STOCK MARKET RULES

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Get Information Before You Invest, Not After

Most of the complicated aspects of our lives could be improved by gathering
information before taking action. Asking why and digging deeper
for information is an inconvenience because it calls for analysis, thought,
and the formation of a conclusion. These activities take time and energy,
and they can often lead to confusion and frustration. To avoid these problems,
we mainly depend on the wisdom of others or adopt a shoot-fromthe-
hip approach to investing.
Depending entirely on the wisdom of others or shooting from the hip
can lead to many misunderstandings. Misunderstandings cause bad timing
and poor strategies. Investment advice can be helpful, but it can be even
more useful as a point of reference, a second opinion, rather than being
accepted as the only approach.
In the stock market, the odds of doing well are improved for the
investor who becomes familiar with the current action of the market and
the particular stock of interest. Becoming familiar with the action can be
accomplished by asking why: Why is the market making this move? Why
is the stock an attractive purchase now?

MARKET MOVES

The stock market is a continuous auction, with the same product being
bought and sold every business day. If there are more buyers than sellers,
the market and prices of individual stocks rise. If there are more sellers
than buyers, prices fall. It’s that simple.
But if it’s so simple, then why does it seem so complicated? Why are
all these investors buying and selling stock? If they’re investors, shouldn’t
they all be buying and holding stock for its investment value? Why are
people surprised when the stock market drops a few hundred points? Does
a severe market correction mean the economy will take a nosedive? The
newscasters always say the stock market forecasts the economic situation
six months to a year away. So what gives?
Anticipation
The most important fact to remember is that the stock market always
trades in anticipation of future events. Often, investors are looking ahead
six to 12 months, but (and here’s the kicker) not always. If the Dow
Industrial Average is down 50 points or more, the major, professional
investors couldn’t care less about what might happen in six to 12 months.
They are concerned only with what might happen in the more immediate
future, that being the next 10 minutes. The faster the market drops, the
shorter their focus becomes. The believers of doom and gloom busily pat
themselves on the back for being correct, and those who know better take
a more moderate stance. Thankfully, it usually takes more than an overcorrection
in the market to cause an economic recession.
Real, Imagined, and Fabricated Factors
A real factor motivating stock market buyers or sellers is money—specifically,
the availability of money. Money availability, as it changes with a
movement of the interest rates or the earnings of corporations.
An imagined factor can be the respected opinion of an economist or
market analyst as to the current strength or weakness of the stock market.
A fabricated factor is the merciless hammering of computerized sell
programs. The sells are often implemented with the intent of testing market
strength by pushing the market down as far as possible. “As far as possible”
is a point that is reached when buyers enter the scene and stop the decline;
that point is called support.
On June 2, 2001, these factors came into play and made a turn in the
Primary Trend of the Dow Industrial Average and other major indexes.
The Dow dropped 3,101 points before reaching support and starting the
recovery. It did a retracement to the 10,635 level, turned and started down
again, this time dropping to the 7,423 point level

TO BE CONTINUED.............................