Posted |
2014 Planning: Buy Signals To Watch For image

To be sure, the Fed's decision to begin tapering their QE program remains the topic of conversation around water coolers in Manhattan, Chicago and LA. In short, nobody really expected Ben Bernanke to start cutting back on one of his greatest inventions as he moved toward the door. However, at the same time, it is a safe bet that very few analysts expected the combination of a taper, an extension of the Fed's zero interest rate policy, and an increased focus on inflation. Wow.

But now that the Fed is out of the way for a while and the market did not go throw another "taper tantrum," it's time to get back to the idea of planning 2014's investing strategy.

Thus far, we've discussed the following ideas:

  • 2013 was a very unique year in that the U.S. stock market was the only place to be
  • Investors learned about "diworsification" this year
  • Individual and professional investors alike were largely underwhelmed by their returns in 2013
  • The term "gain regret" is back in a big way at financial planning firms
  • Planning for the market to "repeat" its 2013 performance is probably a bad (very bad) idea
  • It is a good idea to have a plan for how you are going to try and stay on the right side of the market in the coming year
  • The historical cycles suggest that there could be a meaningful correction (a "mini" bear market, perhaps?)
  • The current bull market has produced gains that have been nearly double the historical average
  • The current bull is growing old
  • Valuations are no longer "cheap" and are either "fair" or slightly overvalued
  • Thus, keeping a couple big-picture, easy-to-use sell signals at your side makes sense

A Sell Off Might Be Waiting in Wings

In sum, some very well respected analysts expect to see the bears come out of hibernation at some point next year. And despite the DJIA and S&P sitting at or near all-time highs, our market models are not exactly singing a happy song right now. No, the bottom line is the divergence between some of our indicators and the price action in the major indices is worrisome.

This fact alone is a good reason to make sure you enter 2014 with your risk management tool belt strapped on. Remember, the last correction of more than 5 percent was more than a year ago. And history shows that the type of one-way street we've seen in stocks this year doesn't last forever.

But, You Might Need A Buy Signal or Two As Well in 2014

So, let's assume that you enter the New Year on your toes. You are ready to defend against the next bear raid on your portfolio and you get out of the way when the decline hits. The question then becomes, Will you know how to get back in?

Remember, without a new crisis or some horrible external event, analysts are not looking for a brutal bear market. Therefore, just "Selling in May and going away" isn't likely to be a winning approach.

No sir. If you expect to succeed in 2014, you will likely need to be execute on the buy side as well.

Signals to "Buy 'Em!"

Frankly, there are lots of great buy signals. For example, you could "be like Buffett" and buy when there is "blood in the streets."

In English, this means that you should buy when stocks are down 10 percent. Then you should plan to buy some more if the indices fall 15 percent. And then go ahead and add another batch of capital if the S&P manages to decline by 20 percent.

Please understand that you are not likely to get the bottom of the bear move using such an approach. But, using this "legging in" strategy will cause you to "buy low." And in the long run, the shares you purchase when things look ugly will help you outperform when the bulls return.

Another strategy that folks tend to like is the "golden cross." The idea is to buy when the 50-day moving average crosses above the 200-day moving average. This is clearly a VERY long-term approach, but the historical results are pretty decent and this signal will get you back on the bull bandwagon before things get away from you.

Trust The Thrust!

However, one of the best longer-term buy signals is called a "breadth thrust." Cutting to the chase, it usually pays to, in the words of Ned Davis Research, "trust the thrust."

The buy signal occurs when the percentage of stocks above their 50-day moving averages has first been below 75 percent and then moves above 90 percent.

The reading indicates that the 90 percent of stocks are healthy from a technical perspective and that the market is "surging." And history shows that this is an indicator to watch.

Since 1967, there have been 17 "breadth thrust" buy signals. Although the signals have been more frequent since 2007, the profitability of the signals is still strong. You see, the S&P 500 has been higher 82.3% of the time one month after the signal occurs. And the market's average gain one month out has been 3.1 percent (compared to the average of 0.6 percent for all one-month periods).

The beauty here is that the signal results are stronger the farther out you go. Three months later, stocks are up 94% of the time and sport an average gain of 6.1 percent versus 1.9 for all three-month periods. Same thing six months later - 94% of the signals are profitable and the average gain is 11.1 percent versus 3.9 percent. And one year later, ALL of the signals produced gains, with the average gain being 16.7 percent as opposed to all one-year period gains since 1967 of 7.9 percent.

Thus, history shows this is a signal it pays to heed. Oh, and the last signal occurred on January 4, 2013. So it would have helped investors get on board what turned out to be a very strong run.

Positions in stocks mentioned: none


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editor and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.