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Either the Nasdaq or the NYSE can lead the market - each one has a different meaning - and here it is.

What you see is a market that’s being led by the NYSE. This is not a condition we normally see at a sustainable advance or a meaningful break out. So unless this condition reverses, we’re looking for further downside.

Performance

So far, 2006 has not been a year to brag about, with both our Rydex Service up just under 7% and our QQQQ Service (on margin) up just over 7% (using closing price for Rydex and Open price for QQQQ). But to put it in perspective, at this point last year, we were sitting well in negative territory before advancing to finish the year up around 50%. And we had the same thing for 2004 - down 14% in March before finishing up 57%.

So I’m not too discouraged, since I understand that 1) investing/trading is something you do for the long term - and like any business, you’ll go through winning months or losing months and what matters is how you finish over a longer period and 2) this system is an intermediate term trend system, so we’ll eventually get the conditions that deliver +10% returns per trade.

For example, In 2005, we had 3 trades that delivered 12.7, 14.3, and 14.8%. So out of 23 trades, 3 resulted in the bulk of all our gains - the remainder of the trades pretty much balanced each other out.

Plus we had just gone through a stretch from October to March where we were up 45% - so we were over due for a draw down.

The point is, playing the mid term trend game, you don’t know when the next big trade will come - you just have to continue to position for it - and if you have patience, you’ll get them.

Of course, you can also play the short term game. The short term game is a way of playing shorter term, more predictable moves for smaller gains. This works great, until you get a 30 day trend - which normally knocks the short term system for a loop. And to me there’s nothing more frustrating than going against a large trade that can make you a lot of money.

Babe Ruth

I frequently liken my system to the way Babe Ruth played baseball. We all know that Babe Ruth was the home run leader. But most don’t know that he was also the strike out leader. So basically, every time he got to the plate, he was swinging away, expecting that perfect pitch, right down the middle and when he got it - he got it. And thus the home run leader. We do the same thing with the market. We look at each and every change in short term trend as a potential intermediate term move. Not every one will be - as we’ve seen. So we may strike out a lot - but when we hit it, we hit it out.

So if you understand that certain conditions repeat - but not all the time - and position for those conditions as if they’re going to be a strike right down the middle, it doesn’t take but 3 trades, as we saw last year, to put in a decent annual return. If you can deal with that - you can handle system trading.

Summary & Outlook

We remain in Sell Mode, expecting the market to move lower into 5/8 - but cognizant of the fact that we’re in a consolidation and that the market can break out of this consolidation either higher or lower.

The next key reversal date aligns closely with the Fed meeting. With everyone expecting their increasing rates to stop, I see us entering into a buy the rumor sell the news scenario. So whichever way we do break, higher or lower, I think we’re setting up for a good counter move. To be honest, my gut has me leaning towards the market breaking higher here - for one last run into a top - and if that happens, that top WILL mark the top for the rest of the year.

Later in the year bird flu will begin playing a role. So far the market has shrugged off everything that’s come its way, but I think bird flu has the potential to have significant impact not just our markets, but global markets.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,
Jay DeVincentis

Trading involves high risk. Past results are not indicative of future returns. Stockbarometer.com and all individuals affiliated with Stockbarometer.com assume no responsibilities for your trading and investment results.

technorati: stocks, stock market, investing, trading.

1. Do not spread your money too thin.

My friend has a little over $200,000 invested in the stock market through 27 different Mutual funds. In my opinion, 27 Mutual funds is 27 too many collecting load fees, management fees, commission fees, operating and advertising fees. Diversity is important, but just as important is over-diversification. Also, in my opinion, $200,000 should not be put into more than 12 stocks, let alone 27 different Mutual funds.

2. Do not pay commission fees to purchase a stock.

If you are going to invest your hard earned dollars into a company, the least the company could do is provide you a way to invest in their company commission free – and they do!

3. Only purchase those companies that pay a dividend.

The same company that you invest in commission free should also offer you another incentive for you to invest – a dividend for the use of your money.

4. Only purchase those companies that have a history of raising their dividend every year.

The same company should continue rewarding you for your faith in their company by increasing the amount of their dividend every year. Rising dividends are also the proof that the company is dong something right.

5. Dollar-cost average into each stock position.

By dollar-cost averaging (buying the same stock at different prices through the years) you’ll never pay too much for the company’s stock, even if the initial purchase is at a 52 week high. Have all the dividends from each company rolled back into more shares of each company, until retirement. The companies you invest in should do this for you, automatically, commission free.

6. Forget making a profit; instead focus on the income provided from your stock portfolio.

That’s right! Forget making a profit. The burden is now lifted - no more pressure on making a buck in the stock market (Instead of trying to bend the spoon, that is impossible, instead just think of the spoon as – omigosh! - I’m in the Matrix). When you focus on the amount of money your holdings are providing in dividends – and when those companies selected have a history of raising their dividends each year – a lower stock price allows the dividends that are being rolled back into the stock to accelerate your income. The total value of your portfolio may go lower, but your income from that lower priced portfolio would increase dramatically. Profit by income!

7. Make every stock purchase with the intent that the purchase will be a long-term investment.

Do not trade in and out of your holdings. There have been many up and downs in the stock market. The down markets only accelerate your income. GE has raised their dividend for 28 years in a row. Why sell it? 100 shares of GE ten years ago has turned into 1200 shares today due to stock splits, and that is not counting how many shares you would have now if the dividends were being rolled back into more shares of the stock through those years.

8. Understand that a lower stock price, after your initial purchase may be a blessing in disguise.

The income from your stock holdings should grow every quarter, no matter what the total amount of your stock portfolio is worth. (If your Mutual fund declines in price from one year to the next and if your income is not increasing (accelerating) from that fund, why are you in that fund?) A company pays their dividend not on how much their stock is worth in the market place. For example, a company pays a quarterly dividend of 50 cents a share. A company has little control on how much its stock price is worth in the market place on any given day. You will receive 50 cents a share per quarter whether the stock price is at 50 dollars a share, or drops to $40 a share or goes up to $70. While the stock is down at $40 a share your dividend reinvestment is loading up on more shares.

9. Develop a savings plan to add to your holdings each quarter to help your dividend reinvestments to accumulate more shares on a dollar-cost averaging basis.

The savings could be as little as $5.00 a week. Why put that savings in a savings account at 1.2 percent, when there are so many companies out there that are paying a 4 to 5% dividend yield and increasing their dividend every year? And since none of the companies you are investing in charge a commission, all of that $60.00 a quarter you saved and invested would help your dividend reinvestments to dollar-cost average into your holdings. Every cent you save and invest would work toward your ROI (Return on Investment).

10. Read my book ‘the Stockopoly Plan’ soon to be released by American Book Publishing.

I believe it will profit you and your family for the rest of your lives.

About the Author:
Charles M. O’Melia is an individual investor with almost 40 years of experience and passion for the stock market. Author of the book ‘The Stockopoly Plan’, soon to be released by American Book Publishing.
For more excerpts from the book ‘The Stockopoly Plan’ please visit http://www.thestockopolyplan.com.

You have permission to reprint this article either electronically or in print as long as the author bylines are included, with a live link, and the article is not changed in any way (grammar and typos, excluded). Please provide a courtesy e-mail to charles@thestockopolyplan.com telling where the article was published.

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