Several times each month I am solicited by various market touts who have a newsletter service, faxes or emails they are willing to send me to make me rich. That sure is nice of them.

The first thing that pops into my head is if this system is so good why are they willing to share it for the lowly sum of $19.95 per month. Of course, some of them will move the decimal point to the right and increase that front number, but not to worry - it is sold with a money back guarantee!

If you should desire to put your toe in the water here are some questions you might want to ask first:

1. Are the figures shown actual trades or is this hypothetical? If it is hypothetical you can stop right there. Total BS.

2. What is the minimum size account I need to take all your signals?

3. Do you use stops?

4. Is slippage and commission figured in?

5. If all trades were made for the past year what was the starting amount and the amount in the account at the end of the year?

6. What was the largest single loss?

7. What was the largest continuous drawdown (loss)?

8. How many winning trades? And average profit?

9. How many losing trades? And average loss?

10. Are you willing to tell me a few clients who are using your method with their permission, of course? (Get references.)

It has been my experience that you will not receive an answer or you might get a form letter saying their method is proprietary information and cannot be given out. Hogwash. We know where you can put that letter.

You might ask to see their model account. Surprisingly the Securities and Exchange Commission does not require these hucksters to maintain such an account. I’d like to see such a regulation passed; there would be a lot less of these methods and systems sold as most of them would go broke. Before you send any money please make them prove with additional documentation exactly what they are selling.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t BuyIt!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

As an investor you will want to check out any equity before you buy it. Many investors go to Morningstar that is one of the largest providers of mutual fund information in the world. It is assumed that their information is correct. After all that is what you are paying for.

Recently the SEC (Securities and Exchange Commission) called them on the carpet for not correcting an error within a reasonable time (whatever that is according to the SEC). Everyone makes errors and this was no big deal.

It seems that when you went to their site and drew up a chart or asked for statistics on Rock Canyon Top Flight mutual fund it failed to notify the potential buyer that the fund had issued a very large dividend of approximately 25% and the NAV (Net Asset Value) dropped from $15 to $11 to reflect the $4.00 dividend.

It seems that when you ask for a chart of this fund on MarketWatch, Yahoo, TheStreet or Bloomberg that they only post the NAV and do not make any adjustment for the dividend or capital gains distributions. When you look at the chart it looks like the fund fell out of bed. Because I look at so many charts I knew immediately that this was a distribution and not some calamity. To be sure it is very simple to call the fund to verify this.

Every fund that makes dividend and capital gains distributions usually does so in December, some in November and very few at other times during the year.

Some nitpicker called the SEC and made a complaint about Morningstar. Not that I am a big fan of them (in fact I think their reports are worthless) they get their price information from other sources such as the above. If you are not familiar with the requirement of mutual funds to disburse their profit before year end you might be fooled when you see the price suddenly drop.

This is important for potential investors. I caution everyone to get a chart of at least a one year performance of any mutual fund before buying it. It is better to go back to year 2000 to see if the fund manager was able to keep from losing money during the last 4 years. Almost none of them could so they talk about how they did better than the S&P500 Index which had a huge loss. Don’t fall for that one.

Once again I caution that any purchase should have an exit plan. One of the basic rules of investing is never to lose a lot if you are wrong. Small losses will not ruin your portfolio, but big losses can ruin your retirement. Set your loss limit and stick with it. For some it might be 5%, others 10% or more, but have an exit strategy or you will go broke.

The secret of the stock market that Wall Street does not want you to know is that success in the market is not buying it is selling.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

How can you dispel an illusion unless you look directly at it? The magician distracts the eye with one hand while he does his manipulation with the other. You are looking in the wrong place and not seeing what is actually happening.

Wall Street has mastered this move even beyond the wildest dreams of Houdini. Investors have become so mesmerized by the smoke and mirrors that they believe the large brokerage houses are telling them the truth.

One of their master distractions has you believing that research is necessary to be able to pick a winning stock or mutual fund. All research is facts and figures which is nothing more than disinformation. Think. That long report by some analyst came from sources available to anyone and everyone, therefore, it is worthless. If everyone knows it then all that information is already reflected in the current price of the stock.

Just because you have information and it seems so good that doesn’t mean the equity price is going to go up. Those beautiful pink, green and yellow tout sheets sent to you by some broker have you looking in the wrong place just as the magician does while he is picking your pocket. Sound familiar?

The annual report is a beautiful document. Slick paper and in full color, but those footnotes are hard to read. You know the old saying: "they give it to you in the big type and take it away in the small type". More of the magician’s tricks. Did it occur to you that much of the content of the annual report is a year old? Is that going to tell you if the stock is going to go up tomorrow or next week?

Another distraction by the master magician is the prospectus. I have written these so I know how they can be manipulated. The most important thing to remember is they were not written for the investor. They are written so some Dilbert lawyer in his cubicle at the SEC in Washington will see that it meets all the regulations. There is practically no difference in the content of a winner and a loser.

So much of what comes out of Wall Street is sleight of hand and smoke and mirrors. You must stop and ask yourself, "Is knowing this going to make me any money?" In all likelihood it won’t. Almost every analyst recommendation put out by brokerage companies is already ancient history and of no value. The Securities and Exchange Commission (SEC) in Washington is now investigating allegations that analysts have become salesmen for their brokerage companies and are told not to issue negative reports on any company no matter how poorly they perform.

