Guest Author - Guido Deboeck

On popular demand, here is a brief refresher on how to figure out the market direction. The direction of the market affects how we live and what we can or cannot do. If you know the market direction at all times or at least most of the time, you have fewer problems knowing how to invest. If you have less problems with investments, you make more money (maybe even to the point where your day job may become a minor distraction...). You have more choices. For some reason some people never seem to know what the market is about or where it is heading, they feel frustrated, they donot know where to put hard earned savings. Frequently, those people blame the markets for low portfolio returns!

Let’s think football, a sport many are quite familiar with without realizing that it teaches valuable investment lessons! Here is what you can learn from football.

You are the 'home team" and the other team is “the market”. A key thing to know at any time in the game is: "who has the ball"? If the home team has the ball, then the game plan should be offensive; if the other team (the markets) has the ball the game plan should obviously be defensive.

How do you figure who has the ball? What does it mean to play offensive or defensive? To figure out who has the ball, just open a newspaper, look at some indices or preferably charts. Some financial newspapers make this real easy for you, e.g. Investors Business Daily. Ask yourself: what has been the recent trend (five to ten days at the most) of the major indices. Eyeball some charts, compare the level of these indices between two dates not much more apart than a week or two, is all what is needed. If all tree indices point upwards the conclusion is that “the home team” has the ball; if all three (or at least two of these indices) point downwards then the the market has the ball. Can it be simpler?

The key is however to draw the logical implications: which is the best investment strategy?

The choice among investment strategies boils down to offensive or defensive. To adopt an offensive strategy in football is to run with the ball as far as one can in the direction of the goal. In investments an offensive strategy means to be fully invested and to capture the highest possible returns from all your invested assets. If the markets are pointing downwards, then a defensive play requires that you protect your assets, move some assets out of the markets, maybe even sit on cash for a while.

When the market has the ball, it will pull you down; the return you made during the uptrend will evaporate in little time; four out of five stocks will be pulled down with the market trend, hence the key is to loose as little as possible whenever there is a down draft.

It is amazing how many people check daily the weather charts in the newspaper but do not bother to check "who has the ball" in the investment game! It is even more surprising how few football fans know how valuable watching a game is to learn about investments...

Chosing the right investment strategy based on factual knowledge about the trends in the markets can affect your long term well being. Not knowing who has the ball is a major mistake. Fortunately, it an easy one to fix: check daily your newspaper what the direction of the market is and adopt the right investment strategy. Stay "in sinc" with the markets, just like you would with the weather...

Here is an exercise: look up some charts either in IBD or on the web about the recent trends of the S&P500, the NASDAQ and the DOW; observe what changes occured in the last three months, the last month, and last week. Who do you think has the ball ? Don't tell anyone, just keep the ball and run with it.

746 words 2.25 minutes