Sunday, June 1, 2008

Following Investor's Business Daily

I want to share some thoughts and observations about William O'Neill's market strategy and Investor's Business Daily.

Back in 2000 and 2001 I tried to follow O'Neill's methods with very negative results. However, I am clear that I wasn't really following his methods. I only thought I was, primarily, because I was too agressive at each announced follow-through day instead of easing in to test the waters. However, in my defense, the Big Picture during the third week of May this year created a sense of deja vu, so I would like to share it with you.

From IBD's "The Big Picture" 5/21/08 - Market In Confirmed Rally:

"Still, other factors point to the market's uptrend remaining well intact. For one thing, the NYSE indexes have become the laggards during this rally.
The Nasdaq has emerged as the market's leading index. Meanwhile, leading stocks have continued to ramp up, breaking out of well-formed bases and banking new highs. In fact, one market sector in particular has been red-hot.
That's the energy sector. Surging oil prices have fueled knockout gains for many oil and gas stocks, be they drillers, exploration and production firms, services providers or other related companies."

From IBD's "The Big Picture" 5/22/08 - Market In Correction (One Day Later):

"The body of evidence now points to a market undergoing a correction. Even before the distribution days started piling up, the major NYSE indexes were hitting new highs on weak volume.
In fact, it has been more than two months since the NYSE gauges have registered any kind of up-day in above-average trade.
The market showed its lack of staying power in its inability to clear key levels of resistance. The main indexes all ran up against their 200-day moving averages recently, only to run out of gas and turn lower.
A lack of breadth among leading stocks also has been a problem. On any given day lately, you may have seen roughly three-quarters of the market's top performers hailing from the energy sector. A strong market rally usually wields broader leadership."

I am not trying to be critical of IBD per se, but I wanted to point out the pitfalls for the inexperienced trader. Given the article on 5/21/08, the novice might have been content to ignore the change in market stance on the next day. However, experienced traders would have already been trimming positions as the "distribution days started piling up".

It was all the more confusing that the arguments used to justify maintaining the "Market In Confirmed Rally" stance on 5/21/08 were the same arguments used to support the "Market in Correction" stance on 5/22/08.

Even so, Investor's Business Daily has a great track record, so let's see how well we can do this year by trading the Qs off of IBD's Market Outlook. In the System Tracker, I have added the IBD market calls this year. So far, it is up over 16%.

Following IBD may prove to be the easiest way to make money in the market.

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