I Used This One Indicator To Buy Stocks That Moved Up 80%+ When The So-Called Experts Called A Market Crash. Here’s How I Did It…
Warning: If you don’t like simplicity, this isn’t for you.
Ignoring news and opinions, including your own, is one of the first rules of sound investing.
A good chunk of what you see and read are articles written by analysts, not investors, who are paid to write their thoughts.
Go back in time, and you will find that opinions have a long history of getting people on the wrong side of the market. This has a catastrophic long-term impact on your wealth generation goals.
The S&P 500 only ever goes in one direction, which is up, periodically, and this, surprise, surprise, does not correlate with what we are flooded with through our media channels.
In my 15+ years of stock market investing and mentoring professionals globally, I know firsthand how frustrating budding investors find it watching this disconnect between a rising stock market unfolding before them versus a media that leads with fearmongering when all one wants to do is create a portfolio that grows consistently.
Relatable?
This was very much me in my early days
However, I eventually had a moment of realisation.
Logic prevailed that if I turned off my media channels and focused on the charts, I would align myself with what the stock market was actually doing, not what the media wanted me to believe was happening, leading to what I hoped would be an improved portfolio performance.
And that was precisely the outcome.
I learned to read the markets more clearly, which brought control and composure over the stocks I invested in, resulting in a portfolio that has been consistently compounding away since 2007/2008.
Question: Why is this moment of realisation so important?
Every year that goes by means less growth on your hard-earned money, which means less time for the compound growth effect to kick in, which means less money at retirement and a smaller-than-wanted nest egg to leave behind for your loved ones.
There is a high chance that what you want to achieve with your investing goals is bigger than you if children are involved.
So, getting this right now and having a process you can stick to for the next 5 to 10+ years is crucial.
Let’s look at some numbers:
If you start with £20k, add £100/month further to the pot and want to reach £1 million in 20 years, you need an annual ROI of 19.78%.
Reduce that to 15 years, and your annual ROI increases significantly to 27.75%.
You can see how a lag of 5 years makes such a big difference. Many are already playing catch-up.
The good news…
There is a proven solution to blocking out news and misleading opinions and aligning with the market to make solid investment decisions consistently and get back on track with your wealth goals.
If you already have a stock market portfolio in place and achieving decent returns but want to take your performance to the next level, what I have to share is also for you.
Now, I want to preface this by saying I’m 100% NOT saying not to watch the news. Absolutely stay informed about world events. Be well-informed so you can have sensible conversations.
Collect your knowledge from various sources so you don’t fall prey to propaganda and fake news.
There is also a lot of good going on in the world that we don’t hear about beyond the ‘and a panda has given birth to a rare albino cub’ segment at the end of the news.
I subscribe to Future Crunch to keep a balanced view of human progress.
However, when it comes to putting a stock market portfolio together, what I recommend is parking all of that to one side, good and bad, and focus purely on what the market is doing.
Let the market dictate a direction and follow.
And the more robotic and objective you are about this, the better decisions you make the more compounded returns you will be rewarded with.
The more one tries to understand why or, worse, outsmart the market, the poorer your performance.
The human brain craves complexity because the more difficult something is to understand, and the more we get it, the better we feel. But investing does little to reward feelings.
It is the simplicity of following the market that eludes people. It truely is the ultimate sophistication.
So, how is this done?
Well, let’s get into it.
A question that I am regularly asked is what is good investing.
My answer will surprise you — pattern recognition.
If an asset has performed well in the past, it will likely perform well in the future.
The patterns we are looking for are called ‘long-term trends’.
A trend is when a market moves up or down over a sustained period, typically 12 to 18 months, before the next correction in the market.
How do we recognise trends?
By introducing the timeless indicator that makes up the core of this article — the 200 simple moving average (200sma), and combining it with the weekly and daily timeframes of the S&P 500.
It is the black line on the following charts.
The 200sma does what the name suggests. It gives the moving average of price over 200 weeks on the weekly timeframe.
And 200 days on the daily timeframe.
A history lesson for you…
Old-school traders did not have the luxury of software, and so were used to drawing charts by hand. As one could imagine, this would have been a long and laborious process when looking at 100s of charts and 1000s of data points, and so old-school traders were uber-selective with the information they put on their charts.
They discovered the 200 simple moving average to be a proven indicator of the long-term trend.
If an asset were trading above the 200sma, its bias would be bullish, and traders would look for long opportunities.
