What frustrates many a novice do-it-yourself investor is trying to figure out where the markets are heading.
It can be a daunting task sifting through the massive amount of information available on the internet to arrive at a handful of evaluation criteria.
What follows is one such approach that focuses on a low information diet of just the key essential factors that’ll give you a good perspective of where money is flowing in the stock market.
Your focus as a do-it-yourself investor should be on optimizing your returns while creating a time-rich lifestyle for yourself.
This means that you’ll need to develop a disciplined approach to assessing potential opportunities.
In this article I’ll show you how you can:
- Use just a handful of economic indicators to get a sense of where the markets might be heading.
- Get the help of the print media to give you an idea as to where the smart and dumb money is being invested.
- Determine the overall trend of the market using some simple technical analysis.
- Assess which economic sectors offer the greatest current prospects.
My intention is to walk you through a typical top down analysis of the stock market without spending a lot of time analyzing countless reams of data.
The goal is to be able to do this complete assessment given a 1-hour time commitment once you have the initial tools set up.
An hour of your time spent on a monthly basis will give you an edge in the markets that most investors do not have.
Let’s start with what a top down approach entails.
By taking a bird’s eye or 30,000 foot view of the general economy and drilling down to how the overall stock market and the individual economic sectors are doing – we can gain a much broader perspective of how the markets might play out in the short term.
Step 1: The State of the Economy
Tool #1 – ISM Index
One of the best ways to get a quick snapshot of how the US economy is doing is to check out the ISM report published on the first day of the month by the Institute for Supply Management.
This report is used by well-informed stock investors to measure the business cycle’s growth and contraction.
Since the data comes from corporate America it is viewed as being more authentic than government generated data.
The ISM is expressed as a single number with 50 being the midpoint. An expanding economy shows up as monthly ISM numbers increasing in value above 50.
It is important to note that your focus should be on the rate of change in the data – not the raw numbers.
The rate of change gives you a clearer picture as to how quickly the data is changing.
Although somewhat time consuming to first set up, you may wish to create a simple spreadsheet that tracks the rate of change month-to-month for the ISM index.
Once you have created this tool you’ll be able to quickly update the data and keep better track of the rate of expansion of the economy.
Of course, you could also subscribe to a fee-based service that’ll provide this statistic as well as others to help you in your decision-making process.
Tool #2 – IWM Exchange Traded Fund
A second helpful tool that’ll give you a snapshot of how the economy is doing is to take a look at the iShares Russell 2000 Index Fund (IWM).
This is an ETF of 2000 small companies.
When the economy shows signs of expansion many hedge fund managers buy IWM and likewise bet on its decline when the economy is shrinking.
Head on over to a stock chart analysis site like StockCharts.com and type in IWM to see a technical chart of how the ETF is doing.
You’ll be able to assess whether the big institutional players are buying the ETF as evidenced by rising prices or not.
This is yet another quick assessment to use in your arsenal of effective stock market analysis tools.
Tool #3 – Personal Consumer Expenditures Index
The US Department of Labor produces a monthly report on consumer spending called the PCE.
This particular report is a good indicator of stock market advances and declines.
Author Joseph Ellis has set up a free website at www.aheadofthecurve-thebook.com where you can create and maintain charts that’ll help you track the rates of change in consumer spending.
This is just another suggested resource that’ll make you more efficient and effective over time in your stock analysis.
Step 2: Smart Money vs. Dumb Money
Wall Street generates most of its massive profits from the “dumb money” that is invested in the stock market every day.
Most of this money comes from passive investors who would rather have someone else handle their financial future rather than take it upon themselves to learn how to manage their own affairs.
The financial services industry does a masterful job of systematically reducing your gains through fees and commissions that are paid out whether or not your portfolio has generated a profit.
Unfortunately, this is where most of the dumb money ends up.
To get a quick feel as to how the dumb money is being invested take a look at a couple of popular magazines such as Money Magazine or Smart Money on the magazine rack or online.
