What if I told you that you could largely determine whether it was a good time to get in or out of the stock market by spending just a few minutes a week tabulating a handful of indicators?

I spend roughly 10 minutes a week assessing stock market conditions. That may sound like a sure path to failure but I believe that by performing just a couple of simple calculations and monitoring a few data points I get a very decent read on the state of the market while eliminating all of the noise that comes with typical stock market punditry. I believe that this approach combined with extraordinary discipline and patience will yield much better than average investment results. Let me explain how it works.

I track four indicators that I believe can give anyone a very accurate picture of the market environment and whether it is an optimal time to buy or sell the stock market as a whole. I tabulate these indicators once a week and post them on this site. If you are curious about the indicators and why they are significant, you can read about them by visiting the links at the top of the site.

The final output is a single indicator specifying the optimal strategy at the current point in time. It will be one of the following:

  • Extremely bullish - this means the indicators are overwhelmingly bullish. It is an optimal time to buy stocks.
  • Moderately bullish - this means the indicators lean bullish. There may be some upside in the market.
  • Neutral - this means the indicators are mixed and it doesn't matter whether you are in our out
  • Moderately bearish - this means the indicators lean bearish. You may want to take some risk off the table.
  • Extremely bearish - this means the indicators are overwhelmingly bearish. It is an optimal time to sell stocks.

This works because when it comes to investing we tend to be our own worst enemies. In almost every case people who would otherwise do well end up losing money because they simply ignore the indicators. This site is aimed to help keep me (and anyone who wants to use it) honest. I am prone to spontaneous decisions and so before I enter any trade I always visit this site to get its permission. Most of us make investment decisions based on a very limited amount of data based on short-term changes, such as what the market has done in the past few hours or days. In reality sound investment (or trading) decisions are made with multiple indicators that are collected over several days-weeks.

To explain my methodology, I’ll draw an analogy. Imagine the opacity slider on the color palette on your computer. The indicators I track individually should be thought of as the opacity level. At any given moment they may be sitting very close to fully opaque or very close to transparent. The vast majority of the time they are going to be somewhere in between and each will be at a different opacity. It’s only when all or close to all of the indicators are close to “opaque” or “transparent” simultaneously that you have an actionable signal. I believe that markets are very rarely optimal for trading. I track these indicators because when they do align they tend to throw off a very reliable signal.

The summation of these indicators are either “get in,” “get out,” or “do nothing.” Historically “do nothing” wins the vast majority of the time.

I believe that Marty Zweig is the smartest trader who ever lived. In the late 90’s he wrote a well-known book called “Winning on Wall Street” in which he outlines several stock market indicators that he tracked. Some of the methods are dated and no longer relevant or actionable, but many are or the underlying principle still applies. It is Zweig’s trading principles that these indicators and my general market philosophies are based upon.

My Philosophy

There’s a fundamental truth in life. You tend to outperform by doing things that are hard. When things that used to be hard become easy, the opportunity is largely gone.

I believe that no matter the time period you live in you are at a disadvantage in the market. Every generation has its own traps to fall into. That’s because at any given time that information which is the easiest to uncover is already known by everyone. People tend to overweight strategies that worked in the previous 1-2 cycles because humans naturally have recency bias. We are all trained by our experiences. It is what is most obvious that we are naturally drawn to and also the least likely to work. We are setup to fail.

I do not believe that technical analysis works reliably anymore because now it is so easy to do and it’s free and everyone tends to fixate on the most obvious points of technical relevance. When there weren’t many people around who understood things like moving averages or willing to take the time to calculate them or possessed the programming skills to calculate them when it was very hard to do, I’m certain TA would have yielded amazing results. It’s also why so few people actually did it when it worked- it was really, really hard. That’s the theme I’m trying to impart. What’s easy and hard changes from generation to generation but the constant is that what’s hard or non-obvious is what tends to yield profits while things that make sense and seem like they should yield an advantage end up losing money.

Nowadays everyone has read William O’Neill’s books and studies the moving averages. We are coming out of a 10-15 year period when using those strategies would’ve made you a ton of money, which most people caught on to around year 14. So now those strategies are extremely popular and their efficacy taken as self-evident and because they are so widely accepted, they are not likely to work going forward. Everyone has finally mastered the winning strategy and is ready to pounce on the opportunity once the setup is right, except that the market has changed and the opportunity is now somewhere else.

Ignorance is relative. The only timeless strategy is to accept that unless you are truly exceptional what you think you know is really just following the path of least resistance. The good news is that you don’t have to be exceptional to beat the market, except in one crucial area.

As stated previously, I believe that markets are very rarely optimal for trading. People who can just sit and do nothing until the odds are extraordinarily in their favor then bet aggressively and get out when the odds shift are extremely rare.

Timing the market has typically been written off as futile, but I’m convinced that by using just these four indicators and only betting (but betting aggressively) when most if not all of them are extremely one-sided, you can absolutely time the market. The issue with timing the market isn’t inability to recoginze the signs to get in or out, it’s ignoring the signs or moving the goal posts when it seems like a good idea. Because most of us lack discipline, when the time comes that all of the indicators are in alignment, we don’t have any cash to deploy because we lost it all by betting too early.

It’s often said that markets are discounting mechanisms. They are always taking into account new information, pricing it in, and looking ahead. They tend to vote way before the reality is even remotely visible. Why does that happen? Nobody knows for sure which to me makes markets endlessly fascinating. Why can’t we as individuals make sense of drastic price swings when they occur? It is one of the great mysteries of the world and one which nobody will solve. The market is a wave of constant uncertainty.

But what about other indicators?

Yes, this is a great and very valid question. What about 9 to 1 up volume or consecutive 2-1 advance/decline indicators?

I think these indicators are great and provide very strong signals. The problem, though, is that they are extremely rare. Like 1-2 days a year or fewer, rare. If you are extraordinarily conservative you would want to wait for these to trigger. But the flip side of that is that you will only participate in the strongest bull markets, which I do not believe is necessary to have great performance. Definitely worth paying attention to but not so great for a weekly market tracker.

I also believe that what you look for should vary by market environment. As I write this we are in one of the most volatile 1-2 year periods for the stock market in history. You have had an incredibly large number of false starts both to the upside and downside. A great environment for selling options, perhaps, not so great for trying to follow the trend. So for now it’s probably prudent to up the 4% indicator to 5 or 6% (I’m not going to for consistency). Next year volatility may well drop and the market becomes very boring and 2-3% might be the better number. Just know that markets do change and nobody ever really knows what’s to come. People should use the indicators that they are most comfortable with.