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06/11/1999

Trading Tips From The "Experts"

About ten years ago, I briefly left my position with a major Wall
Street brokerage firm to go out on my own and attempt to
become an equity trader. To say I flamed out would be an
understatement. At least my old firm took me back (never burn
those bridges).

In preparation for this new endeavor I read all manner of books,
including Jack Schwager''s "Wizards of Wall Street," Marty
Zweig''s "Winning on Wall Street," Stan Weinstein''s "Secrets for
Profiting in Bull and Bear Markets," and the classic
"Reminiscences of a Stock Operator," by Edwin Lefebvre (the
story of Jesse Livermore). I already knew a ton about trading but
I painstakingly reviewed these and other books for wisdom. It''s
a big reason why I''m a bit cynical about the new breed of day
traders.but I wish them all luck because, in the end, if they
succeed it''s great for the economy, right?

Anyway, I recently uncovered a sheet I put together for the folks
I used to work with (2/91) which outlined general equity trader
rules.as they were in the late 80s, early 90s. I repeat these for
you because this is truly "Wall Street History." So many of these
sacred shibboleths are now, themselves, history as the last few years
of market action have shown. Others, are still applicable today.

[I am not editing what I wrote in 1991. It''s written in cliff notes
fashion and many of these are repetitious but that''s how you
learn, right?]

--Dividend yield under 3% on DJIA is negative.
--Positive yield curve produces up market 80% of the time.
--Mutual fund cash indicator good contrary indicator.
--Action in utilities preceeds general market trends.
--Major direction of the market is dominated by monetary
considerations.
--Very rare for advances to lead declines by a 2 to 1 margin over
a 10-day period.
--When up volume leads down volume by a ratio of 9 to 1 or
more its an important signal. Every bull market in history and
many good intermediate advances have been launched with a
buying stampede that included one or more 9 to 1 up days.
Having 2 within a reasonably short span is very bullish (within 3
months).
--Fighting the tape is an open invitation to disaster.
--At bottom: extraordinary pessimism and continued pessimism
during the first sharp rally in the bull market. At top: small rise
in rates can be the catalyst.
--Only be contrary when crowd is very one-sided.
--Buy strength, sell weakness and stay in gear with the tape.
--Stocks are most likely to be accepted as prudent at the moment
they''re not.
--The way you know the market is overvalued is when you can''t
find a single company that''s reasonably priced or meets your
investment criteria.
--Look for non-institutional participation.
--It is a positive when a company is buying back shares. Don''t
invest in companies issuing new shares.
--Beware the "next something" (i.e., the next IBM).
--Stay away from whisper stocks. If a new idea really works it
will be good a year from now.
--Avoid stocks with excessively high P/E''s.
--When cash exceeds debt it''s very favorable.
--If P/E is less than growth rate that''s good.
--Market is a discounting mechanism; stocks sell on future, not
current fundamentals.
--Never buy a stock when good news comes out.
--Never buy a stock because it appears cheap after getting
smashed.
--Never buy a stock on a downtrend.
--Don''t make emotional decisions.
--Stocks fall apart much faster than they rise because fear causes
a panic reaction while greed takes awhile to simmer.
--Historically, the advance/decline line reaches its ultimate peak
five to ten months before the blue chips top out.as confidence
wanes, money moves out of secondary stocks and into the
higher-quality blue chips.
--Longer a divergence lasts, the more significant the eventual
reversal will be.
--Maintain optimism.
--If news events don''t move markets the way you think they
should that''s telling you something.
--Top formations in the market averages occur in only one of two
ways:
(1) The average moves up to a new high, but does so on low
volume. Demand for stocks is poor at that point and the rally
is vulnerable.
(2) Volume surges for several days, but there is very little, if any,
upside price progress as measured by market closes.
--If stocks that have been leading the bull market start breaking
down, that is a major sign the market has topped.
--Hold a stock as long as it is performing properly. "It is never
your thinking that makes big money, it''s the sitting."
--Buying stocks based on a cheap P/E is wrong.
--Stock market is neither efficient nor random. It is not efficient
because there are too many poorly conceived opinions. It is not
random because strong investor emotions can create trends.
--Stock at new highs has much more of an open running field
because no one ahead of you is at a loss and wants to get out at
the first opportunity. Everybody has a profit. Everybody is
happy.
--Always want to be better prepared than competition.
--When the market gets good news and goes down, it means the
market is very weak. When it gets bad news and goes up, it
means the market is healthy.
--When your worst fears aren''t realized you should probably
increase your position.

And from Jesse Livermore:

"Always sell what shows you a loss and keep what shows you a
profit."

"To buy into a rising market is the most comfortable way of
buying stocks.Remember that stocks are never too high for you
to begin buying or too low to begin selling."

"They say you never grow poor taking profits. No you don''t.
But neither do you grow rich taking a 4-point spread in a bull
market."

[Editor Note: Again, these were disparate opinions from various
experts. Some are contradictory. And you can pick apart each
one].