Take a moment to leaf through the nature of the investment articles and what appears on the cover of the magazine.
Often this simple insight can give you an idea as to how the masses are enticed to invest – whether it be in mutual funds or similar investment products.
Then head on over and check out the cover of Forbes or The Economist. Skim through the contents to gain some insight as to where the smart investors may be investing.
You may be able to get a feel for how the economy is doing and where you might want to consider placing your hard-earned capital.
Step 3: Overall Technical Analysis of the Market
First, go to a stock chart analysis site such as StockCharts.com and type in the symbol for the S&P 500 Large Cap Index ($SPX) which is often used as a broad index for the overall stock market.
Then once in the chart, set the overlays to 50-day Simple Moving Average and 200-day Simple Moving Average (if not already done so) to give you a half year of data points to look at from a graphical or visual perspective.
By looking at the chart pattern and the interaction between the moving day averages you will be able to quickly assess the historical trend over the past several months of where the stock market is and where it might be heading.
Another quick assessment is to look at the most recent 30-day period of trading volume to get a feel as to whether money might be flowing into the stock market or seeking safer havens such as bonds or other fixed income securities.
If you are familiar with some of the other technical indicators you may also want to use the Money Flow Index to get a sense of how the big institutional players have been allocating capital throughout the most recent months.
Should you like to learn more about how to better use technical analysis in your stock investing decision-making process, please check out Michael Sincere’s book: All About Market Indicators.
It’s a simple easy-to-follow insightful resource.
Step 4: Sector Rotations and Money Flow
Your next stop is to drill down deeper into the top 9 economic sectors that make up the stock market as a whole.
Money flows from one sector into another based on how the overall economy is doing as well as the seasonality of the sector’s strength.
These sector rotations are what you want to be aware of as a do-it-yourself investor.
Your goal should be to follow the trend not buck it.
It is a lot easier making money in the stock market when you are following the money flow of the big institutional players.
For example, the technology and consumer discretionary sectors are usually stronger in the fall and weaker in the spring.
This aligns well with the expected increase in consumer spending that occurs from October to January every year.
So how do we go about analyzing each sector?
Here are a couple of simple approaches.
The first is to go to each technical chart of the top 9 sector Exchange Traded Funds (ETF’s) known as Spiders or “SPDR.”
Take a look at the moving day averages to see if they are up, flat or down.
This is a simple way to verify which sectors are currently in favor with Mr. Market thereby increasing your chances of making profitable trades.
You may also wish to drill down deeper into the top 3 holdings in those sectors that tweak your curiosity to see if any buying opportunities may be presenting themselves.
The nine ETF SPDRs that focus on the following sectors along with their biggest holdings are listed below.
Another important analysis to do on a regular basis is that of monitoring the rate of change in each of the sectors month to month.
This can be done by creating a simple spreadsheet and entering the data yourself.
Or you can play with the technical chart and adjust the time period for which you would like the data to be displayed.
Once you have the raw data you can enter the info into a calculator or spreadsheet to see what the rate of change is.
The actual raw data is not that helpful.
The rate of change is what you should be focusing on in all of your investing analysis.
It is the rate of change that is going to tell you how fast the fundamentals are changing.
A helpful inexpensive IOS app to consider using is one called StockTouch.
It uses heat map technology to visually track changes in the stock market whether it be individual stocks within an industry or entire sectors.
Heat maps are a color representation of how a particular stock is trading in relation to past performance and others within its industry.
This visual representation is a quick and easy way to assess trends that are occurring in the market.
This app is worth checking out as it saves you a lot of time researching trends in the market.
You’ll be able to hopefully make better quality buy and sell decisions with it.
To gain a much broader perspective of how seasonality might play out for your decision making, check out Yale & Jeffrey Hirsch’s book Stock Trader’s Almanac 2013 .
Since the early 70’s the Hirsch’s have been compiling statistical data and presenting it in a form that’ll help you make sense of seasonal patterns in the market.
