Saturday, July 24, 2010

Track Record For “Market Pulse” In IBD

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A lot of the questions I seem to get regarding the general direction of the stock market tend to revolve around what kind of track record for the "Market Pulse" in the IBD. I'm not sure where it's addressed at, but O'Neil does talk about this in one of his books. I believe what he said was the the method he uses to determine the overall trend is right about 80 percent of the time. He goes on to say that no system is 100 percent right 100 percent of the time. He concludes that for our purposes, you can make money with a system that is right that often.

I've noticed that there are many critics of the IBD and their methods for identifying market tops and bottoms. Where I think this is shortsighted is the most people don't even have a method. And that even if it seems obvious that the market has topped, then why did so many people lose nearly half of their investment funds in the last bear market. The fact is that they either didn't have a system or they chose to ignore it. The real reason is probably that for most people, they've been brainwashed into thinking that you must buy and hold forever. You do this at your peril with individual stocks. The price of a stock is directly determined by the demand for it. Demand is primarily determined by where the big money flows. It eventually leaves and in many cases, it never returns. This is when the small investor gets screwed. Now I don't believe that the same rules apply for mutual funds. They definitely should be held for 15 to 20 years minimum.

What's important to know is that the vast majority of times, the track record for the market pulse in the IBD has identified market tops enough times to know it's a good tool to use. And while it does flash a "market in uptrend" signal that doesn't always succeed, every bull market has begun with an attempted rally and a follow through day. The current outlook in the IBD is a good place to start if you have no system because it is based on what the market says what is happening instead of the opinion of the talking heads on tv.

So, before you invest, make sure your stock market investing strategy includes a way to find the overall market trend whether it's the Market Pulse of some other system you trust.

Good luck!

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