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You Can’t Beat The Market
By: Thomas Mullooly
...unless the stocks you own ARE beating the market!
There is no way on earth you could ever beat the market if the stocks you hold
are not keeping up with the market. And hopefully, staying ahead of the market.
But yet, that’s what lots of people try to do. They’d rather keep all the dogs
in their account and maybe “take a flyer” on one stock, hoping for a miracle.
It’s like trying to win a NASCAR race with your Ford Taurus. It just ain’t gonna
happen.
But hey, maybe you don’t want to beat the market overall. Maybe you just want to
own the BEST semiconductor stocks, or the best retailers, or the best utilities.
Seriously, how would you even KNOW if your stocks or mutual funds are beating
the market, or are the best names to own in their group? Well, I can tell you
this...
the best indicator I’ve ever seen in twenty-plus years in the business has been
relative strength.
What is relative strength? It is simply the measure of how your mutual fund or
stock is doing, compared to a group of other stocks, funds or indexes...or the
market overall.
Perhaps you want to compare Intel with other semiconductor stocks. Maybe you
want to compare Microsoft with the S&P 500 Index. Maybe you want to compare your
mutual fund against the Dow Jones Industrial Average or the Standard & Poor’s
500 Index.
This is a very easy calculation. Here is how you do it: Simply divide the price
of your stock or mutual fund against whatever yardstick you choose. You’ll get a
fractional number as the result. But slide the decimal over so you can work with
whole numbers. Then we begin plotting that result daily on a point & figure
chart.
These relative strength charts move much slower than a typical chart. Anything
going up over time will be in a column of X’s. Anything going down will be in a
column of O’s. If you want to significantly improve your chances of beating the
market, the index (or whatever yardstick you choose), it MUST be in a column of
X’s and preferably be giving buy signals.
Why is this so? Well, if your stock or mutual fund is climbing in a column of
X’s against the market (or a group of its peers), it HAS to be outperforming the
yardstick, right? It cannot go higher unless it is rising faster than the market
overall.
Now, if your stock or mutual fund is going down against the yardstick you are
using, it means your stock or mutual fund has poor relative strength compared to
the index you are plotting it against.
Poor relative strength is something to be avoided.
Here’s why: When the market starts falling apart and things look bad, stocks and
mutual funds with poor relative strength (or on a relative strength SELL signal)
will usually fall further, faster than the rest of the market.
Now, stocks on a relative strength BUY signal can also fall with the market. But
our experience has shown that stocks with good relative strength (or on relative
strength buy signals) usually don’t fall as far as the market overall. They are
also are the first names to bounce when the market recovers.
About the Author:
Thomas Mullooly, President of Mullooly Asset Management, works one on one with
individuals so they can regain control of their investments. Tom's popular email
alerts help folks to reduce the risks in their portfolios. To learn how to stop
making simple investing mistakes and to sign up for Tom's email alerts, visit
http://www.mullooly.net, today. |