Brian Trumbore



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-06/11/1999-      
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Wall Street History

06/11/1999

Trading Tips From The "Experts"

About ten years ago, I briefly left my position with a major Wall
Street brokerage firm to go out on my own and attempt to
become an equity trader. To say I flamed out would be an
understatement. At least my old firm took me back (never burn
those bridges).

In preparation for this new endeavor I read all manner of books,
including Jack Schwager''s "Wizards of Wall Street," Marty
Zweig''s "Winning on Wall Street," Stan Weinstein''s "Secrets for
Profiting in Bull and Bear Markets," and the classic
"Reminiscences of a Stock Operator," by Edwin Lefebvre (the
story of Jesse Livermore). I already knew a ton about trading but
I painstakingly reviewed these and other books for wisdom. It''s
a big reason why I''m a bit cynical about the new breed of day
traders.but I wish them all luck because, in the end, if they
succeed it''s great for the economy, right?

Anyway, I recently uncovered a sheet I put together for the folks
I used to work with (2/91) which outlined general equity trader
rules.as they were in the late 80s, early 90s. I repeat these for
you because this is truly "Wall Street History." So many of these
sacred shibboleths are now, themselves, history as the last few years
of market action have shown. Others, are still applicable today.

[I am not editing what I wrote in 1991. It''s written in cliff notes
fashion and many of these are repetitious but that''s how you
learn, right?]

--Dividend yield under 3% on DJIA is negative.
--Positive yield curve produces up market 80% of the time.
--Mutual fund cash indicator good contrary indicator.
--Action in utilities preceeds general market trends.
--Major direction of the market is dominated by monetary
considerations.
--Very rare for advances to lead declines by a 2 to 1 margin over
a 10-day period.
--When up volume leads down volume by a ratio of 9 to 1 or
more its an important signal. Every bull market in history and
many good intermediate advances have been launched with a
buying stampede that included one or more 9 to 1 up days.
Having 2 within a reasonably short span is very bullish (within 3
months).
--Fighting the tape is an open invitation to disaster.
--At bottom: extraordinary pessimism and continued pessimism
during the first sharp rally in the bull market. At top: small rise
in rates can be the catalyst.
--Only be contrary when crowd is very one-sided.
--Buy strength, sell weakness and stay in gear with the tape.
--Stocks are most likely to be accepted as prudent at the moment
they''re not.
--The way you know the market is overvalued is when you can''t
find a single company that''s reasonably priced or meets your
investment criteria.
--Look for non-institutional participation.
--It is a positive when a company is buying back shares. Don''t
invest in companies issuing new shares.
--Beware the "next something" (i.e., the next IBM).
--Stay away from whisper stocks. If a new idea really works it
will be good a year from now.
--Avoid stocks with excessively high P/E''s.
--When cash exceeds debt it''s very favorable.
--If P/E is less than growth rate that''s good.
--Market is a discounting mechanism; stocks sell on future, not
current fundamentals.
--Never buy a stock when good news comes out.
--Never buy a stock because it appears cheap after getting
smashed.
--Never buy a stock on a downtrend.
--Don''t make emotional decisions.
--Stocks fall apart much faster than they rise because fear causes
a panic reaction while greed takes awhile to simmer.
--Historically, the advance/decline line reaches its ultimate peak
five to ten months before the blue chips top out.as confidence
wanes, money moves out of secondary stocks and into the
higher-quality blue chips.
--Longer a divergence lasts, the more significant the eventual
reversal will be.
--Maintain optimism.
--If news events don''t move markets the way you think they
should that''s telling you something.
--Top formations in the market averages occur in only one of two
ways:
(1) The average moves up to a new high, but does so on low
volume. Demand for stocks is poor at that point and the rally
is vulnerable.
(2) Volume surges for several days, but there is very little, if any,
upside price progress as measured by market closes.
--If stocks that have been leading the bull market start breaking
down, that is a major sign the market has topped.
--Hold a stock as long as it is performing properly. "It is never
your thinking that makes big money, it''s the sitting."
--Buying stocks based on a cheap P/E is wrong.
--Stock market is neither efficient nor random. It is not efficient
because there are too many poorly conceived opinions. It is not
random because strong investor emotions can create trends.
--Stock at new highs has much more of an open running field
because no one ahead of you is at a loss and wants to get out at
the first opportunity. Everybody has a profit. Everybody is
happy.
--Always want to be better prepared than competition.
--When the market gets good news and goes down, it means the
market is very weak. When it gets bad news and goes up, it
means the market is healthy.
--When your worst fears aren''t realized you should probably
increase your position.

And from Jesse Livermore:

"Always sell what shows you a loss and keep what shows you a
profit."

"To buy into a rising market is the most comfortable way of
buying stocks.Remember that stocks are never too high for you
to begin buying or too low to begin selling."

"They say you never grow poor taking profits. No you don''t.
But neither do you grow rich taking a 4-point spread in a bull
market."

[Editor Note: Again, these were disparate opinions from various
experts. Some are contradictory. And you can pick apart each
one].

Brian Trumbore