The Market is Rising But Stocks Keep Breaking Down

The market appears to have changed from being aAlmost all mutual fund managers want to minimize
declining market to being a rising market. Day afterfluctuation in the amount of assets they are
day, reporters announce that there has been anothermanaging. That's why most are so ardent in opposing
market advance. Yet, it may seem that every timeattempts to "time the market" (an issue I may take
you invest in a stock it breaks down and your stopup at another time).
loss is triggered. It is not always easy to participate in"Timers" sometimes sell their stock positions or
a new uptrend.mutual funds because doing so is required by their
During the transition from a bear market to a bulldiscipline for managing risk. Fund managers, on the
market, is parking your assets in a money-marketother hand, have a vested interest in discouraging
fund really your best option? Here are someinvestors from doing anything that removes cash
alternatives.from the consolidated investment account they are
In the transition time, when the market appears tomanaging. SPY, on the other hand, can be bought
be in the beginning phase of a new up-trend after aand sold like any other stock. Thus, if you get a buy
prolonged decline, we may hesitate to invest until wesignal on the market, but are not yet ready to take
have more assurance that the trend is likely toindividual positions because of the number of
endure awhile. In the early stages of a recoveringbreakdowns you are seeing in individual stock
market, we may be slower to invest than we couldpatterns, you might consider filling several of your
be. There is a good reason for this. Those whoportfolio slots with SPY. Then, as you need cash for
carefully monitor stock behavior during these timesthe purchase of individual stocks, you can sell enough
may notice that an inordinate number of stocksSPY to meet your needs. Because SPY represents
break down and collapse after attempting to reverse500 stocks, it is less risky than individual stocks in the
course. Even though the market seems to beearly stages of an up-trend. This will enable you to
recovering and indexes are rising impressively,participate on the upside even if individual stocks still
individual stocks are churning. During a recovery afterlack stability. While you are waiting for good
a bear market, stocks may make a big rise and thenopportunities in individual stocks, you have the
fall enough to lose almost all the gain. Only those whopossibility of making much more than money market
bought at the very beginning of the price surge canreturns by investing in the market (S&P500) as
make a profit under those conditions. Most investorsa whole through the purchase of SPY. Even here,
will not do that, so they will lose on their trades.though, proper timing is essential. Do not invest in
When thousands of stocks alternately rise a littleSPY until indicators confirm that the market is in an
then plunge to give up most of the previous gain, theup-trend.
overall market may look good as it rises steadily toHow can one know when to use SPY instead of
higher valuations. In the meantime, though investorsindividual stocks? The issue hinges on whether the
may hear that the market is up 12% year to date,new market trend has sufficient internal momentum
they notice that their own portfolios are down 5%.to support individual stock trends long enough for
Thousands of stocks are taking turns at pushing thethem to be profitable.
market a little higher. Even though the percentage ofA simple way to monitor the development of a new
breakdowns is high, the combined effect is a risingmarket trend is to watch the Dow (tests conducted
market. During times like this, when individual stockby our traders have convinced us that the Dow
breakdowns are relatively frequent, the volatility (andgives more precise signals for shifting trends in the
risk) of individual stocks is much greater than that ofmarket than does the S&P500). One way to
the market as a whole. Thus, many investors moveapproach the problem is to track the 10-day and
assets to the money-market while the market as a20-day simple moving averages of the Dow Jones
whole is making gains that are much more attractive.Industrial Average. Your alert signal would occur when
Individual stocks do not always evidence this level ofthe 10-day moving average rises above the 20-day
instability in the early stages of a market turnaround.moving average. Your signal would occur when the
However, when they do, I suggest that investors20-day moving average begins to rise while the
and traders evaluate whether or not it would be wise10-day moving average remains above the 20-day
to make the following "tweak" to their discipline.average. This alignment and the rising of the 20-day
During the waiting period between the time when theaverage would suggest that the momentum of the
market turns bullish and when you begin to takenew trend is sufficiently developed to support trading
positions in selected stocks, you might be able toin individual stocks. The position of the 10-day
further enhance returns by investing in the market asaverage above the 20-day average lets you know
a whole. There is a security (symbol = SPY) thatthat the short-term trend still supports the rising of
tracks the S&P500. It is an exchange-tradedthe 20-day average. Until these conditions occur, a
fund (ETF) also known as a SPDR (Standard &person could stay with the SPY positions. Even after
Poor's Depository Receipt). Our traders track SPYthe signal is given, SPY would be sold off only as
and a large number of other ETFs daily and rankneeded to free up money for a stock purchase.
them relative to each other. They make this part ofReversing the configuration of these moving
their daily discipline because it gives them theaverages would provide a bearish indicator. Of course
information they need to participate in the marketthis combination of moving averages is only one
even when individual stocks are churning but theexample of the tools that might be employed. The
market is rising. If this helps them, you might benefitpurpose here is to be able to place money where it
from doing the same thing.can earn a return well above that offered by any
Technically, it is a no-load mutual fund that trades onmoney market fund when individual stocks are
the stock exchange like a stock. Investing in thiswhipsawing too much or triggering stop losses too
stock is somewhat like buying the Vanguard 500frequently for most people to make significant
Index fund, but it is better for the purpose. Vanguardheadway toward profitability.
discourages people from buying and selling their fundCopyright 2009, by Stock Disciplines, LLC. a.k.a.
like a stock.StockDisciplines.