by Joe Duarte, MD Market Timing FOR DUMmIES ‰ Market Timing For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. 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Library of Congress Control Number: 2008939707 ISBN: 978-0-470-38975-1 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 About the Author Dr. Joe Duarte (www.joe-duarte.com) is best known for his candid, no- nonsense, and prescient expert commentary on the  nancial and commodity markets, such as his on-the-money call on CNBC, June 4, 2008, when he cor- rectly noted that oil had made a top and that a fall below $110 would take prices to $100 or less. By September 2008, oil had broken below $100. He is a widely read analyst and writer and an active trader. His daily Market IQ column is read by thousands of investors, market timers, and professional traders around the world. Dr. Duarte is the author Futures & Options For Dummies, Trading Futures For Dummies, Successful Biotech Investing, and Successful Energy Sector Investing. His combined expertise in health care, energy, and the effects of politics and global intelligence on the  nancial markets offers a unique blend of insight and information to thousands of active investors and political and intelli- gence a cionados around the world on a daily basis. Dr. Duarte’s Market Moves column is syndicated to a global audience through FinancialWire, a leading independent syndicate of  nancial information. He is also a featured columnist on the popular investor Web site Stockhouse.com. Dr. Duarte is a frequent guest on CNBC and is an original CNBC Market Maven. He is a regular guest on the Financial Sense Newshour with Jim Puplava radio show, where he comments on the energy markets and geopolitics. Dr. Duarte has been writing about the  nancial markets since 1990. His articles and commentary have been featured on Marketwatch.com and in Barron’s, Smart Money, Medical Economics, and Technical Analysis of Stocks and Commodities magazines. He has been quoted in the Associated Press, CNN.com, The Wall Street Journal, Smart Money Magazine, and Investor’s Business Daily. In 2003, Dr. Duarte received second place in the professional section of the Medical Economics Investment Challenge with a 12-month return of 42 percent. Dr. Duarte published the critically acclaimed market-timing newsletter “The Wall Street Detective” from 1990–1998, when it became an exclusively elec- tronic publication. It later was converted to Joe-Duarte.com. His daily market commentary “Joe Knows” appeared on Financialweb.com from 1998–2000. Dr. Duarte served as senior columnist for Investorlinks.com from 1998-2001. He is a registered investment advisor and president of River Willow Capital Management. He lives in Dallas, Texas, plays a Gibson ES-135, and loves his vintage Völkl tennis racket. Dedication To family, friends, and market timers around the universe. Acknowledgments Writing a book is a unique, lonely, and personal experience, and very few but the author, the editor(s), and those who share the space-time continuum with them can understand this. During this one, I had my share of ups and downs as well as rewards. So I can’t complain. Still, I couldn’t have done it without the usual gang that helps me on a daily basis. So here’s a big thanks to: My family, my of ce staffs from my other life, the Wiley editorial staff, espe- cially Stacy and Traci who helped shepherd me to the  nal goal, nearly on time for once. Grace “the wonder agent” and purveyor of recurrent gigs. Thank you for sticking with me. Frank “the master of all things Web-related,” without whom there would be no Joe-Duarte.com. Too bad you couldn’t come along on this little expedition. To Stone Barrington, Michelle Maxwell, and Sean King, Gabriel Allon, Oliver Stone (the literary character, not the movie director), and other inhabitants of pages and audio books that help me stay sane as I work and travel. As always coffee, tea, vitamins, sports drinks, nutrition bars, and the game of tennis also help. Special thanks to those who read my books, subscribe to my Web site and have kept this thing going for 18 years. Who’d’ve thunk it? And also to two longtime friends, John and Greg, whose interactions with me always prove to be worthwhile and interesting, to say the least. My patients who so graciously come back the next day even if I’ve had to run out of the of ce in a hurry to be on CNBC. If I’ve forgotten to mention anyone, it wasn’t intentional. I’m not as young as I used to be. Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Traci Cumbay Acquisitions Editor: Stacy Kennedy Copy Editor: Traci Cumbay Editorial Program Coordinator: Erin Calligan Mooney Technical Editor: Tim Ord Senior Editorial Manager: Jennifer Ehrlich Editorial Supervisor & Reprint Editor: Carmen Krikorian Editorial Assistants: Joe Niesen, David Lutton, Jennette ElNaggar Cover Photos: Blend Images Cartoons: Rich Tennant ( www.the5thwave.com) Composition Services Project Coordinator: Katie Key Layout and Graphics: Nikki Gately, Sarah Philippart, Christine Williams Proofreader: Christine Sabooni Indexer: Word Co Indexing Services Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies Ensley Eikenburg, Associate Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services Contents at a Glance Introduction 1 Part I: Stepping into the World of Market Timing 7 Chapter 1: Becoming a Market Timer 9 Chapter 2: Peering Inside the Mind of a Market Timer 25 Chapter 3: Preparing Yourself and Your Finances for Timing 35 Chapter 4: Charting Your Course: The Market Timer’s Edge 45 Part II: Market Timing’s Methods and Strategies 67 Chapter 5: Timing with the Reports That Move the Markets 69 Chapter 6: The Seasons and Cycles That In uence the Markets 87 Chapter 7: Digging In to Trends, Momentum, and Results 97 Chapter 8: Timing with Feeling: Making Market Sentiment Work for You 115 Part III: Applying Timing to the Markets 129 Chapter 9: Timing in the Real World: Examining a Sample Trade 131 Chapter 10: Timing the Stock Market 145 Chapter 11: Timing the Bond Market 161 Chapter 12: Timing Foreign Markets 175 Chapter 13: Timing the Metals, Heavy or Not 185 Chapter 14: Timing Commodities: Making Money Down on the Farm 197 Chapter 15: Timing Currencies and Related Markets 213 Part IV: Timing the Sectors 227 Chapter 16: The Timer’s Dream: Sector Investing 229 Chapter 17: Timing Financial Service Stocks 241 Chapter 18: Timing the Technologies 259 Chapter 19: Timing the Energy Sector 277 Chapter 20: Timing the Health Care Sector 295 Part V: The Part of Tens 309 Chapter 21: Ten Game Savers to Know and Trust 311 Chapter 22: Ten-Plus Awesome Resources 319 Index 325 Table of Contents Introduction 1 About This Book 1 Conventions Used in This Book 2 Foolish Assumptions 3 How This Book Is Organized 4 Part I: Stepping Into the World of Market Timing 4 Part II: Market Timing’s Methods and Strategies 4 Part III: Applying Timing to the Markets 5 Part IV: Timing the Sectors 5 Part V: The Part of Tens 5 Icons Used in This Book 6 Where to Go from Here 6 Part I: Stepping into the World of Market Timing 7 Chapter 1: Becoming a Market Timer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 De ning Market Timing 10 Terms of Engagement for Timing 11 Timing Technique: The Secret of Success 13 Running Down Reasons to Market Time 15 The Nuts and Bolts of Market Timing 17 Financing your possibilities 17 Analyzing the markets 19 Setting your timing ritual 20 Setting Realistic Expectations 21 You can’t predict the future 22 You can’t win every time 22 Measure your success reasonably 22 Enjoying the Process and the Fruits of Your Labor 23 Chapter 2: Peering Inside the Mind of a Market Timer. . . . . . . . . . . . .25 Finding Out How Wall Street Really Works 25 Introducing the Federal Reserve 26 Uncovering the Psychology of Timing 30 Vigilance: Being a steady, not a fast Eddie 30 Preparation: Acknowledging the Boy Scout in all of us 31 Execution: Pulling the trigger on the trade 32 Picking Your Battles and Battle elds 33 Market Timing For Dummies x Chapter 3: Preparing Yourself and Your Finances for Timing . . . . . . .35 De ning the Role of Timing in Your Financial Plan 35 Financing Your Timing 38 Considering Personal Matters 39 Determining Your Net Worth 40 Getting Tooled Up for Timing 41 Setting up your trading account 41 Building your timing toolkit 42 Chapter 4: Charting Your Course: The Market Timer’s Edge . . . . . . . .45 De ning the Primary Trend 45 Introducing the Four Amigos: Signals That the Trend Is Changing 48 Taking stock of the trend reversal 48 Riding the highs of breakouts 49 Getting through the lows of breakdowns 50 Introducing Commonly Used Charts 54 Candlestick charts 54 Bar charts and associated tools 55 Understanding Moving Averages 56 Trend and Momentum Oscillators 57 The “Big Mac” of technical analysis: The MACD oscillator 58 Finding relative strength with RSI 59 