- Variable Rates of Return from Stocks
- Speculative Bubbles Are Often Followed by Years of Below-Average Investment Performance
- The Moral of the Story—Be a Flexible, Opportunistic Investor
- Growth Targets—"The Magic 20"
- Growth Target Zone
- Active as Opposed to Passive Management of Assets
- Diversification—A Major Key to Successful Investing
- Income Investing—Time Diversification
- Creating a Bond Time Ladder
- Increasing Returns from the Stock Market while Reducing Risk
- Useful Market Mood Indicators That You Can Maintain and Use in Just a Few Minutes Each Week
- Relationships of Price Movements on NASDAQ and the New York Stock Exchange
- How to Identify Periods When NASDAQ Is the Stronger Market Area
- General Suggestions
This chapter is from the book
This chapter is from the book
This chapter is from the book
How to Identify Periods When NASDAQ Is the Stronger Market Area
The steps involved have to be taken only once each week, after the close of the final trading session of the week. The entire process should take just a few minutes. Signals, created at these times, carry for the entire week following, until the next calculation takes place. Here are the procedures involved:
Secure at the end of each week the closing levels of the NASDAQ Composite and the New York Stock Exchange Index. These are readily available in Barron’s, in the financial pages of virtually any major newspaper, and on almost any Web site relating to the stock market.
Divide the weekly closing level of the NASDAQ Composite by the closing level of the New York Stock Exchange Index to secure a weekly NASDAQ/NYSE Index relative strength ratio. For example, on April 22, 2005, the NASDAQ Composite closed at 1932.10, and the New York Stock Exchange Index closed at 7015.85. The weekly ratio, therefore, stood at .2754. (1932.10 divided by 7015.85 = .2754.)
Each week, calculate the average of the most recent 10 weekly ratios that you have calculated, as per Step 2. To do this, you add the most recent 10 weekly ratios and divide the total by 10. On the eleventh week, you drop the furthest week back so that you are always totaling and then averaging the most recent 10 weeks in your calculation. This is called a moving average.
Compare the most recent reading of the NASDAQ/NYSE Index relative strength ratio to its 10-week moving average. If the weekly relative strength ratio is greater than its 10-week moving average (for example, if the latest weekly ratio stands at .2750 and the 10-week moving average is .2746), consider the NASDAQ to be leading the New York Stock Exchange Index in relative strength. This will usually carry positive implications for the stock market. If the weekly relative strength ratio is below its 10-week moving average (for example, the ratio is .2745 and the 10-week average is .2750), consider the NYSE Index to be the stronger market area. This does not necessarily carry bearish implications but does indicate that the most favorable market climate, at least based on this indicator, is probably not in effect.
Weekly ratios will increase if NASDAQ is rising more rapidly than the New York Stock Exchange Index. They will decrease if NASDAQ loses strength in relationship to the New York Stock Exchange Index.
The following tabulations in Table 1-3 are hypothetical, based on retroactive research employing the parameters set forth above, and do not represent real-time performance for the entire period. The presumption is that investors would be invested in stocks only during favorable market periods (weekly NASDAQ/NYSE Index ratio above its 10-week moving average) and would be in cash at other times. No allowance is being made for commission and other transaction expenses or for tax consequences. Nor is any allowance being made for interest returns while in cash or for dividend payouts while in stocks.
1971–April 2005*
|
Performance of the NASDAQ Composite Index |
||
|
Buy and Hold |
Average Gain per Annum |
8.98% |
|
|
Maximum Open Drawdown |
–77.42% |
|
|
Invested 100% of time |
|
|
Trading By The NASDAQ/NYSE Index Relative Strength Indicator |
||
|
|
Average Gain per Annum |
11.28% |
|
|
Percentage of Time Invested |
–54.6% |
|
|
Rate of Return While Invested |
20.65% |
|
|
Number of Round-Trip Trades |
–141 (4.1 per year) |
|
|
Maximum Open Drawdown |
–39.72% |
|
For the New York Stock Exchange Index |
||
|
Buy and Hold |
Average Gain per Annum |
7.60% |
|
|
Maximum Open Drawdown |
–49.78% |
|
|
Invested 100% of time |
|
|
Trading By the NASDAQ/NYSE Index Relative Strength Indicator |
||
|
|
Average Gain per Annum |
7.59% |
|
|
Percentage of Time Invested |
–54.6% |
|
|
Rate of Return While Invested |
13.9% |
|
|
Number of Round Trip Trades |
–141 (4.1 per year) |
|
|
Maximum Open Drawdown |
–23.72% |
* --The employment of the NASDAQ/NYSE Index relative strength indicator, even as a sole determinant for stock market investment, would have improved both rates of return while invested as well as risk levels for the NASDAQ Composite, more than doubling rates of return achieved while investor capital was at risk in stock portfolios that replicated on a buy and hold basis the performance of the NASDAQ Composite Index. No credit has been given for income received while in cash.
--The performance of the NYSE Index improved, too. This index produced almost identical returns when invested all the time as it did when it was invested only when the NASDAQ/ NYSE timing indicator was favorable. However, rates of return while invested were clearly superior during periods that this model was favorable (+13.9% rate of return versus +7.59% for buy and hold). Risk levels were lower, too (–23.72% versus –49.78%).
---No allowance has been made for trading expenses, but these would almost certainly be offset by additional interest earned while in cash positions.