If an asset were trading below the 200sma, its bias would be bearish, and traders would look for shorting opportunities.
They would never go against the bias.
Here’s the thing:
Intuitions still use this logic today, and so do we as trend-followers. If it ain’t broke, don’t fix it.
The advantage we have today is software doing all the boring work, such as creating and updating price charts. We then have that free time, which would have been spent on drawing charts to make better investment decisions and get on with life.
By combining the 200sma with the weekly and daily timeframes of the S&P 500, we adopt an indicator with a rich history of keeping us aligned with:
1. Market momentum and direction
2. The institutional flow of money
We can then pinpoint where the institutions are, where the money is and hence where the trends are.
We position ourselves to let the institutions do all the hard work — remember, they pay £1000s monthly to get news before us, so by the time we hear it, the news is old and factored into the market — and when we spot the start of trends using the 200sma, we jump on the trend and piggyback the ride.
Simple and lucrative.
Let’s look at the S&P 500 weekly timeframe in more detail
2008 was the last time the S&P 500 broke below the 200sma. This is the last true bear market. (first red shade)
Following the recovery in the market from 2009, the S&P 500 broke back above the weekly 200sma in 2010 and has been using it as a trampoline ever since. (green arrows)
We will ignore CV19 as a black swan event (second red shade). These tend to bring in a period of madness before the markets settle into their usual pattern. Note how the bull trend before CV19 continued after CV19 was factored into the markets.
Also, note how the 28% decline of 2022 (third red shade) was also halted by the weekly 200sma in October 2022. The market has since recovered +30% from this point at the time of writing.
Use October 2022’s low to see how far up the S&P 500 has moved if reading weeks, months, or years after this article’s publication.
Here are some examples of stocks we have bought post CV19 that have moved over 80%:
3i Group (ticker: iii)
McKesson Corporation (ticker: MCK)
Nvidia Corporation (ticker: NVDA)
So the question is, when is the right time to start buying into the stock market following a decline like 2022?
The answer is when the S&P 500 moves back above the daily 200sma.
As long as the S&P 500 remains above the weekly 200sma, which it has done since 2010, the overall bias is bullish.
We then use a move above the daily 200sma on the S&P 500 to buy stocks.
And a move below the daily 200sma on the S&P 500 to exit them.
I have the S&P 500’s daily timeframe below.
During 2022’s decline, the S&P 500 moved below the daily 200sma in February/March 2022. This is also when we sold the stocks we purchased post-COV19 in 2020.
This meant that the weekly and daily timeframes were out of alignment.
- Bullish alignment is when the weekly and daily timeframes are trading above their 200sma.
- Bearish alignment is when the weekly and daily timeframes are trading below their 200sma.
In 2022, the S&P 500 was dropping, but from February/March 2022 to January 2023 it was:
- Above the weekly 200sma (see weekly timeframe above)
- Below the daily 200sma (daily timeframe below)
Realignment between the weekly and daily timeframes happened in January 2023 when the S&P 500 moved back above the daily 200sma.
As a reminder, the S&P 500 has been trading above the weekly 200sma since 2010, ignoring the blip around CV19 in 2020.
Now, let’s go back to the start of 2023 when our media channels were overrun by the news of failing banks. When everyone else was expecting the world to come to a burning end, this was precisely when the S&P 500 aligned in relation to its weekly and daily 200sma, and we started buying into the stock market.
Fast forward to December 2023, and the S&P 500 has climbed +30% at the time of writing, absorbing every other perilous piece of news on the way up.
Again, use October 2022’s low to see how far up the S&P 500 has moved if reading weeks, months, or years after this article’s publication.
And there you have it;
Combining the S&P 500 with the 200sma will give you a clear and uncluttered view of what the market IS DOING, blocking out the noise and misleading opinions of what media channels want you to believe is happening or is likely to happen.
This will guide you in precisely when to consider entering and exiting stocks, as opposed to being confused and frustrated watching our media channels.
There is no money in predicting. The money is in letting the market dictate a direction and following.
Let me leave you with this…
Good investors are good kissers.
Keep It Simple, Sweetheart.
How To Get Started Today?
Visit us at DataDrivenInvestor.com
Subscribe to DDIntel here.
Have a unique story to share? Submit to DDIntel here.
Join our creator ecosystem here.
DDIntel captures the more notable pieces from our main site and our popular DDI Medium publication. Check us out for more insightful work from our community.
DDI Official Telegram Channel: https://t.me/+tafUp6ecEys4YjQ1
