Monday, December 29, 2008

Buy or Sell? What are excellent signals for investment? Find out whether we are in Bull or Bear Market?

How to find out where we are in the investment cycle?
What are good signals for buy or sell?

An investor does not need to be an economist to find out where we are in the cycle. There are many signals given by business and the public. Those signals from business indicating a raging bull market and the time to sell may include:
 PER ratios and forecast increases in profit are very high
 institutional cash holdings are very low, stock market indices are beginning to falter and are far above the norm
 a mania for a sector, investment style, asset or geographical area
 bad news is dismissed and good news is a catalyst for action
 new issues are oversubscribed and trade at a premium
 the stockbroker’s phone is always engaged
 inflation and interest rates are beginning to increase but are dismissed as blips
 dividend yields are at record lows

Signals from the public indicating a raging bull market and the time to sell may include:
 media and pundits are overwhelmingly optimistic
 doomsters are few, ignored or fired
 consumer and government borrowing and spending are high
 speculation in shares and housing is rampant
 advertisements abound for foreign holiday homes
 dinner party talk is boastful of success in the markets
 few can see any reason for a change
 political stability seems unending
 empty restaurant and trains seats are rare
 sudden appearance of new cars in the neighbourhood
 investors think they are geniuses, complete novices show interest in risky investments and their ‘success’ is highlighted in the press
 investment conferences are packed and the circulation of publications like Investors Chronicle is at a peak
 conspicuous consumption of luxury goods, such as fireworks, champagne and cigars at Christmas and New Year parties

The indicators of a bad bear market are the reverse and are excellent buy signals.

Buying Guide
Buying is easier for an investor to do than selling, although today is always the worst time to buy a share from a psychological viewpoint. If a share has met the strict criteria laid down in this book, then go ahead and buy. Do not be put off by a recent lower price, as that is no longer relevant and, in any case, may signify lack of support in the market. What is relevant is the expectation that the price will rise from here. By all means, monitor the share and choose the moment to buy, especially if it is over-bought and a correction is anticipated. Be aware of the normal market size of trades in the share and the number of market makers, as it is very important to be able to buy and sell unhindered. Take great care to avoid being stuck in a falling share that cannot be traded due to its illiquidity.

Selling Guide
Selling is one of the hardest investment decisions. If a share falls in price, the hope is that it will recover but, if it is sold now, then an unnecessary loss will be realised. One way to take out the emotion is to set a stop loss of, say, 20% and strongly consider selling if this is triggered. A wider stop loss may be preferred for more illiquid shares, as they can be more volatile. Many shares in a portfolio may have the stop loss breached if there is a sudden market wash-out. Nevertheless, the principle still holds and selling them will prevent suffering further falls. It is worth remembering that a stop loss at 20% means that the next share you buy has to rise from 80 to 100 to make good this loss, a rise of 25%. Without a stop loss, hanging on to a share which falls 50% in value means that the next share has to double from 50 to 100 to make good the loss.

Sell when the story changes. If the reason why a share is bought no longer holds then the share should be sold. For example, if there was a promised roll out of a consumer franchise, such as a restaurant chain, of 25 new outlets a years and this has now been scaled back to say 10, then the story has changed and the share should be earmarked for disposal.

Sell when there is a better opportunity. Investors should constantly be on the look out for upgrading the quality and prospects of a portfolio and selling a share for a better one is the way to achieve this. Do not be tempted to continually add shares to the portfolio but keep the number steady at around a dozen shares spread across at least five sectors. If you want to add a share to your portfolio then do so on condition that an existing share is sold.

Set a price that you would sell any share in the portfolio. Monitor the shares and when the pre-set level is reached strongly consider selling in the light of prospects. Do not be greedy and, when you have achieved your goal, sell, even if the prospects look good. Do not try to squeeze the last bit of performance from a share but instead leave something for the next investor.

For more Information:
Shares or Stock Trading Resources
Optimal Trading Strategies, Investment Intelligence from Insider Trading, The Stock Investor’s Pocket Calculator, How to Profit in the Stock Market Using Volume and Stop Orders



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