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By: Chris Rowe — June 30, 2015

Buy This Market

The market could get a bit uglier but at this point it makes sense buy on the way down. And if you know how to sell naked put options then you might be looking at a perfect storm. (More on this strategy at the end of the article.)

I never profess to be a perfect market timer but you don't have to be a perfect market timer to make money in the stock market. If you feel that you do then you're looking at it all wrong.

GUYS... I'm not saying it's THE bottom. But in this article, I'll show you one extremely accurate indicator that's calling a near bottom (short-term), which is why it makes sense to buy this market.

But first...

 

Chris Rowe CEO/CIO, Rowe Wealth Management Chris Rowe
CEO/CIO,
Rowe Wealth Management

THREE KEYS TO PROFITABILITY, IN ORDER OF IMPORTANCE:

1. Limiting your losses using responsible risk management.

2. Making profitable trades/investments more than unprofitable trades/investments (not 100% necessary for long-term profitability).

3. Market timing (absolutely not necessary but definitely helpful).

Many market technicians expected a corrective dip to hit the stock market, based on recent price behavior and seasonal patterns. So at this point, it pays to follow indicators that are usually spot on in guiding the timing of your entry points.

Who Cares About the "Why"?

I don't need to impress or excite you with the reasons why the stock market declined. I'm sure your inbox is flooded with that already.

Will things get temporarily fixed in Greece again (surprise! hooray!! rally!) or will we go into the 3-day weekend here in The States without a real answer (dreary stock market for this week but a 3-day weekend to come up with reasons why it's not that bad)?

There will be other big economic news items that come into play, just this week.

There's the monthly ISM Manufactuing index tomorrow morning. There's the monthly employment situation on Thursday. People will be talking about Yellen and interest rates again. FOMC minutes will be released on July 8th.

We spend little time thinking about why things may or may not happen. Instead, let's focus on what actually moves prices - human nature and psychology. We focus on these factors because they tend to repeat themselves over and over again, no matter what decade we are in and what problems we are facing.

S&P 500 1-Year Daily Chart

2015-06-30_10-32-52

While many indicators are showing oversold levels, today I choose to focus on the exponential daily RSI. Note that the exponential RSI is more sensitive to more recent activity, very much the same way an exponential moving average is more sensitive to recent activity than a simple moving average.

Circled in green you can see it might be moving to an oversold buy signal again. This is when the RSI moves from below the 30-line to above the 30-line. If the stock market continues lower today then the exponential RSI may not stay above the 30-line. Then we won't have an RSI buy signal. Fine.

On a harsh sell off, like the one we find ourselves in, the RSI and stock market may continue the dip lower (example: red arrows). But would we really fair that badly if we started buying at the red arrows?

You'll lose more money by missing profitable opportunities out of fear. And if this time around this "doesn't work" then do understand that the RSI buy signal in the S&P 500 has an amazing track record over time. So don't sit there and say the RSI or my investing methodology is bad.

I've published studies showing the last 20 years of S&P 500/exponential RSI activity and frankly I don't have time to do it again today. I can't even link to the articles because of regulations in the money management industry (remember, I'm not only a publisher now, I advise and manage money for individual investors/institutions and the rules are very different.) But feel free to do a 20-year study on your own if you need more comfort. The point is, it's a solid indicator.

Technical indicators I use have not confirmed demand being back in control of the stock market. I tend to wait until they are showing demand before stepping in to buy, but at this point we are close to seeing the exponential RSI buy signal so I chose to write about it immediately and demand is likely to take control back shortly anyway. I won't have time to write about it to alert you the moment it does happen because this is the last day of the quarter, making it a very busy time for Rowe Wealth Management.

This is when I am focusing extremely hard on the recent behavior of the financial markets so that I know what securities to rebalance my clients money into. As I recently wrote, this is when you should be focusing on which sectors fair well in this turbulent time. Because at the turn of the quarter is when funds are rebalancing their portfolios and they are exiting what they expect to be weak and buying what they expect to be strong.

If you're getting your guidance from mainstream financial media then you're listening to people getting paid to make predictions and forecasts. Essentially, they are advertizing for their firm. The media will keep you excited, only to your detriment, in order to keep you glued to the screen so you see their commercials. It's best to follow what price action is telling you.

One final point: I've said that it obviously pays to be right more often than wrong (see the RSI). But there are plenty of extremely successful traders out there who are wrong more often than right. This is because they use risk management strategies. I'll eventually do another short course on risk management but until then you should be using stop loss order to automatically sell you out when key technical levels are broken. Better yet, if you understand how to use options then you should be using them to hedge your positions or limit losses. Selling naked puts to back into positions here is an excellent strategy (selling the at-the-money put options that expire in 30 - 45 days... and selling 1 put for every 100 shares of the stock/ETF you want to own).

For more on this strategy you can use this link.

 

~ By Chris Rowe, CEO/CIO Rowe Wealth Management

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***Disclaimer: Rowe Wealth Management is NOT a part of True Market Insiders. They are two separate companies, in different locations, with different management and employees.  Rowe Wealth can't answer any questions about True Market Insiders or its programs, and True Market Insiders can't answer any questions about Rowe Wealth Management.  True Market Insiders is not a registered investment advisor.

 

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