Can We Buy And Hold?

We’re fond of saying, “Buy and hold is dead!” It’s our contention–based on our reading of history–that the stock market is much too volatile, much too prone to painful drops of hundreds or thousands of points, for any investor to stay married to his or her positions. It’s especially true in retirement planning for people who are within a few years of saying goodbye to the workaday world and living off a pension, Social Security and investment income.

On 3/26/04, some wise guy on Bloomberg TV made the brilliant assertion that someone who invested in stocks in the days immediately after the 9-11 terror attack would be way ahead today. Sure, the DOW and NASDAQ are much better than they appeared when the World Trade Center was smoldering rubble. But all of the gain came in the last year! Anyone holding shares for the past 2-1/2 years would have experienced several stomach-churning reversals, including the recent correction. Who needs that?

We prefer to save ourselves from ulcers by following the sage advice of legendary investor Bernard Baruch—“I always bought my stocks a little late, and I usually sold them a little early, but I made a fortune in between!”

The challenge, of course, is to determine the best time to buy and sell. Every day we are bombarded by messages exhorting us to “get in” or “get out.” We face a blizzard of business headlines, earnings and economic reports, analyst upgrades and downgrades, media hype, ongoing terror threats, Alan Greenspan addresses and assorted rumors and manipulation by insiders. There is great potential for information overload that leads to investor paralysis, missed opportunities and depressing losses.

We cut through the clutter with technical analysis. Using charts and plain, old mathematics, we get an unbiased look at the market that helps to gauge the strength or weakness of short-term trends.

There are enough indicators to overwhelm even the most-dedicated technical analyst. We keep it simple by closely following moving averages and the Moving Average Convergence-Divergence indicator (MACD).

We keep an eye on the 10- and 20-day moving averages for the DOW and NASDAQ, but we pay particular attention to the 50-day moving average. In an uptrending market, the 50 DMA acts as support. If the averages begin to fall toward the 50 DMA, it signals a possible change in direction. We use MACD for confirmation. When MACD falls below 0 and the index breaks below its 50 DMA–especially on strong volume–it is time to begin selling out in conservative portfolios and lightening up in more aggressive portfolios.

The next barrier is the 200-day moving average. As an index slides toward that major support, we’ll often do more selling. If it breaks below the 200 DMA, we’re out of equities because the potential for carnage is high.

The same goes in a downtrending market. A break above the 200 DMA is a buy signal if confirmed by MACD advancing above 0. Crack the 50 DMA on strong volume, and it’s probably a good time to pile into stocks for at least the short term.

Many times we incorporate “stochastics” to help determine if the market is extremely overbought or oversold and primed for a reversal. When the stochastics lines cross, a powerful move often follows.

That’s what occurred the week 3/22/04 for the NASDAQ. That index bounced off its 200 DMA as the stochastics lines crossed. A major rally started 3/25/04 with follow-through until the final moments of Friday’s session, 3/26/04.

Tracking those indicators, we see a good chance to add to the equity positions in our retirement portfolios next week. Time will tell, of course, as outside events can thwart careful planning.

But we’d much rather place our trust in unbiased technical analysis than in the proclamations of a market maven who likely received his marching orders from the back room of his brokerage.

For a FREE report on HOW TO TRADE FAST, enter your email address at:

lb.bcentral.com/ex/manage/subscriberprefs?customerid=12826 lb.bcentral.com/ex/manage/subscriberprefs?customerid=12826