ZF Capital

IN THE STOCK MARKET, everybody’s got a system. Some people use the charts, others follow the fundamentals. Others invest based on the seasons or stars. Over time, some approaches work more than others, but of course, nothing works all the time.

There is no sure thing. But after trading everything from stocks on the screen to futures on the floor, I’ve come to believe that the most simple and effective way to put the odds on your side when allocating assets is to follow what I believe is the golden rule: Don’t fight the tape.

Deciding whether a stock is “overvalued” or “undervalued” is totally subjective. Price, on the other hand, never lies. The tape is the tape and determining weather a security is strong or weak is easily visible to even the uneducated naked eye. When a market is strong, you might not want to invest in it, but I think you’re a major fool to stand in its path. (more…)

LET’S BE HONEST: Even before the atrocities of September 11th, the widely owned names were in bad shape. Now, given the dramatic declines we’ve seen over just the past few weeks, many strategists are calling the market a bargain. Goldman Sachs’s Abby Joseph Cohen recently raised her equity allocation, as did Tom McManus of Banc of America. Uber-bull Tom Galvin of Credit Suisse First Boston also urged investors to buy, and even Treasury Secretary Paul O’Neill has weighed in with his investment strategy, telling CNN he felt the Dow could approach new records within 18 months.

The country isn’t just patriotic — it’s bullish. From Joe Sixpack to Joe Battipaglia, most people aren’t questioning a rebound, but just waiting for it to occur. As we often point out, two sides make a market. Many investors feel as if the worst is over, while others expect more downside to come.

While I am not a roaring bear, I am a realist. And besides rising or falling, the third scenario for stocks — one it seems bulls and bears alike have completely forgotten about — is that the market might go absolutely nowhere for quite some time.

Most financial planners, market analysts and mutual-fund companies like to harp on the idea that the market returns about 10% a year. And while it’s true that the long-term average return on stocks has been approximately 10%, to suggest that an average year sees the market up 10% isn’t just misleading, but just plain wrong. Indeed, as we first pointed out a few months back, there have been long periods of time where the market has done absolutely squat. (more…)

MY ADULT LIFE began the day I understood persistence of trend. This undeniable trading truth dramatically increased my profitability and changed the way I look at the world.

Markets aren’t chaotic. Just as the seasons follow a series of predictable trends, so do market psychology and stock prices. Stocks are like everything else in the world: They move in trends, and trends tend to persist.

We are all looking for an edge. Low commissions and superior trade execution can only do so much. I have found that the biggest advantage you can have in the market is to trade with the trend. It’s the economic equivalent of having the wind in your sails.

In my experience, good traders seldom have strong opinions about the future, because they are humble enough to know their opinions don’t mean squat. The future will unfold no matter what any of us think about it. What most fundamental investors and message-board devotees fail to realize is that it isn’t our job to hypothesize how a stock should or could act. What matters is how a stock is acting at the time of our analysis. (more…)