MARTIN ZWEIG WINNING ON WALL STREET-plus comments

 P22 Remember you are playing with probabilities, employ sensible strategies to limit risk, and get aggressive only when conditions warrant

 

P52 Fed Indicator

Discount rate, fed reserve requirements and fed funds rate.

Negative moves remain for six months then they go stale. And are discarded.

P53 moves by the Fed toward easing have a greater positive impact on stock prices than the negative effect created by tightening moves.

The initial fed cut is significant. +2, every other cut adds 1, six-month fade.

 

Extremely bullish= 2 or more

Neutral 0 or 1

Moderately bearish -1 or -2

Extremely bearish =-3

 

P59 the returns in the extremely bullish is so good that it would pay for a patient and risk-averse investor to stay completely out of the stock market at any time the fed indicator rated anything less.

 

Installment debt

Reported once a month, Fed stat release G 19

Expansion in debt is negative, debt plunges its bullish

Above 9%, so a band 6-12% around this, yoy growth.

 

P70 FED INDICATOR GRADINGS

Extremely bullish = 4 model points

Neutral= 2 model points

Moderately bearish = 1 Model point

Extremely Bearish= 0 Model points

 

INSTALLMENT DEBT

Positive = 2 Model points otherwise 0

 

PRIME RATE

8% arbitrary rate?

Cut is positive = 2

Otherwise 0 Model points

 

The monetary Model is online

 

P79 Monetary model Buy at 6 points, sell at 2 points

Can be used with other indicators and make partial moves. Eg from 50% to 100% invested. When bullish signals

Bearish 0% to 40% invested.

 

P81 -Obviously the stock market is no place to be when monetary conditions are hostile. Yet, stocks are super attractive when the Fed is loosening and interest rates are falling. Don’t Fight the Fed.

 

Be contrary when the crowd is extremely one-sided otherwise stay with tape.

 

Tax loss buying, pick a diverse set of stocks, spread bets, if they are not showing signs of going well in a few weeks post year end then sell them.

 

BULL MARKET SIGNALS

1.     When advance /decliners are over 2x for 10 days

2.     Fed lowers reserve requirements or lowers interest rates

If both are between 3 months then they are very bullish, usually they come early in the bull market

Bear market conditions

1.     Extreme deflation

2.     Ultra high PE’s—be careful of no earnings, then use average earnings of the last few years as EPS

3.     Inverted yield curve—uses Moodys aaa corporate bond yields as the long-term rate and 6-month commercial paper as the short rate, must persist or get worse

If the market declines more than 10% with none of the above present, then buy

 

STOCK PICKING

1.     Strong growth in eps and sales—steady more important than volatile

2.     Reasonable pe given growth rates—if too high avoid, relative to the market

3.     Corporate insider buying or at least no heavy selling

4.     Relatively strong price action by the stock itself

 

Prefer buying strength and selling weakness

Price change on the day of the result is important, poor tape action is a kiss of death

A big price lift on day of announcement is positive

Look for bad b/s or unsustainable earnings and avoid

If the market pe is 10, I am happy to pay 16x for quality stock

Charts looking for stocks behaving better than the market or at least as good as the market.

Best chart in a strong market is a series of higher highs and higher lows. The best buying points are short-term pullbacks 5% to 10% from a high, provided that the small downturn does not violate a recent prior low.

 

If you purchase a stock greatly at odds with your own feelings youre going to be very uncomfortable with it. And youll probably sell it on the first tiny reaction, or be tempted to get out with a very small profit if it rises a bit. This would defeat the whole purpose of buying stocks, ie, looking for those that may make big moves and letting your profit rides-but cutting your losses short. 

 

Insider buying—I define an insider buy signal as a case when 3 or more insiders buy a stock within a 3 month period but none sells. Conversely, I would define an insider sell signal as a case when 3 or more insiders sell within the latest 3 months and none buys, preferring unanimity

 

Buy a stock that is up strongly 3x in a year, as long as the pe is still reasonable and earnings growth is there.

 

If you hold too much of a position you are apt to worry about it excessively and often wind up selling it too soon—sell some to a comfortable level

 

One small break in the growth rate is clearly forgivable when the company is beginning to show signs of getting back on track –and especially when the outlook for the industry is improving and the pe remains modest.

 

STOP LOSSES

Do not back out of your stop or second-guess yourself

Don’t average losers

Your first loss is your best loss

Generally set stops 10 to 20% below purchase price. Depending on trading pattern and feel, volatility

Try and set a stop just below the previous low that a stock has made recently, or just below a trendline, it is an art not science

Recycle capital is better than staying in a poor position

TRAILING STOP—put just below the previous minor low, and construct a trendline connecting several low points of the stock. A trailing stop 25% below the current is way too low, while 5-6% is too light.

The main idea is to make the best guess you can about what an ordinary reaction in the price would be, as opposed to a drop commensurate with bad news or lower expectations for the company or perhaps more negative general stock market conditions. You’re trying to separate the random or normal sell-offs from the non-random and abnormal sell-offs inspired by more negative conditions. So you do not want to be taken out on temporary dips.

Although you get stopped near a short-term low from time to time, stops enable you to cut losses and let profits run, I can't think of anything more important in managing money.

 

SUMMARY

House clean your stocks periodically

Move cash weightings around a lot through the cycle

At market peaks move to cash or conservative stocks, at market lows buy aggressive stocks—when the market is behaving well and has support

The average guy buys stocks when the market is in decline and sells in the initial part of a rally

Diversify stocks shotgun not rifle

Buy strength-- sell weakness and stay in gear with the tape

Comments

 MZ is really a sophisticated trader rather than an investor IMO. His heyday 1970-90's was really some time ago and I wonder whether some strategies are now front run by algos etc. The book does point out counter intuitive traps for investors as well as some short-term trading tools that have been handy.