Page 327 - How to Make Money in Stocks Trilogy

204 A WINNING SYSTEM

Similarly, bull markets usually top out and turn down before a recession
sets in. For this reason, looking at economic indicators is a poor way to
determine when to buy or sell stocks and is not recommended. Yet, some
investment firms do this very thing.
The predictions of many economists also leave a lot to be desired. A few of
our nation’s presidents have had to learn this lesson the hard way. In early 1983,
for example, just as the economy was in its first few months of recovery, the
head of President Reagan’s Council of Economic Advisers was concerned that
the capital goods sector was not very strong. This was the first hint that this
advisor might not be as sound as he should be. Had he understood historical
trends, he would have seen that capital goods demand has never been strong
in the early stage of a recovery. This was especially true in the first quarter of
1983, when U.S. plants were operating at a low percentage of capacity.
You should check earlier cycles to learn the sequence of industry-group
moves at various stages of the market cycle. If you do, you’ll see that railroad
equipment, machinery, and other capital goods industries are late movers in
a business or stock market cycle. This knowledge can help you get a fix on
where you are now. When these groups start running up, you know you’re
near the end. In early 2000, computer companies supplying Internet capital
goods and infrastructure were the last-stage movers, along with telecom-
munications equipment suppliers.
Dedicated students of the market who want to learn more about cycles
and the longer-term history of U.S. economic growth may want to write to
Securities Research Company, 27 Wareham Street, #401, Boston, MA
02118, and purchase one of the company’s long-term wall charts. Also, in
2008, Daily Graphs, Inc., created a 1900 to 2008 stock market wall chart
that shows major market and economic events.
Some charts of market averages also include major news events over the
last 12 months. These can be very valuable, especially if you keep and
review back copies. You then have a history of both the market averages and
the events that have influenced their direction. It helps to know, for exam-
ple, how the market has reacted to new faces in the White House, rumors of
war, controls on wages and prices, changes in discount rates, or just loss of
confidence and “panics” in general. The accompanying chart of the S&P
500 Index shows several past cycles with the bear markets shaded.

You Should Study the General Market Indexes Each Day

In bear markets, stocks usually open strong and close weak. In bull mar-
kets, they tend to open weak and close strong. The general market averages
need to be checked every day, since reverses in trends can begin on any