USING THE CYCLE "CLOCK" TO TIME SECTORS, FUNDS AND INDUSTRIES

We have discussed what happens to IPOs, now let's discuss what happens to the cycle when we look at mature stocks, (for these purposes we will consider anything over two years "mature").

Generally, by this time, the stocks can't be hyped for performance anymore. The public has figured out that these stocks are either dogs or winners and treats them accordingly. (They can be fooled by false splits and buybacks, but we will reserve this discussion for another time).

Now the stocks must stand on their own performance achievement. By this time the stock will generally follow the rest of the industry, and this is where we must be more critical in consideration of the sector and industry the the stock belongs to.

Cyclical action is dependent, not primarily on the individual stocks itself, but rather the performance of the industry as a whole and the stocks performance relative to the rest of the industry.

This is where buying into a sector fund makes the job a lot easier. We don't have to just evaluate the stock in isolation, but rather how are the the rest of the sector's members performing. This makes the job an awful lot easier.

Generally I will start with the NYSE stocks which are common to the industry we are looking at. Most times I will not be buying these stocks, but rather the less expensive NASDAQ stocks because they are cheaper in price. I don't do this because I can't afford the more expensive NY stocks, but rather the leverage that NASDAQ stocks can offer. Let's face it. ....It's much easier for a $15 or $20 stock to move $5.00 than it is for a $80 stock to move the same equivelent percentage move of $32. We can afford to buy more, therefore we get more bang for the buck.

Yes, the risk is greater, but then we don't have to risk as much to make the same equivelent level of profit. Even better are call options, which if done properly can offer three to four times the leverage with LESS risk in my opinion. Most folks try to invest the same amount in options that they would have risked in the underlying stock instead of just the equivelent amount of contracts which probably costs less than 10% of the outlay for more expensive issues, (but that again is an issue for another day). Generally if a stock is optionable and over $20 I will take the option every time; risk less and profit more than if I had bought the underlying.

Once I have identified a stock, (or industry), the next step is researching the stocks which are in the same industry. What I really want to know is, "What are the other comparable stocks within the industry doing"??

I have lists of NY stocks for each Industry that I track and what I do is look at each stock within the list to see if it is advancing in trend and momentum. If the majority of these big board stocks are advancing then it is a pretty safe bet that my stock will advance as well. As a generalization, I want to see that at least 20% of these stocks have turned from being negative to positive, (keeping our "clock" or " wheel" in mind). So I wait for the number of stocks with positive trends to drop under 20%, then recross to above 20% and I will then ride these stocks or funds until they get over the 80% level and then drop back, (equivelent to the 12 O'clock position on our clock).

Sounds simple and basic, and most of the time it is.

How do we measure trend and momentum?

Lots of different techiniques, and the ones I use are quite sophisticated, but here is a simple method that will work in the majority of case for you.

Look at the price today versus 28 days ago. Is it higher or lower? If it is higher, then the trend is probably up....if it is lower then the trend is probably down...Wow!

Now take a 9 day average of the trend ....this is momentum. If the number is less than yesterday, then momentum is declining, if it is greater then momentum is increasing.

Do this for each of the industry stocks that you have identified. Now if the previous day you had less than 20% of the stocks with positive momentum and trend and today you have more than 20% of the stocks with positive trend and momentum then we are set up to confirm a buy signal for that particular stock or fund. If on the other hand we had more than 80% of the stocks with positive momentum and trend yesterday and today the number has dropped under 80%, then we would believe that our cycle had run its course and it was time to take profits.

This is of course simplified, but the tenets will work. To improve the results even more we need to detrend the data to account for general market trend that could mask what our sector or industry group is doing.

Next time I will teach you a simple method of detrending data.