10 Rules to Beat the Market

8/1/2019 10 Rules to Beat the Market

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How I Use 10 Basic Rules to Time theMarket, and Beat It

Dear Trader,

My own favorites include the tried and true, "The trend is your friend," and "Buy low, sell

high." The challenge, of course, is knowing which direction a stock is trending, and when a

stock's price is low (or high).

That's where Mike Turner fits in. He's the author of the best-selling book "10: The Essential

Rules for Beating the Market," and he's also editor ofTrade of the Weekand a paid, weekly

Mastering the Markets newsletter.

Each week in Mastering the Markets, Mike uses his proprietary software systems along with a

set of ten simple, easy-to-understand trading rules to identify sectors and individual stocks

that appear to be in the early stages of a major move.

What Mike doesn'tuse are opinions -- his own or anyone else's.

By removing all emotion from the decision-making process, a la the fictional Spock of "Star

Trek" lore, Mike's rules-based system takes the guesswork out of trading stocks.

And it's a system that's been working well recently. Just last week, Mike and his subscribers

locked in impressive short-term gains by selling their positions in ResMed Inc (NYSE: RMD),

up +16.8% since Mike recommended it on Feb 9; Kinetic Concepts (NYSE: KCI), up

+20.1% since Feb 1; Brookfield Properties (NYSE: BPO), up +26.5% since Jan 19, and

Perrigo Company (Nasdaq: PRGO), up +30.0% since Feb 2.

At the core of Mike's trading strategy are his 10 rules, which he summarizes thusly:

Rule #1 -- Think Like a Fundamentalist. Growth is the key. When looking at a company's

fundamentals, focus on earnings growth. Growth is what investors look for, growth is what

drives demand for shares, and demand for shares is what drives prices higher. But be careful!

You should never buy a stock based on fundamentals alone. Fundamentals only tell you what

to consider buying. They do not tell you when to buy. Traders must use technical analysis to

determine when to buy. (See rule #3 for further details on this.)

Rule #2 -- Avoid Expensive Stocks. How much are you paying for each dollar in earnings?

Use a stock's price-to-earnings ratio (P/E) to gauge how expensive a particular stock is. Butremember: value does not move a stock's price higher. What value does is tell you whether

you're getting a good deal on your purchase. In order to figure out whether you're getting a

good deal, you should only compare a stock's P/E ratio to other stocks in its same industry.

This is the best way to determine whether one stock is more expensive than another.

Rule #3 -- Trade like a Technician. Use fundamentals to select which stocks to consider

buying; use technical analysis to determine when the time is rightto buy (and sell) those

stocks. Technical analysts use stock charts and a variety of mathematical indicators to help

them figure out when to buy. I pay particularly close attention to a stock's 10-week moving

average. But the 10-week moving average I use is different from what most traders use

because I shift it forward in time by three weeks. When a stock crosses this revised trendline
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to the upside it gives me a much more reliable buy signal. And when it crosses this trendline

to the downside it gives me a much more reliable sell signal.

Most traders also are not successful because they don't pay attention to the charts for a

stock's sector and industry. That's a huge mistake. I've discovered that half of a stock's price

movement is tied to trends within its sector and industry. So it's critically important for you to

know where that industry and sector are moving before you enter into any trade.

Rule #4 -- Always Have an Exit Strategy in Mind. Why do you buy a stock? The primary

reason to buy a stock is to sell it. Nobody has ever made a dime by buying the right stock at

the right time. You only make money when you sell. And when it comes to selling, most

investors don't have a plan in place. As a result, they will either get out too early, or moretimes than not they'll get out too late. The key is to know the right time to get out of a stock.

I have developed a formula for doing just that. In each issue of Mastering the Markets, I

provide a specific exit strategy (both a target price and a stop loss) for each and every one of

my recommended trades. You should never buy another stock without first putting this type of

exit strategy in place.

Rule #5 -- Never Marry a Stock. Too many investors get into a stock because they love the

company, or because the stock has made them a lot of money. In other words, they have an

emotional attachment. They just can't bear to sell it, even if the price is dropping. Well, guess

what? That stock doesn't love you back. It's just a piece of paper. Remember: the only reason

to buy a stock is to sell it. Your decisions need to be guided by a strict set of trading rules,

not by your emotions. Traders and investors who get emotionally attached to their holdings

will suffer devastating losses time and time again. If this sounds all too familiar, then it's timeto start following my ten rules.

Rule #6 -- Watch for Insider Buying. Corporate insiders often sell their shares for many

legitimate reasons. But they only buy new shares for one reason: the manager or executive

knows or thinks something good is about to happen to the company. And these well-informed

hunches are often correct. After all, nobody in the world knows a stock better than its top

managers.

Most traders ignore insider buying patterns. But I watch them like a hawk. I use my

proprietary computer models to keep a close tab on insider trading patterns for over 6,000

different stocks. By doing so, I regularly identify a handful of stocks that are displaying

significant recent insider buying. These stocks are much more likely to jump higher in the

coming weeks and months.

Rule #7 -- Institutional Ownership. When the "smart money" invests in a company, it's

generally considered a good thing for share prices. However, you can have too much of a good

thing. If 98% of a company's outstanding shares are owned by a few large institutions, then

there are very few shares left to trade in the open market. And there's also more risk that the

shares will plummet when those big institutions decide to sell. My "sweet spot" for institutional

ownership is between 30%-60%. Avoid stocks with less than 5% institutional ownership or

more than 95%.

