Winning on Wall Street
Martin Zweig is perhaps the most successful predictor of market trends in the history of Wall Street. That alone would make his book an interesting read.
Predicting Market Trends
Zweig uses several 'factors' to predict market trends including:
1.The Prime Interest Rate.
If the rate is 8% or better any rate hike is a sell signal,
and a cut of 1 full percent, or 2 smaller cuts in a row
is a buy signal.
If the rate is below 8% any cut is a buy signal,
and two small hikes in a row, or a hike of 1 full percent
is a sell signal.
2.The Federal Reserve Discount Rate and Reserve Requirements.
Any increase in either is a sell signal (-1) and wipes out any
positive points. The negative point remains for 6 months.
Any cut in either wipes out any negative points. An initial cut
(a change in direction, or the first change in 2 years) gets 2
positive points that lasts for 6 months when the score is
reduced to 1 point for another 6 months.
3. Installment Debt Indicator
Calculated by dividing the month's figure by that same
month, a year previous. Sell signals come when rate of
increase rises up to 9%. Buy signals come when rate of
increase falls to 9%
4. ValueLine Composite Index
Rises or Falls by 4% are buy and sell indicators.
He recomends that the small investor track the VLE once
a week. That is the timing I use to grab numbers anyway.
5. Now here is where Zweig gets a little strange. He converts all of his respective points for each of the 4 factors above to "model points". Numbers 1, 3, and 4 are either on "buy" or "sell" signals. Buys get 2 model points. Sells get 0 model points.
Points for number 2 (the FED) are converted this way:
+2, +3, or +4 get 4 model points
0 or +1 get 2 model points
-1 or -2 get 1 model point
-3 or -4 get 0 model points
The model points from the 4 factors are then tallied. A rise to 6 model points is a "buy" signal. A fall to 2 model points is "sell" signal
My problem with Zweig's system is that it is cumbersome for the average investor. But I do notice that the 4% Value Line Composite (or Zweig's 'ZUPI') seems to be a consistently accurate predictor of trends by itself. I think I will include it on my front page. In fact, following the the VLE probably makes more sense than following the DJIA or the S&P500. For in the VLE each stock is measured by the percent of its gain or loss, and then the percents are tallied. This gives a clearer picture of what market did. In the other averages the more expensive stocks' gains can count more than the less expensive, even though the less expensive stocks gained by a greater percent.
Zweig is a momentum player. He prefers to buy stocks already making an upward move, stocks that have shown themselves to be stronger than average in the preceeding dip. He prefers to buy only when the market has shown an upward trend. One of his mottos is: "don't fight the tape." In keeping with this idea he takes the following measures.
1. He limits his losses on a stock by placing stop loss orders at the same time he purchases his shares. He allows for a 10 to 20 percent loss, depending on the volitility of the stock being purchased.
2. He locks in his profits with stop loss orders, which he will move up as the stock rises.
Another motto of Zweig's is, "buy strength, sell weakness". This too is a classic momentum player's idea.
Zweig tries to run contrary to certain sentiment indicators. He cautions that this is an art not a science.
MUTUAL FUNDS CASH...Zweig watches the funds for a build up of excess cash. What can be considered "excess" is subject to scrutiny and debate. I just got an email forwarded to me whose message was that the Mutuals have more cash right now than in any time in the last 10 years. The grain of salt that should be taken with the above statement is the fact that most of the mutual funds did not exist 10 years ago.
INVESTMENT ADVISORS...The big houses all put our recomendations on stocks. A poll of these advisors would give a feel for the mood of their customers toward any particular stock. Zweig uses these numbers. But he rightly warns that sometimes, particularly in a BULL market, the majority IS right.
BARRON'S ADDS...Zweig takes a measure of the degree of bullishness in the adds in BARRONS.
SECONDARY OFFERINGS...Zweig notes that few secondary offerings are seen in bear markets. The number of secondary offerings being placed is a measure of bullishness.
Zweig gives data to support general market rises on the trading day BEFORE the following hollidays:
Holiday UP DOWN UNCHANGED Presidents Day (Feb) 12 3 2 Easter 26 5 3 Memorial Day 25 4 5 July 4 28 5 0 Labor Day 31 2 0 Thanksgiving 27 4 2 Christmas 25 7 1 New Years 31 1 1 THE FIRST TRADING DAY AFTER THE HOLIDAY CAN BE GOOD. Thanksgiving 30 2 1 Christmas 22 10 1
*From Martin Zweig's WINNING ON WALL STREET, page 158.
Zweig notes that if the day preceeding the holiday is DOWN, then the day following that holiday is also very likely to be down. Modays seems to be down more than up, and that Fridays seem to be up the most of any trading day. Tuesday, Wednesday, and Thursday tend to be neutral.
Zweig also rated the performance of the different months from 1897 to 1988. Here they are from best to worst:
December, August, January, November, July, March, October, April, June, May, February, September.
The reader should note that Zweig was not rating the DEGREE of rise or fall of the market in these months, only the likelihood that the market WOULD rise or fall. The worst dips tend to group themselves into October. But the market is more likely to fall in September.
This book makes a good read, and I heartily recomend it. Zweig has become a big player in the Mutual Funds, and you can find his sites all over the internet. I really like his ideas on trends. But I think I can pick stocks as well as he does. So can you.
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