Getting a Grip on Bollinger Bands 59 Looking into the future 60 Thinking outside the bands 60 Making Technical Analysis Work: An Overview 61 Looking for the setup 62 Buying on strength and on dips 62 Using trend lines as buy and sell points 64 Running down other important technical formations 64 Part II: Market Timing’s Methods and Strategies 67 Chapter 5: Timing with the Reports That Move the Markets . . . . . . . .69 Understanding the U.S. and the Global Economies 70 Homing in on an example 71 Keeping tabs on the data mill 73 Getting a Handle on the Reports 74 Exploring Speci c Economic Reports 76 Using the employment report 76 Taking in the Consumer Price Index (CPI) 78 Perusing the Producer Price Index (PPI) 78 Making sense of the ISM and purchasing managers’ reports 79 Considering consumer con dence 80 Poring over the Beige Book 82 Focusing on housing starts 83 xi Table of Contents Taking in the Index of Leading Economic Indicators 84 Grasping Gross Domestic Product 85 Trading the Big Reports 86 Chapter 6: The Seasons and Cycles That Infl uence the Markets . . . .87 Getting the Big Seasonal Picture 88 Glimpsing the Monthly Tendencies 89 The January effect 90 The turn of the month 91 Timing Summers, Holidays, and Santa Claus 91 Summer folly 92 Holiday fun 92 Santa Claus is coming to town 92 Cycling with the Presidents 93 Examining the cycles during two presidents’ terms 93 Using the cycle cautiously 95 Chapter 7: Digging In to Trends, Momentum, and Results . . . . . . . . . .97 Trending with the Times 97 Looking for trends by time 98 Secularizing the trend 99 Using the short-term trend properly 101 Looking at the long-term trend 103 Spotting trend changes in the intermediate term 105 Examining Market Breadth 109 Consulting the NYSE advance-decline line 110 Analyzing the McClellan Summation Index 112 Chapter 8: Timing with Feeling: Making Market Sentiment Work for You . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 Getting in Touch with Your Contrarian Self 116 Going with Your Gut — and Your Charts 116 Identifying greed cycles 117 Identifying fear cycles 119 Using Bellwether Stocks 120 Gauging Feeling with Sentiment Surveys 122 Using Trading Volume As a Sentiment Tool 123 Finessing “Soft” Sentiment Indicators 125 Part III: Applying Timing to the Markets 129 Chapter 9: Timing in the Real World: Examining a Sample Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 Setting the Stage for a Sample Trade 131 Sorting through a major mess 132 Charting your way to the next step 133 Market Timing For Dummies xii Getting the long-term picture 133 Viewing the intermediate term 134 Getting Ready to Trade 137 Looking for the right opportunity 138 Tracking the trade 139 Fine-tuning your exit point as things progress 140 Reviewing your timing endeavor 141 Finding a Sequence for Successful Trading 142 Chapter 10: Timing the Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . .145 Timing the Whole Enchilada 146 Starting with the S&P 500 146 Timing and taming the Nasdaq 100 149 Timing the Dow Jones Industrial Average 151 Timing Individual Stocks 152 Bottom  shing 153 Riding the momentum roller coaster 154 Shorting the losers 158 Chapter 11: Timing the Bond Market . . . . . . . . . . . . . . . . . . . . . . . . . . .161 What Makes the Bond Market Tick 162 The give and take between Fed and bond market 162 Finding general hints about bonds 164 Tying economic reports to the bond market 165 Making Bond Timing Work 166 Reasons to time bonds 167 Buying bonds for hedging and diversi cation 168 Allocating time and money to bond timing 168 Finding the right time for bonds 169 Chapter 12: Timing Foreign Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . .175 The Whole World Is One Market 176 Considering the Currency Effect 177 Timing Foreign Markets 178 Getting started 179 Dividing up your timing world 179 Choosing International ETFs 181 Chapter 13: Timing the Metals, Heavy or Not . . . . . . . . . . . . . . . . . . . .185 Getting the Golden Touch 186 Treading carefully with gold stocks 188 Choosing the best route for trading gold 189 Rounding out the precious sector 189 The Industrial Truth: Timing Copper and Other Metals 189 Mining copper trades 190 Trading steel, ubiquitous steel 192 Getting into aluminum 193 Using ETFs to Trade the Metals 194 [...]