Trading Tips From The “Experts”

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