975. We have been in the third phase of a great primary bear market. We are finally in the zone of “great values”. In many cases, stocks are selling “below known values”. Here’s an interesting statistic: The price/ earnings ratio for the 30-Dow Industrials is now around 6.0 while the yield on the Dow is 6.36. This means that the Dow P/E is below the yield on the Dow. This happened only once before in the last forty years, and that was during 1948-50.

Second item: The Dow is now selling below its book (or break-up) value. This has not occurred since 1942. Are these two above Dow “tests” infallible indications of the final bottom? Not at all, but they do indicate that the Dow is sure getting down there.

There is no doubt that the 1974 bottom call was one of the greatest stock market calls in modern history, right up there with Hamilton’s 1929, Rhea’s 1932, and Schaefer’s 1949 calls. Based on the Dow Theory and his own observations, he told his subscribers the market was a “sell” in August 1987, even though no Dow Theory sell signal has been triggered at the time (Hamilton and Rhea has always emphasized that one does not usually need to wait for a Dow Theory buy or sell signal to tell one to buy or sell). That signal, however, was triggered just days before Black Monday, October 19, 1987, as the Dow Transports confirmed the Dow Industrials on the downside by breaking through its preceding secondary lows on October 15 (such a signal in the third phase of a primary bull market is taken to be a primary bear market signal).

Russell stayed cautiously bullish during the late 1990s. In September 1999, the Dow Theory generated a primary bear sell signal. Today, Russell still maintains that we are in a primary bear market, and that the market will not bottom until stocks have reached the point of “great values” with P/E ratios below 10 and with dividend yields of greater than 5%. At the age of 79, Russell is still going strong, publishing a market commentary every Monday to Saturday.

The Dow Theory Today

The Dow Theory has withstood the test of time - the latest “proof” being Russell’s primary bear market call based on the Dow Theory in September 1999. As with his 1974 primary bull market call, numerous stock market analysts ignored him, including some of his own subscribers. Various “trading systems” come and go, but the Dow Theory has been a reliable tool for the trader/investor for over a century - mainly because the Dow Theory is not a system, but merely a theory based on the principles as first developed by Charles Dow, and which is open to interpretation.

Since the 1999 primary bear market signal, a great deal of interest has been revived in the Dow Theory. However, not a day goes by without spotting someone who claims an understanding of Dow Theory but who actually only has a cursory understanding at best. More recently, numerous traders have tried to reduce the Dow Theory to a “system,” where a series of confirmations of the Dow Jones Industrials by the Dow Jones Transports (or vice-versa) is taken to be “buy” or “sell” signals without regards to other factors such as valuation, economic conditions, and investor sentiment.

It is to be said here at none of the above Dow Theorists interpreted the confirmations of the indexes in that manner. None of them actually waited for such “signals” to buy or sell - they bought or sold in advance. Waiting for such “signals,” they claimed, would cause them to have missed a significant part of the move, and such moves can be costly. The primary purpose of this indicator is to serve as a confirmation of the current trend, and if one index does not confirm the other (or if it takes a long time to confirm) then it is a warning sign that the current trend may be over, and positions may need to be liquidated (or stops may have to be tightened) or may need to be covered if one is short. Again, the confirmation of one index by the other is not to be taken as a buy or sell indicator.

Another variation of this fallacy is that the July and October 2002 bottom were the true bottoms, and that unless those bottoms were jointly penetrated by the Dow Jones Industrials and Transports, we are now in a bull market as interpreted by the Dow Theory since we have made higher highs in both indexes. Nothing can be further from the truth. Please remember that Dow’s original emphasis was on valuation and economic conditions. All the major indexes are still overvalued today judging by their P/E and P/D ratios. Moreover, the higher highs indicator can only be treated seriously in the third phase of a primary bear market, when pessimism runs extreme and when stocks are liquidated without regards to values. We had none of that in this bear market so far.

We believe any serious investor/trader should take the time and try to gain a true understanding of the Dow Theory. I sincerely believe that the Dow Theory is even more valuable today than it ever was - in a world full of hedge funds using price, volume, and volatility breakout systems and with anyone willing to jump in at the sign of a potential trend. Today’s markets are more emotional than ever and only by knowing the true tenets of the Dow Theory can one stay firmly planted on the ground with both feet. Ignore the presses and anyone else who has not taken the time to learn the Theory. Read all the historical writings by the above Dow Theorists, and I promise you that this education will be immensely more valuable than any secondary education you can obtain in a top ten business school or a top five investment bank today. Our site will try to incorporate the Dow Theory in our analysis, but please bear with us from time to time since we are still students of the Dow Theory ourselves.

Henry To, CFA is the managing member of Independence Partners, LP, a SEC registered hedge fund.
He is also editor of the investment website, www.marketthoughts.com.

Article Source: http://EzineArticles.com/?expert=Henry_To

Stock trading keeps getting competitive and the stock market doesn’t care if you are experienced or a newbie stock trader. The rules and the opportunities are the same every day, so either youre going to make money stock trading or you are going to lose it in favor of the more seasoned ones.

As a stock market trader your homework is all about studying and testing different trading strategies that can help you take advantage of stocks and at the same time protect your gains. Just always keep in mind that a good strategy is simple and practical. Complicated stock systems will always make you slow in your decision making process or confuse you from the start.

There are some very good sites on the web where you can access practical trading strategies that are easy to implement. One of those sites is Stress Free Traders http://www.stressfreetraders.com

They focus on short term stock trading tactics that can help you identify and handle stocks while reducing your trading risk.

All in all, stock market trading is all about picking the best stock opportunities and following your buy and sell signals with ease and simplicity. Once you learn to master your trading decisions, you can aspire to produce consistent profitable results.

Stress Free Traders helps beginner day traders and investors take advantage of stocks with momentum in a practical way at
http://www.StressFreeTraders.com

Article Source: http://EzineArticles.com/?expert=Day_Trading_Education

1. You can tell if a Stock is cheap or expensive by the Price to Earnings Ratio.

False: PE ratios are easy to calculate, that is why they are listed in newspapers etc. But you cannot compare PE’s on companies from different industries, as the variables those companies and industries have are different. Even comparing within an industry, PE’s don’t tell you about many financial fundamentals and nothing about a stock’s value.

2. To make Money in the Stock Market, you must assume High Risks.

False: Tips to Lower your Risk:

· Do not put more than 10% of your money into any one stock

· Do not own more than 2-3 stocks in any industry

· Buy your stocks over time, not all at once

· Buy stocks with consistent and predictable earnings growth

· Buy stocks with growth rates greater than the total of inflation and interest rates

· Use stop-loss orders to limit your risk

3. Buy Stocks on the Way Down and Sell on the Way Up.

False: People believe that a falling stock is cheap and a rising stock is too expensive. But on the way down, you have no idea how much further it may fall. If a stock is rising, especially if it has broken previous highs, there are no unhappy owners who want to dump it. If the stock is fairly valued, it should continue to rise.

4. You can Hedge Inflation with Stocks.

False: When interest rates rise, people start to pull money out of the market and into bonds, so that pushes prices down. Plus the cost of business goes up, so corporate earnings go down, along with the stock prices.

5. Young People can afford to take High Risk.

False: The only thing true about this is that young people have time on their side if they lose all their money. But young people have little disposable income to risk losing. If they follow the tips above, they can make money over many years. Young people have the time to be patient.

Cory operates an educational website to help people discover their options to becoming financially free.
To learn more checkout:
http://www.choose-to-be-rich.com

Article Source: http://EzineArticles.com/?expert=Cory_Bain