... Futures For Dummies (by yours truly) and George A Fontanills’s book Trading Options For Dummies for the full details ✓ Market sectors: A specific area of the market, such as technology or health care Market timing of individual sectors of the market is essential in both bull and bear markets and can be very profitable See Part IV for more details on sector investing ✓ Trends: Time periods in the markets... trade for short periods of time That’s not something I recommend for you at the start of your timing career, but it is worthwhile as you gain experience Check out my book Trading Futures For Dummies (Wiley) for a good overview of leveraged ETFs and how to use them for timing Parts 3 and 4 of this book also give you more detail on using ETFs for timing individual sectors of the market Analyzing the markets... Stepping Into the World of Market Timing In this part, I ease you into the wide world of market timing, introducing you to its basic tenets and showing you the tools you use to time the markets You find out about the principles that market timers use, and the charts they use to get the timing job done Read this part to stock up on the raw materials of market timing Part II: Market Timing s Methods and Strategies... introduce you to the world of market timing and show you how you can be in control of your investment results Defining Market Timing Market timing is the act of entering and exiting trades (buying and selling at the most opportune time) in any market, whether, stocks, bonds, futures, or options When timing the markets your goals are to ✓ Decrease your exposure to risk As a market timer you want to stay... been a market timer for 20-plus years and have found the concepts that I’ve put forth in this book quite useful I hope that you do, too Part I Stepping into the World of Market Timing N In this part ew to market timing? This part of the book takes you through the basics you need to get started In it, I show you how to think like a market timer and how to use the tools that lead to successful timing. .. rises, the short seller loses money And stocks can fall only to zero, but they can theoretically rise forever 11 12 Part I: Stepping into the World of Market Timing ✓ Bull markets: Markets that are rising ✓ Bear markets: The opposites of bull markets; the tendency of prices during these periods is for markets to fall ✓ Leverage: The practice used by traders in which less than the full amounts of money... do Try to hit a tennis ball without timing your stroke Or try to run a yellow light before that camera goes off behind you without timing So why is it that if you’re talking about getting married or buying a house, people say that timing is everything,” but when you talk about market timing, people roll their eyes and tell you that it’s impossible? In fact, market timing isn’t just possible; it’s central... the process — and the results A n old market cliché says “there’s always a bull market. ” In other words, if you look hard enough you can find a market that is trending, up or down, and that you use to make money Because there’s always a bull market, market timing may be the trading method of the 21st century, given the potential for volatility in the world and the markets, and the change that’s likely... the markets on a daily basis with the goal of anticipating significant changes in the overall trend of the markets and then acting upon them decisively before they advance to the point where you’ve missed a significant opportunity to make money Before you become a market timer, you need to understand trading, which is what market timing is all about It may help you to think of trading as investing for. .. often as well as ten ways to keep your timing practice on track without losing your shirt or your sanity 5 6 Market Timing For Dummies Icons Used in This Book I use icons to emphasize and reinforce information throughout the book Here’s a list of the icons you find and what you can expect from the text they highlight When I present a concept that is important for you to keep in mind as you read, I . by Joe Duarte, MD Market Timing FOR DUMmIES ‰ Market Timing For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright. 10: Timing the Stock Market 145 Chapter 11: Timing the Bond Market 161 Chapter 12: Timing Foreign Markets 175 Chapter 13: Timing the Metals, Heavy or Not 185 Chapter 14: Timing Commodities: Making. the World of Market Timing 7 Chapter 1: Becoming a Market Timer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 De ning Market Timing 10 Terms of Engagement for Timing 11 Timing Technique: