Ask Mike:

Question:

Hi Mike,

I've been a subscriber to TurnerTrends for nearly 2 years and want to compliment you on the great service! I use both the StockMasterPro and follow two of your portfolios.

You often refer to the weekly "TurnerTrends Market Forecast" chart. I can see that you rely heavily on this chart with regard to your investing, but I am not at all sure I understand where the data comes from and how I could be using this chart in my own investments.

Would you please go into some detail about this chart and how you think a subscriber should be using it?

Thank you,

Aidan T from Portland

Mike's Response:

Hello Aidan,

The Market Forecast chart, which is included in my Weekend Reports and is also posted on the StockMasterPro and ETFMasterPro home pages, is an incredibly useful tool for market timing investment strategies.

First of all, let's understand the makeup of the chart...

It has three lines, including:

• New Buy Signals (the green colored line)
• New Short Sell Signals (the red colored line)
• Composite (the black colored line), which is just the difference between the total number of new Buy Signals and new Short Sell Signals.

The new Short Sell Signals and new Buy Signals are the signals generated by the TurnerTrends software as it analyzes over 6,000 stocks and ETFs. A signal is considered "new" when the previous week, the technical rating on the equity was "OUT", meaning that no directional trend has been established.

There are several assumptions that I make about this chart, such as:

1. The data should only be looked at from a monthly perspective. Weekly data are just too volatile to be useful. However, comparing the total number of new Buy Signals to the number of new Short Sell Signals, from one month to another, readily shows trends. I also use a smoothing algorithm on these lines to further enhance directional trend detection.
2. There is a direct correlation to the volume of new Buy Signals to the Bullishness of the market. The more new Buy Signals, the more investors are bidding up prices. Conversely, the more New Short Sell Signals, the more investors are taking money out of the market by selling and thusly reducing the demand for shares.
3. The steeper the upward incline of the Composite line, the stronger the market is and the more likely that buying equities will result in near-term profits. Conversely, the steeper the downward incline of the Composite line, the weaker the market is and the more important it is to keep stop loss settings extremely close to the trading price.
4. When the Composite line crosses the Short Sell line it is more likely that we are experiencing a market top. When the number of new Short Sell Signals is so low and the number of new Buy Signals is so high as to create the anomaly of the black line (Composite) crossing above the red line (Short Sell Signals), the likelihood of a near-term market correction is very high. This is a very contrarian strategy. It assumes that market tops are defined by investor exuberance where very few stocks are moving lower in price and, therefore, very few stocks are giving Short Sell Signals.

When the black line (Composite) crosses above the red line (Short Sell), I will become much more aggressive with my stops. Normally, I keep my stops below the Expected Move as subtracted from last week's lowest low. But, when the black line moves above the red line, I take that as a sign to look for opportunities to take money off the table and sell my equities that have a lot of unrealized gains.

As the black line moves lower, I become very conservative with my trades. I tend to be more in cash on downward moves of the Composite line and more fully invested in upward moves of the Composite line.

I look at this chart as very strong leading indicator of where the market is most likely to be headed within the next 30-60 days. It tends to keep me out of market corrections and provides a lot of help in how I time my exit strategies when I am moving unrealized gains into the bank

Thank you for the question and for being a loyal subscriber.

Mike