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Eye on the Market: Trade What You See?
By David O. England
CARTERVILLE, IL - Eye on the Market with David O. England - Trade What You See?

Last week I addressed the question, “What do market tops look like?” I charted the last two market tops where one could see market tops take months to form.  In addition, the jury is still out on if we currently are making one. Today I am answering a question, “Does your trading system using the blue signal line work with mutual funds”.

To answer this question let’s use one of the most popular and largest mutual funds, the Growth Fund of America symbol AGTHX. To make sure there is zero bias, I (alphabetically) picked the first mutual fund I use when monitoring my equity mutual fund comparison charts.
 
Per the chart, look at the price action after the two previous market tops (points A&B). In March of 2000 (Box A) the fund made a new high and then took six months before breaking down under the blue signal line. Using my system the investor would be out and would have locked in multi- year profits. The fund then dropped for twenty six months before generating the next buy signal. Imagine how many additional shares could have been bought back at these lower prices.


 
Let’s fast forward to 2007 (Box B) when the fund made a new high and then took nine months before breaking down under the blue signal line.  Using my system the investor would be out and once again would have locked in multi- year profits. The fund then dropped for fifteen months before generating the next buy signal. Imagine how many additional shares could have been bought back at these lower prices. Currently, you can see the price of AGTHX is making an impressive new multi-year high and nowhere near a system sell signal.

What can we gather from this data? First, by using this system, investors would have received system sell signals, locking in multi-year profits and system buy signals allowing investors to buy back in at lower prices. Second, it proves this system works for at least one mutual fund. It would be wrong to think this system would work for all mutual funds. 

Third, just because these signals were profitable in the past in no means guarantees the same winning track record for the future. Finally, by learning from this chart we are making our decisions rationally by what we see and not what we hear, think, or feel is going to happen.
 
Not to be a broken record but keep in mind no system is 100% accurate-period but investors should study previous market behavior for clues to what may happen in the future. I would never consider buying a security until I studied at least the previous action around market tops and bottoms.
 
In addition, unless there is a minimum spread of four percent-the difference between the dividend yield and the total of all expenses I would not consider holding through the downturns. This is my personal criteria and is not meant to be used as investing advice. When you have a healthy four percent plus spread this allows one to pick up shares exponentially through dividend reinvestment-a subject I will be writing about later this spring. Of course, these dividend reinvestments must be commission free.

Many are calling for the market to make a multi-year high this spring and then start a severe bear market. Personally, I am not in the camp but will be monitoring market events and will be reporting through this column. No matter what happens in the months ahead, we will keep a calm head and only make decisions-rationally on what we see-fear will not be invited to the party!

In answering your question on if this system works with mutual funds the answer is yes, at least with one AGTHX and possibly more.  The more important question is, “Are you going to take the time to learn if this system works for your securities”? This system is for educational purposes only and not meant for investment advice.

DAVID O. ENGLAND is an associate professor of finance at John A. Logan College and founder of the Eye on the Market-Training Academy. He can be reached at thetraderseye@gmail.com. The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short, or hold any stock or investment product is a direct result of your own decision, free will, and research.



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Published 07:00 AM, Saturday Feb. 16, 2013
Updated 04:20 PM, Friday Feb. 15, 2013

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