One of the most important things you must know before buying any stock is the direction of the general market. 90% of all stocks go UP in a general bull market and 90% of all stocks go DOWN in a major bear market.
But how do you know why even the so-called “good” ones go down when they haven’t lost their value. Sales, profits, everything remains the same yet these stock decline in price.
Your broker or financial planner won’t tell because almost none of them have been taught this simple technique. You can check it out yourself.
In the newspaper Investors Business Daily there is published several times each week the IBD Mutual Fund Index. Look at the 200-day Moving Average dotted line. When the direction of that line is going up it is a bull market. When the direction of that line turns down as it did this past July it is a bear market. Very simple.
This index is made up of 24 large mutual funds. They own hundreds if not thousands of different stocks. This dotted line that is computed every day is composed of those thousands of stocks. From the direction of the dotted line it clearly indicates a bull or a bear market.
This is a very long term signal and is not for short term trading. It is ideal for retirement and college plans. The inexperienced investor does require any knowledge of fundamental or technical trading techniques.
It is advisable for those not following the IBD Index when buying any stock, ETF or mutual fund there should be an open stop loss order placed immediately. With mutual funds it will have to be a mental stop where the investor keeps track. The most any prudent investor is willing to lose is about 10%. He might risk more, but that is up to each individual. Don’t rely on any broker to protect an account.
Once a market starts down it begins to feed on itself. Buyers hunker down and slowly disappear. The prudent investor will look at his portfolio statement carefully every month. If any mutual fund goes down more that the set amount he has decided upon (maybe 10%) he should call his broker and all that money transferred into a money market account.
Money market funds do not pay much, but even if the amount is zero percent at least the money is being secured while waiting for the next buying opportunity.
All investors and even day traders should be aware of general market direction as it will aid in establishing equity positions.