Trend Trading Report Part II - Market Conditions

Buy a stock only when the S&P 500 index is trending upward. This is fifth of the twelve commandments of profitable investing  covered in my website. You're probably wondering what the S&P 500 index has to do with your decision to buy a stock. This is a very important issue and directly applies to your ability to be successful as a Trend Trader.

To understand the fifth commandment, consider the following facts:

1. The S&P 500 Index is considered the bellwether indicator for the U.S. stock market. This index covers a broad cross-section of publicly traded stocks in the stock market.
2. The overall trend in the stock market can be determined by looking at the trend of the S&P 500 index.
3. The overall trend in the stock market is heavily influenced by institutional investors.
4. If the stock market is trending upward, the institutions are buying and that buying by the institutions is the primary reason the market is moving upward.
5. 75% to 85% of all stocks go up when the S&P500 index is trending upward.
6. Roughly 90% of all stocks go down when the S&P500 index is trending downward.
7. If the S&P500 index is trending downward and a Trader wants to purchase a stock that has been trending upward, there is a good chance that the price action for that stock is going to reverse and proceed downward. This will quickly put the Trader at a disadvantage in terms of the price action for that stock relative to the price the Trader paid to purchase that stock.

During the week there are often scheduled news releases that can significantly impact the stock market. Many Forex Traders use a weekly online calendar that provides specific times of the day when those news items are scheduled.  The first two of the following six news items have the highest impact on the market. The remaining four can also have a high impact: In general, be careful abou making trades in and around those times of high impact news.

1. Non-Farm-Payroll (NFP)
2. FOMC Minutes or other Federal Reserve reports or speeches from the Chairman of the Federal Reserve (currently Janet Yellen).
3. Unemployment Claims
4. Consumer Confidence
5. Crude Oil Inventory Changes
6. Housing Market Reports

Global news often has a major impact on stock market performance. This news is random and spontaneous. It can't be predicted as to what will be communicated and when it will be received. The important point to keep in mind is to stay in touch with the news and protect your trades with stop losses to limit the risk in each trade.

Seasonal Impacts on the Market

Professional traders recognize that there are better times of the year to invest than other times. As with our weather seasons, we also know that historical seasonal patterns can be unpredictable. Consider the following for what their worth. I'm not presenting these as fact.

• January often rises strongly. Some believe that falling prices in January are indicative of a bear market for that year.
• Some of the biggest market bubbles have burst during October.
• Some believe that most all market gains are made between November 1st and April 30th.
• Some believe that by the end of May, it's best to sell and go away for the summer months. Note: This wasn't necessarily true in 2009 as the market saw significant gains, albeit the market energy (volume) was very light.
• August is a "sleeper month" when many professional traders take vacations. However it's also a time when huge pension and mutual funds quietly start buying stocks.
• September is the month institutions often dump stocks they want to sell in preparation for the end of the fiscal year. They sell off stocks with poor performance, stocks that ran up on speculation, and stocks in sectors with low expectations for year end performance.
• October - This is the month when some of the biggest market bubbles have burst.
• Winter - Some believe that most market gains are made between November 1st and April 30th.

The following chart is a good visualization of this phenomenon.

Notice that January, March, and April are typically very strong as are November and December.

I recommend a good article on this subject. It is titled "

Sell in May and Go Away: Is It True".

Summary

To optimize success as a Trend Trader, one needs to trade with the "market trend". In addition Traders needs to be aware of scheduled news and seasonality factors that could negatively impact trading results.

End of Part II

Part III of this report will be released in about one week. The topic is "How To Recognize Trends".

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