Tomorrow is the first day of December and the final month for 2015. This year saw the S&P open at 2058.90 on January 2. Today the index closed at 2080.41 a move higher of just 21.51 points or 1.04% for the year. It has been the longest sideways year in the history of the index. December also marks one of the best months for stocks and I am not expecting to be disappointed this December. For the S&P it is the number 1 month and has been that way on average since 1950. For the Dow Jones Index it is the number 2 month on average also since 1950. For the NASDAQ is the second best month on average since 1971.
S&P 2015 Chart
The year 2015 has seen the S&P trade within a tight range from 2000 to 2100. Stocks have seen a major sell signal this year when the 50 day simple moving average (SMA) collapsed below the 100 and 200 day moving averages. Then the 100 day fell below the 200 day moving average which is considered a bear signal and a warning of what may come. It is also the most pronounced sell signal since 2011 and the strongest sell signal since the bear market ended in 2009.
S&P index for 2015 to Nov 30 2015
Ignore Sell Signals At Your Peril
It is rare when a major sell signal such as we saw this year can be ignored. At some point they almost always come back to haunt investors. It can take months for the ramifications to be felt or seen, but it is even rarer when such a sell signal signifies nothing.
Be Cautious
That does not mean we should just get out and go to cash, but it does mean we should be more cautious with our trades and how we invest our hard-earned capital.
Start Your New Year’s Resolution Early
In 1974 as the market collapsed in one of the worst bear markets since 1929 and 1932, my mentor told me on December 1 that I should start my New Year’s now. The chart below shows the start of December in 1974 with the S&P trading at around $65.00. Yes that is right, $65.00. It had pulled back from $93 in May and from $99.80 in January. In October 1974 the S&P had reached $62.28 and analysts were incredibly bearish. Newspapers ran doom and gloom articles daily. The Arab oil embargo had ended in March but the market was caught in a “death spiral”. Nixon had resigned as President in August and Gerald Ford was President. But the bear market continued to ravage portfolios. So when my financial mentor told me to start my New Year’s early I was rather puzzled. Then he explained to me why.
SPX – Fall 1974
10 Resolutions For Changing Your Investing Methods
Resolution 1: Stock Selection Is Key To Growing A Portfolio
The first resolution he told me was that to be successful and truly build wealth that would withstand any crisis I needed to start focusing on quality large cap stocks that would survive almost any crisis short of a nuclear holocaust, which in 1974 was always a reality. He told me that while I had done not too poorly with some speculative stocks and medium size firms, he explained that those same stocks had destroyed a huge portion of my portfolio in the bear market, and indeed they had. He outlined that many of these stocks would not recover in the aftermath of the bear market of 1974 ending and for many that would survive, it would take years for these stocks to return to prior values. He explained that my first New Year’s resolution should be to stop trading speculative stocks and small firms and focus on large cap stocks.
Resolution 2: Close Losing Positions Quickly
The second resolution he explained had to be to close losing positions quickly and early when a trade turned the wrong way.
Resolution 3: Think Small
My third resolution was to trade through investing smaller amounts of capital and watching for opportunities to jump into a trade and then end that trade when 50% or more of the profit was made.
Resolution 4: Watch High Price To Earnings Multiples
The fourth resolution was to be wary of stocks with higher price to earnings ratios no matter how bright their future looked.
Resolution 5: Understand Options
The fifth resolution was to understand the power of options to protect a position as well as provide profit.
Resolution 6: Think Outside The Box
The sixth resolution was to “think outside the box” when it came to investing. He explained that buy and hold for most investors would not build large wealth unless they were lucky enough to hold the “right” companies for the “right” length of time. Instead he explained that value can be derived by studying chart patterns, trends and movements to profit from strong trends, either up or down in large caps. By focusing on those trends, profits could be made that would challenge any buy and hold portfolio.
Resolution 7: Profit From Dips, Pullbacks and Corrections
The seventh resolution was to understand that down markets were not be feared but to be used for profits. He explained that if I learned just one thing from the bear market of 1974, it should be how large the profits had been when we shorted different stocks.
Resolution 8: Paper-Trade For Consistent Returns
The eighth resolution was to continually experiment with strategies. He explained that I should continually paper-trade strategies to determine their effectiveness and consistency at generating profits and controlling losses. He explained that paper-trading was very under-rated and rarely used but it was the only way to not lose capital and learn how to become a better investor. For every investor who told him, they needed “skin in the game” to truly learn, he told me these investors had forgotten one of the most important rules of investing – don’t lose capital.
Resolution 9: Take Profits
The ninth resolution was to understand that taking profits, no matter how small, was always better than taking a loss. He explained that small profits compound over months and years to grow my portfolio. Never regret taking a profit.
Resolution 10: All Bull Markets End
The tenth and final resolution was to understand that every bull market will end and when markets show top formations, it is always a signal to raise cash levels. It is not a signal to leave, but definitely to prepare for what might come next.
2016 Ahead
My mentor passed away years ago, but I still have his many notes and his 10 resolutions from the first day of December 1974. So I pass his 10 resolutions onto all investors. Don’t wait for January to make your resolutions. Start now in December. Resolve to become the very best investor you can and to learn how to profit in up or down markets. Resolve to take profits, to learn new strategies and to protect capital being risked. His 10 resolutions given to me on that day with the 1974 bear market crushing stocks as it entered its final ferocious stage after a year of staggering losses, formed the investing style and methods I use today. It molded and compounded the portfolio I have enjoyed trading in, for the last 41 years.
2016 lies ahead. Whether it will see the end of this, the second longest bull market in US history is conjecture at this point. I am expecting a better December as the month begins but the major sell signal we have seen and which is still in place today, Nov 30 2015, could be a signal we refer back to at some point in 2016. I know that I will be prepared whether the market in 2016 moves higher or lower. I hope by starting your New Year’s resolutions early, you will be as well.
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