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M = Market Direction: How You Can Determine It 203

key investing skill virtually all investors, whether amateur or professional,
seem to lack. In fact, Wall Street analysts completely missed calling the mar-
ket top in 2000, particularly the tops in every one of the high-technology
leaders. They didn’t do much better in 2008.
We conducted four surveys of IBD subscribers in 2008 and also received
hundreds of letters from subscribers that led us to believe that 60% of IBD
readers sold stock and raised cash in either December 2007 or June 2008
with the help of “The Big Picture” column and by applying and acting on
our rule about five or six distribution days over any four- or five-week
period. They preserved their capital and avoided the brunt of the dramatic
and costly market collapse in the fall of 2008 that resulted from excessive
problems in the market for subprime mortgage real estate loans (which had
been sponsored and strongly encouraged by the government). You may
have seen some of our subscribers’ comments in IBD at the top of a page
space titled “You Can Do It Too.” You’ll learn exactly how to apply IBD’s
general market distribution rules later in this chapter.

The Stages of a Stock Market Cycle

The winning investor should understand how a normal business cycle
unfolds and over what period of time. The investor should pay particular
attention to recent cycles. There’s no guarantee that just because cycles
lasted three or four years in the past, they’ll last that long in the future.
Bull and bear markets don’t end easily. It usually takes two or three tricky
pullbacks up or down to fake out or shake out the few remaining specula-
tors. After everyone who can be run in or run out has thrown in the towel,
there isn’t anyone left to take action in the same market direction. Then the
market will finally turn and begin a whole new trend. Most of this is crowd
psychology constantly at work.
Bear markets usually end while business is still in a downtrend. The rea-
son is that stocks are anticipating, or “discounting,” all economic, political,
and worldwide events many months in advance. The stock market is a lead-
ing economic indicator, not a coincident or lagging indicator, in our gov-
ernment’s series of key economic indicators. The market is exceptionally
perceptive, taking all events and basic conditions into account. It will react
to what is taking place and what it can mean for the nation. The market is
not controlled by Wall Street. Its action is determined by lots of investors
all across the country and thousands of large institutions and is a consensus
conclusion on whether it likes or doesn’t like what it foresees—such as
what our government is doing or about to do and what the consequences
could be.