Follow Scout Instinct in Your Investing

September 16, 2008
Michael Doran

,
Christopher Nezbeth

Physician's Money Digest, March15 2003, Volume 10, Issue 5

Whether you were a Boy Scout, a GirlScout, or the drum major in yourschool marching band, as a child youmost likely heard the motto: Be prepared.Luckily, if you happened to ignore this famousdose of advice because of a strong urge to flexyour adolescent rebelliousness, there'sstill time to witness the consequencesof following its direction.

As a matter of fact, today's physician-investor would be wise to borrowfrom the Scouts' rule of thumb. Thecurrent stock market is the perfectplace to challenge the authenticity ofthis famous slogan. Be prepared,however, to reap the benefits whenthe time is ripe.

TWO DIFFERENT MINDSETS

Before you replace your existinginvestor attitude with this universalfavorite, it's important you realize thatthere is a difference between being aprepared physician-investor and beinga smart one. For example, don'tassume that a well-prepared investor is one who isfully invested in the market at all times. A preparedinvestor is not one who will score big oncethe market turns around because they're investedin everything. That is not what being preparedmeans in the stock market.

In fact, an investor doesn't have to be fullyinvested at all times to do well. With a good advisor,it's possible to outperform the market's 10%average annual return. In this particular case, thekey to being prepared involves knowing how toread market direction, not buying as many stocksas you can. In addition, it also means knowingwhat indicators to be on the lookout for, so thatwhen the market does turn around, you'll be atthe forefront of a bull market.

TRUSTED INDICATORS

There are thousands of indicators investorsand traders use to measure when to be more fullyinvested or when to step to the sidelines and protectprofit. Some of these include economic indicators,technical indicators, and psychologicalindicators (ie, measurements of investorsentiment). Factoring in the market'shistorical data, there are a few fairlysimple technical measurements thathave been found to be the most reliable.The following is a list of some of thesetrusted indicators, which can helpensure you don't missthe signs of an approachingbull market:

• Rally follow-throughdays. As thename implies, follow-throughdays occur inthe days following arally. They are thedays when the broadmarket indexes (ie, theS&P 500 and Nasdaq)increase 2% or more and experiencemore volume than the daysbefore. These follow-throughdays confirm the rally's strengthand sustainability. They indicatethat more buying is coming into the market,which indicates the strong likelihood that institutionsare buying.

• Sector leadership. Every strong rally thatleads the market out of a bear market has strongsector leadership. Sector leadership can be discoveredby finding the sectors with the strongestindustry group, relative strength, and groupchart status. Also, investigate how much buyingpower is coming into the sector.

Tip:

• Market breadth. Studies of previous bullmarkets show that breadth (ie, how broad therallies are) is a strong indication of continuedstrength. If a rally is only the result of a handfulof sectors and industry groups, it will not pull themarket out of the grip of the bear. To get a handleon the breadth of the market, look atadvances versus declines, and up-volume vsdown-volume on a shorter- and longer-termmoving average basis. It's helpful to trackthis on a 5- and 11-day moving average basis.

• Investor sentiment. The market tends torespond contrary to the opinion of the averageindividual investor. Everyday factors, such as thenumber of bearish or bullish articleswritten in the papers recently,put/call ratios, and popular magazinecovers, can often act as secondarymarket indicators. Formore information on this subject,check out the Investors.com Website or the American Associationfor Individual Investors Web site(www.aaii.com).

OTHER POSSIBLE STEPS

Besides being on the lookout formarket indicators, there are stepsinvestors can take in the currentmarket climate that will benefitthem in the long run. With the helpof your advisor, objectively review your portfolio interms of how it is suited to your current investmentprofile. Next, if you don't already have one,create a set of rules for investing. These rulesshould consider market direction and economicfactors, and include specific buying, selling, andholding regulations. Finally, find a proactive managerwho will not plow your investments into adown-trending market, one who will wait for confirmation of an up-trend and apply both fundamentaland technical analysis.

Michael Doran is a private

money manager

affiliated with Sierra

Capital Planning in

northern California. He

runs a fee-based business

and a hedge fund

for qualified investors.

For more information,

call 877-467-8657 or

visit www.sierrainvestor.com. Christopher

Nezbeth contributed to

this article.