Red Light - Green Light

I've been watching the stock market a lot lately. This sell-off is weird. Companies are making millions but afraid to expand and grow---meaning hiring new people. But in a market like this it's important to keep things in perspective. Years ago I isolated what I think is the most important discovery I or anyone has ever made in the market. Understanding this and mastering the simple mechanics is very important to wise trading.

I am speaking of my "Red-Light, Green-Light" phenomenon. Basically it deals with the quarterly news cycles. As the CEO of a publicly traded company there were times when I could talk about earnings and such and times when I had to be quiet. These dealt with the times throughout the year when a company comes up on earnings but hasn't released the numbers yet. I thought what if I and 25,000 other CEOs, CFOs, COOs and other insiders had to be quiet all at the same time? No news, except that issued by analysts, pundits, and lay citizens? What would happen to the market in general and to that particular stock? News to stocks is like gas to a car. You need it to get to the next station. The news could also be bad, but let's just categorize it as news. You've heard, "No news is good news?" Not to the stock market. "NO news is bad news."

Without going into detail here, let me summarize. The market goes down in February, May, August into September, and often the first few weeks of December, then rallies into the year end---called the Santa Clause Rally. If you can get my book RED-LIGHT, GREEN-LIGHT, and read the first two chapters, you'll see how this works. In fact I show the charts of a 40 year study in the market, which shows this quite clearly. In fact it's quite remarkable.

You've all heard things like this: We're entering the earnings season." We're in the earnings reporting season." This week (say, mid-July) 190 of the S & P 500 companies will give their earnings. What you never hear is this: Hey everyone, we're leaving the earnings season. Get your money out of harms way." And for option traders this can be devastating, because they own a fixed time investment and it expires. Time becomes the enemy for option investors.

Now, to this year. We've had a double whammy. We' had the typical summer rally, but it was stepped on by the talk of the Debt Ceiling. Now we're in the August red-light period and it's tough. It will come back.

Also, note that everyone is talking about the DOW selling off 10%. It seems like the media is trying to run cover for this administration. They use the figure from August 1st to the present. Go back four weeks before that and you'll see the DOW at 12,800. It's now at 10,700 (and it's been lower). That's about 20% in anyone's book (except Liberal Commentators). Oh, and 20% down in any given time period signals a bear market. That's the technical definition.

Have heart though. In 1987, we had the largest sell-off in my history. However, if you had $100,000 invested it would have gone do to $60,000. That's bad, but if you did not panic, within 13 months you would have been back up to $120,000. That's $20,000 ahead. So keep you head and don't panic.

To see all of this in chart format go to YahooFinance.com, or Bigcharts.com or Stockcharts.com and look at the whole market for this year. You will be amazed how these months play out.

Happy investing.
I'll have some more political commentary and some covered calls later.