WHEN the MARKET MOVES,WILL YOU BE READY? How to Profit from Major Market Events

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WHEN the MARKET MOVES,WILL YOU BE READY? How to Profit from Major Market Events 00_200274_FM/Navarro 7/31/03 12:52 PM Page i WHEN THE MARKET MOVES, WILL YOU BE READY? How to Profit from Major Market Events Peter Navarro McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto ebook_copyright 6x9.qxd 10/20/03 11:20 AM Page 1 Copyright © 2004 by The McGraw-HIll Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-143594-8 The material in this eBook also appears in the print version of this title: 0-07-141067-8. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales pro- motions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at [email protected] or (212) 904-4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. 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DOI: 10.1036/0071435948 DOI Page 6x9 10/2/02 1:33 PM Page 1 Want to learn more? , We hope you enjoy this McGraw-Hill eBook! If you d like more information about this book, its author, or related books and websites, please click here. 00_200274_FM/Navarro 7/31/03 12:52 PM Page iii To the loving memory of Ruby, my honey. Foresight could have saved her from a fate more cold and cruel than the stock market itself. Let us always remember to look ahead—and never forget the lessons in kindness, gentleness, and peace she taught us. This page intentionally left blank. 00_200274_FM/Navarro 7/31/03 12:52 PM Page v For more information about this title, click here. CONTENTS Acknowledgments xi Introduction xiii Part One The Big Picture 1 1 So You Want to Make a Million in the Stock Market 3 Anatomy of a Crash 4 2 What’s Your Wall Street “IQ”? 7 3 The Four Stages of Macrowave Investing 15 The Four Stages of Macrowave Investing 16 Stage One: The Four Dynamic Factors 17 Stage Two: Three Key Cycles That Shape Market and Sector Trends 19 Stage Three: Picking Strong and Weak Stocks and Sectors 23 Stage Four: Using Solid Money, Risk, and Trade Management Tools to Buy, Sell, and Short Stocks 24 Part Two The Four Dynamic Factors 27 4 Follow the Earnings Calendar! 29 Key Point #1: Fall into the Gap? 30 Key Point #2: Buy on the Rumor, Sell on the News 31 Key Point #3: Consensus Estimates versus Whisper Numbers 32 Key Point #4: Sector Watch 33 Key Point #5: Earnings and the Broad Market Trend 33 5 Follow the Macroeconomic Calendar! 37 Key Point #1: The Market’s Major Fuel 38 Key Point #2: Use Macro Scenario Building 38 Key Point #3: Mr. Market Hates Inflation 41 Key Point #4: Mr. Market Hates Recession 42 Key Point #5: Mr. Market Hates Productivity Decreases 43 Key Point #6: Mr. Market (Mostly) Hates Trade Deficits 44 Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use. 00_200274_FM/Navarro 7/31/03 12:52 PM Page vi vi CONTENTS 6 Uncle Sam and the Stock Market 49 Key Point #1: The Tools of Monetary Policy 50 Key Point #2: The Fed Moves in Cycles, Not Isolated Steps 51 Key Point #3: Monetary Policy Ripples through the Stock Market 52 Key Point #4: You Can’t Push on a String 53 Key Point #5: The Two Problems with Financing Fiscal Policy 54 Key Point #6: Fiscal Policy’s Blunt and Irreversible Tool 55 Key Point #7: The Problem(s) with Tax Cuts 55 7 Exogenous Shocks and the Strategy of the Macroplay 59 Key Point #1: The Art of the Macroplay 60 Key Point #2: Contractionary Oil Price Spikes 61 Key Point #3: War Premiums and Penalties 62 Key Point #4: The Terrorism Tax 63 Key Point #5: The Market Stain of Scandals 65 Key Point #6: The Role of Disruptive Technologies 66 Part Three The Three Key Cycles 69 8 Tracking the Market and Sector Trends 71 Key Point #1: The Market Trends Up, Down, or Moves Sideways 72 Key Point #2: Individual Sectors Move Up, Down, or Move Sideways 74 Key Point #3: Use Exchange-Traded Funds to Track Market and Sector Trends 75 Key Point #4: It’s Easy in Hindsight to Spot Market and Sector Trends 77 Key Point #5: Use the 3-Point-Break Method to Spot Changes in Trends 78 9 The Business Cycle and the Stock Market Cycle 85 Key Point #1: The Business Cycle’s Ups and Downs 86 Key Point #2: The Stock Market’s Crystal Ball 88 Key Point #3: The Stock Market and Four Dynamic Factors 89 Key Point #4: The Profitable Patterns of Sector Rotation 90 10 As the Interest Rate Cycle Turns. 95 Key Point #1: The Four Stages of the Interest Rate Cycle 96 Key Point #2: Higher Interest Rates Negatively Affect the Market and Sector Trends 97 Key Point #3: Some Bond Market Basics 100 Key Point #4: The Term Structure of Interest Rates 101 00_200274_FM/Navarro 7/31/03 12:52 PM Page vii CONTENTS vii 11 Unlocking the Mysteries of the Yield Curve 105 Key Point #1: Constructing the Yield Curve 106 Key Point #2: Shapes of the Yield Curve 107 Key Point #3: Some Historic Evidence of the Yield Curve’s Predictive Powers 110 Part Four Picking Strong and Weak Stocks and Sectors 115 12 It’s Finger-Lickin’, Stock-Pickin’ Good 117 Key Point #1: Buy Low on the Dips, Sell High on the Peaks 118 Key Point #2: Buy High, Sell Higher 119 Key Point #3: High Volume Movers 121 Key Point #4: The Ratings Game 122 Key Point #5: Buy What You Know 123 Key Point #6: The Way of the Red Herring 124 Key Point #7: Ignore Hot Stock Tips 125 13 It’s Absolutely Fundamental 129 Key Point #1: An Efficient and Random Market? Not! 131 Key Point #2: Exploit Price Deviations from “Fair Value” 132 Key Point #3: Many Fundamental Analysts Are “Value Investors” 133 Key Point #4: The Fundamental Analyst’s Tools 134 Key Point #5: Use the Internet to Simplify Your Fundamental Screening 135 Key Point #6: The Fundamental Analyst’s Traps 137 Key Point #7: Use Both a Fundamental and Technical Analysis Screen! 139 14 Technically Speaking 143 Key Point #1: Learn the Lingo and Underlying Psychology 144 Key Point #2: Price Chart Patterns Identify Trends! 147 Key Point #3: Some Common Chart Patterns Can Be Helpful 150 Key Point #4: Volume Speaks Volumes 154 Key Point #5: Moving Averages Clarify the Trend! 155 Key Point #6: The Signals of Momentum Indicators 157 Key Point #7: Au Contrarian! The Logic of Market Sentiment 159 Key Point #8: Use a Technical Screen! 160 Key Point #9: Some Tools Work Better Than Others, Depending on the Market Trend 163 00_200274_FM/Navarro 7/31/03 12:52 PM Page viii viii CONTENTS Part Five Buying, Selling, and Shorting Stocks 169 15 Managing Your Risk 171 Key Point #1: Risk Represents Both Danger and Opportunity 172 Key Point #2: The Three Dimensions of Risk 173 Key Point #3: The Myriad Sources of Risk 174 Key Point #4: The Reward-to-Risk Ratio 175 Key Point #5: Some Useful Yardsticks to Measure Risk 176 Key Point #6: What Does “Well Diversified” Mean? 177 Key Point #7: Some (More) Risk Management Rules 177 16 Managing Your Money 181 Step #1: Calculate Your Investing Batting Average or Win% 183 Step #2: Determine Your Risk Capital 184 Step #3: Determining Your Reward-to-Risk Ratio 186 Step #4: Determining Your
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