Rule #8 -- Diversification. Proper diversification will protect you from major losses and

potential ruin. To keep the investing odds in your favor, never hold more than 30% of your

portfolio in any one sector (such as biotech and drugs), and never hold more than 20% of

your portfolio in any one industry (such as healthcare). Following this rule will force you to

stay diversified and will reduce your risk. It will also give you exposure to sectors and

industries that are trending higher at any given time. Even in bear markets there are always

certain sectors and industries that are moving upward in price.

Rule # 9 -- Asset Allocation. Most investors don't know how many stocks they should have

in their portfolio, and they don't have a concrete strategy for how to spread their money

across their positions. Rule #9 addresses this problem. When you're investing in the stock

market, I believe you should invest your money evenly across all of your positions. For

example, if you hold 20 stocks, then you should invest 5% of your money into each holding.

I regularly give presentations in front of thousands of investors, and people often tell me that

I should invest more of my money into my very best picks, and that I should invest less into

stocks that aren't making me money. But I disagree. After all, why on earth would I ever


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invest a cent into stocks that don't have the potential to make me the most money? With this

in mind, I only invest in my very best stock ideas. For you to do the same, you need to

maintain a small portfolio of between roughly 10 and 20 positions. By keeping your portfolio

small, you'll ensure that you're investing only in your very best ideas. And at the same time,

by spreading your money evenly across a small basket of holdings, you'll stay diversified and

you'll ensure that a sharp decline in one of your holdings doesn't drag down your entire

portfolio.

Rule #10 -- Timing the Market. There are ways to know, within a reasonably high degree of

certainty, whether you should be in the market or out of the market. I have a chart I call the

"CrossOver Oscillator," which analyzes the combination of new buy signals and new sell

signals. When the lines cross in a certain fashion, I can tell you it's time to start thinkingabout taking profits off the table. That was the case in May of 2008, and we all know what

happened after that. Even if my oscillator is early, you still have profits to take off the table,

because inevitably the market has moved up strongly prior to the correction warning, and

you've got a grand opportunity to put money in the bank. It is possible to exit near the top,

and I can show you how. A key element is to have a set of rules that you follow. Don't let

your emotions guide you. Don't guess about when to get into the market. Don't guess about

when to get out.

In the following interview with Bob Bogda, Mike expands upon his strict rules-based stock-

picking process and reveals one of his current favorites...

Bob: How do you make your trading decisions?

Mike: First and foremost, I follow my ten rules. Then I look at the top 20 or so stocks that

my proprietary software systems identify, out of a universe of 6,000 stocks. I focus most of

my attention on three things: a "fundamental score" that my proprietary computer systems

assign to each stock, a similarly formulated "technical score," and a detailed analysis of each

stock's industry and sector.

My fundamental score, which is based on my ten rules and isn't available anywhere else, tells

me at a glance how strong or how weak the stock is. My computer algorithms assign a score

of 0 to 10 to each of several different analysis criteria for a stock's financial condition,

including various growth rates and peer group comparisons.

I do a similar type of scoring for technicals, including a score for whether the stock is tradingabove or below my proprietary trendline, a score for the "Zone" each stock is currently trading

in (there are four Zones that range from the highest to the lowest price of the stock for the

past three years), a score for the range of average trading volume, a score for the bullishness

or bearishness of the stock's sector and industry, and a score for how long the stock has been

in a "Buy Signal."

Finally, we know that 50% of the movement in a stock is caused by movement in the stock's

sector and industry, so my interpretation of these charts is influential in determining my final

trading recommendations for my Mastering the Markets readers.

Bob: How do you further narrow down the list of potential trades?

Mike: Each week I develop an in-depth market forecast in order to develop a trading bias --bullish, bearish or neutral. Then I use a quantitative tool to find the highest-rated stocks and

exchange-traded funds that fit my bias. If I'm bullish, I look for opportunities to buy. If I'm

bearish, I look to take profits on my current holdings and sell stocks short into rallies. If I'm

neutral, I look to take profits when possible and do as little trading as possible.

Bob: What is your current market bias?

Mike: I am generally bullish between now and mid-November, although I do expect to see a

mild correction of 6% to 8% about mid-June. My longer-term forecast is definitely bearish,

but that could easily change as time unfolds. I am very concerned about the huge U.S. debt

load and the lack of real job growth.


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Bob: What are the strongest segments right now?

Mike: Healthcare looks strong, especially health insurance. I also like some of the China

stocks. Consumer cyclical stocks are showing strong upward technical trends. I like a number

of technology stocks and even some of the transportation stocks, especially the ocean-going

shippers.

Bob: Out of these top segments, what is your favorite stock right now?

Mike: China Automotive systems (Nasdaq: CAAS) is one of my favorites, particularly since

it is a Chinese company. This automotive firm specializes in automobile and truck parts. China

has become one of the world's largest automobile manufacturers and unlike in the UnitedStates, where for every car sold, there is just about the same number that are junked, in

China the cars are rarely junked. Parts stay in demand for a long time and with the expanding

middle class in China, this company could be a big winner for a long time.

Live long and prosper,

Bob Bogda

Managing Editor

Trade of the Week

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10 Rules to Beat the Market