Page 357 - How to Make Money in Stocks Trilogy

232 A WINNING SYSTEM

a 10% to 12% dip, the general market averages may continue to penetrate
into new low ground for a week or two. Yet the upside/downside volume
may suddenly shift and show steadily increasing upside volume, with down-
side volume easing. This switch usually signals an intermediate-term upturn
in the market. But you’ll pick up the same signals if you watch the changes
in the daily Dow, Nasdaq, or S&P 500 and the market volume.
Some services measure the percentage of new money flowing into corpo-
rate pension funds that is invested in common stocks and the percentage
that is invested in cash equivalents or bonds. This opens another window
into institutional investor psychology. However, majority—or crowd—
thinking is seldom right, even when it’s done by professionals. Every year or
two, Wall Street seems to be of one mind, with everyone following each
other like a herd of cattle. Either they all pile in or they all pile out.
An index of “defensive” stocks—more stable and supposedly safer issues,
such as utilities, tobaccos, foods, and soaps—may often show strength after a
couple of years of bull market conditions. This may indicate the “smart
money” is slipping into defensive positions and that a weaker general market
lies ahead. But this doesn’t always work. None of these secondary market
indicators is anywhere near as reliable as the key general market indexes.
Another indicator that is helpful at times in evaluating the stage of a
market cycle is the percentage of stocks in defensive or laggard categories
that are making new price highs. In pre-1983 cycles, some technicians
rationalized their lack of concern with market weakness by citing the num-
ber of stocks that were still making new highs. But analysis of new-high
lists shows that a large percentage of preferred or defensive stocks signals
possible bear market conditions. Superficial knowledge can hurt you in
the stock market.
To summarize this complex but vitally important chapter: learn to inter-
pret the daily price and volume changes of the general market indexes and
the action of individual market leaders. Once you know how to do this cor-
rectly, you can stop listening to all the costly, uninformed, personal market
opinions of amateurs and professionals alike. As you can see, the key to stay-
ing on top of the stock market is not predicting or knowing what the market is
going to do. It’s knowing and understanding what the market has actually done
in the past few weeks and what it is currently doing now. We don’t want to give
personal opinions or predictions; we carefully observe market supply and
demand as it changes day by day.
One of the great values of this system of interpreting the price and vol-
ume changes in the market averages is not just the ability to better recog-
nize market top and bottom areas but also the ability to track each rally
attempt when the market is on its way down. In most instances, waiting for