This resource is a great starting point for learning about how you can be more effective in doing your due diligence of the current stock market trends.
There you have it – a simple yet comprehensive snap shot analysis of the stock market.
You could of course add other tools to your arsenal.
However this basic framework should point you in the right direction and give you an initial read as to how the stock market is currently behaving.
Read more posts like this in our General Investing Advice Category.
Find out how to use three stock selection tools that’ll give you some greater insight into how you can streamline your selection process in finding wonderful dividend stocks.
For this particular video tutorial, we’ll take a look at using Charles Carlson’s Big Safe Dividends website, along with the Preset screen feature within Yahoo! Finance and finally MSN Money’s Stock Scouter ranking system.
The whole idea behind using these particular tools is to be able to simplify the stock selection process by using the built-in features of several pre-set screens.
We want to eventually streamline our investment process so that we become both more efficient and effective as do-it-yourself investors.
To your ongoing success as a do-it-yourself investor.
As a do it yourself investor you’ll want to optimize your efforts online so that you spend a minimal amount of time and effort generating those significant returns.
Whether you play the market using stocks, options or a combination of the two, you’ll need to come up with an effective way of getting into the zone if you want to consistently beat the market averages.
And what do I mean by getting into the zone?
This is where you as an investor are able to efficiently process information about the stock market enabling you to create an edge over other investors.
In other words, the tasks associated with finding, assessing and strategizing investment opportunities tend to flow effortlessly with minimal frustration.
So how do you get into your zone?
Here are 4 stock investing tips to help increase your productivity and optimize your efforts in the stock market.
Managing Your Time
To get the most out of the time you spend working on your investment portfolio, get into the habit of blocking out a set period of time specific to investing.
And when is the ideal time?
Consider setting aside a block of time first thing in the morning when you are both mentally and physically fresh and therefore the most productive.
The morning is an ideal time to do some research and set up potential investment plays prior to the markets opening.
A focused effort of 30 to 45 minutes will go a long way in improving your financial education and your ability to generate more consistent returns down the road.
Managing Your Environment
In order to better focus your attention on your investments, eliminate those distractions that will take you out of your zone.
Some of the most common distractors that you have control over are:
- Turning off email and instant messaging service notifications.
- Putting your mobile phone on silent and diverting or muting your landline.
- Logging out of your Facebook and Twitter accounts.
- Removing distracting items from your sight.
As well, so as not to waste your precious time, have everything ready to go before you start.
Think of being both time efficient and effective with your time.
Do so by being tidy and organized with your documents and workspace.
Also make sure that your environment is comfortable so as not to be distracted by being too hot, too cold, hungry, thirsty or cramped.
You may also want to consider avoiding eating a high carbs meal prior to getting into your zone.
This is because the brain produces serotonin which is a hormone that helps you sleep.
Just the exact opposite effect that you desire.
Constant interruptions by others take you out of the flow of productivity.
The easiest approach to use for eliminating this problem is to set some specific ground rules for those around you.
Let them know ahead of time that you will be indisposed for a specific period of time unless there is a genuine emergency.
Be clear about what constitutes a genuine emergency.
I often let people around me know about the “Four F’s” in deciding what a real emergency is.
If there is a “flood”, “fire”, “fatality” or “front end loader” in the lobby, then please let me know about it.
Otherwise, please respect my privacy.
Setting simple ground rules helps to cut down on those unwanted interruptions and take you out of your productive flow.
The name of the game is to optimize your time spent with the whole investment process so that it becomes easier to produce your desired results.
The key to staying on top of your investment portfolio and simplifying the whole investment process over time is to be consistent.
By blocking out time on a regular basis to explore investment opportunities, as well as grow your financial knowledge, you’ll begin to see dramatic changes in your skills and results.
Ideally, as a do it yourself investor you should try to set aside some time each day to focus on how you can improve your investment portfolio.
Even 30 minutes a day will make a significant difference to your overall returns over time.
If you are motivated to generate consistent double-digit returns from your holdings year in and year out, then having a disciplined approach will move you that much closer to your goals.
When you take an active approach to investing, you increase the odds of realizing your dreams that much sooner.
Start creating your desired lifestyle by getting into your zone more often.
Read more posts like this in our Investor Psychology Category.
In Part Two we explored how eliminating time wasters and certain tasks can optimize your investing efforts.
The elimination approach is based on using the 80:20 Principle to streamline your endeavors by eliminating the top 20% of tasks that take up 80% of your time and effort.
In this article, I’ll share with you three strategies that’ll free up more of your time and increase your productivity to boot.
And how are we going to do that?
By Following a Low information Diet
There is an overwhelming amount of information and misinformation in the investment landscape. Where do you turn to get an unbiased opinion that’ll really move you closer to achieving your financial goals?
Too many information sources have a vested interest in either peddling a specific line of financial products or keeping you ignorant as to how you could do things better. Sometimes the best approach to this information overload is to limit access to it.
Think about it – as an investor – do you really need to see stock price changes on the screen every few seconds? If you were professional trader it might, but for the regular Joe – I don’t think so.
To regain your focus and sanity consider going on a low information diet.
Start by assessing which 20% of the information that you read is going to really produce 80% of your gains.
Put another way – ask yourself:
What 20 percent of my actions in the areas of finding, assessing, or strategizing are going to produce 80 percent of my results?
Here’s a 3-step approach to consider implementing on a temporary one-week reprieve to refocus your energy and time.
Step One – Reducing Media Consumption by 80%
Limit your total media consumption to less than 15 minutes per day including reading the newspaper, visiting financial news websites, watching business news television programs or listening to any news on the radio.
With the time you’ve just created spend it re-connecting with family and friends, as well as reflecting upon what action steps you could eventually implement that’ll get you closer to realizing your dreams.
Take it upon yourself to learn a new financial skill that is valued by our society. Become better adept at investing or picking up a skill that’ll move you forward in your career or passions.
Keep in mind that this is a temporary strategy – unless of course you find that a low information diet is more conducive to living a fuller more productive life.
Step Two – Reducing Email Use by 80%
Limit your use of email systems to just twice a day – unless of course your work requires constant use of email.
By batching your email correspondence you’ll save yourself a lot of time.
Check your email once in the morning after you have accomplished at least one important productive task.
By tackling at least one important task first thing in the morning before being sidetracked with other time consuming activities, you’ll move towards becoming more productive in less time.
When you do check your emails look for those from which you are expecting a response. Limit your reading and response time to those emails that actually require your attention or are going to move you forward.
Check your emails near the end of your day. This should give you enough time to not only respond to important requests but also send out your emails in batch.
Step Three – Cutting Back on Social Networking Use by 80%
If you are in the constant habit of sending text messages, checking your Facebook page or other social media sites throughout the day then following this step is where you are going to regain much time.
It is great that we can communicate instantly with people across the globe. However, taken to an extreme we can waste an incredible amount of time texting or surfing during the course of our busy days.
It’s no wonder we feel overwhelmed at times. The constant barrage and interruption that can occur decreases our productivity.
If you are being interrupted while working on tasks requiring some degree of focus and creativity, you’re sabotaging your efforts. These minor distractions actually take you out of your creative flow which may require a lot more time than you think in order to get back into.
This week give you yourself a greater chance of successfully completing many of your projects by cutting back on your use of your mobile phone or access to various social networking sites.
Instead, take the time saved to complete high priority projects or even channel some of your energy into learning more about the wonderful world of investing.
Isn’t that what we’re trying to accomplish with this simple 3-step re-focus?
I hope that by implementing one or all of these steps you will begin to see the power of how reducing your information flow can actually improve your productivity, creativity and financial intelligence within a very short period of time.
Read more posts like this in our General Investing Advice Category.