Become aware of the magician’s tricks and watch out for that other hand he has in your pocket.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

When the stock market is going up and all your stocks and mutual funds are making money you feel like a genius. It is too bad that some folks don’t remember what happened in 2000. Of course, right now we are in one of those genius phases.

Your broker and financial planner are encouraging you to buy, buy, buy. And I can’t fault that at this time. You remember back in 2000 how many times they told you to buy, buy, buy while the market was going down, down, down. Are we in another of those periods now that are leading up to a humongous crash? Hey, I don’t predict, but I do listen to the voice of the market.

The great Wall Street mantra is "buy a good stock and put it away". Did you keep WorldCom and Global Crossing? Even if these were exceptions because of fraud a smart investor would not have lost any money. In fact he could have made a nice profit. But Al, they went under! Yes, I know, but the smart money still made out because they sold near the top.

As a former exchange member and floor trader I was not right every time I bought something and I especially did not like giving back nice profits that had accumulated. You don’t have to be psychic to know when to sell and don’t think you are going to be able to pick the top. A really smart trader waits for a stock or fund to start up and then jumps on it with both feet. When it starts down he jumps off looking for another equity that is going up. The wise trader knows he can’t buy the bottom and sell the top. What he wants is a big bite out of the middle.

When you make a sandwich most of the meat is in the center and a professional trader does the same with his trading. He wants to take a bite out of the middle of the move. You can do this too by looking for stocks, mutual funds or Exchange Traded Funds that have a nice upward pattern. As I said before buying is not the secret. Then what is?

You must learn to sell - for two reasons. First to protect your equity after your initial purchase and second to keep from giving back profits you have made as the equity advances. The great Wall Street secret is an exit strategy: knowing when to sell. Unless you learn to sell you will not be successful in the market. Brokerage companies do not want you to sell and rarely issue sell signals. You must decide how much you are willing to risk before you buy.

The simplest way is with a percentage stop loss order of 5%, 7%, 10%, 12%, whatever you can live with. Instruct your broker to place a trialing stop or you can change it yourself every week. Do not lower a stop.

Selling is the great secret you will never hear from your broker.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

Duck! No I don’t mean a quack, quack. I meant get down, look out for a huge blob of brown stuff is heading your way.

This one is so large it is going to make Enron and Worldcom look like Boy Scouts stealing cookies at a picnic. As a result of these latest revelations we are going to have to find someone new to blame. So far the blame has been on the World Trade Center tragedy and dishonest executives at a few large corporations. These are a pittance when you see what is coming.

Does your company have a defined benefit pension plan? Did you know that 234 companies listed in the S&P500 index do? Did you also know that they owe their retirement plans $78 billion (yes, that’s a B)? Wait a minute. I thought they were supposed to put funds into it every year. They are, but they haven’t. How come these companies are showing big profits and not meeting their obligation to their employees?

It’s all legal and has the blessing of the SEC (Securities and Exchange Commission).

This is how they do it. The company says they are going to make 10% return on retirement plans, but in 2002 they lose 5%. The SEC says they are allowed to project that profit over the next 10 years. If the company has a $100 million pension fund they put in their financial statement that they made $10 million in 2002, 10%. What happens to the $5 million loss? They deduct the $5 mil from the bottom line of the financial statement that now includes the $10mil phony profit and keep the $5mil as if it was actually there which it isn’t. In reality the company now owes the pension plan $15mil which the SEC says they can amortize over the next 10 years. Talk about smoke and mirrors!

General Motors owes about $15.5 billion to its pension plan that is an amount equal to one half of the value of the entire company. Technically the employees own half the company, but my guess they will not see much, if any, of it. Do you think GM has the ability to make its current pension contribution plus another $1.5bil every year for the next 10 years? Quack, quack, quack. Not a chance. If the talking heads know about this they aren’t quacking.

Once this becomes known not just about GM, but also the other 233 companies (and maybe yours) the stock market will be taking another dump. P/E ratios are now about 30 for the S&P500. When money is taken from their bottom lines it will result in pushing those ratios much higher which will further weaken the market.

Here are 3 questions for the owner, Treasurer or Controller of your company: What is the company’s projected rate of return? Will there be funds paid into the plan this year? Does the company owe any money to the plan?

Don’t let him give you a quack, quack.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

I’ll bet with almost anyone that has stocks or mutual funds in his portfolio that he has losers, but he won’t sell them because he "likes them" or some similar excuse. This is the philosophy of a loser.

You cannot become emotionally involved with anything you have bought whether it is stocks, mutual funds, collectibles, real estate, etc. etc. When you see the value of these things heading down it is time to try to salvage some of your money even if you have to take a loss.

I have seen people hang on to a piece of land (or a stock) for years just so they could get out "even". Believe me "even" is not even. Suppose you paid $20,000 for the land and it took you 8 years to find someone willing to buy it for $20,000. If you could have sold it for $15,000 and put the money in a money market account at 6% for 8 years you would now have more than the original $20,000 ($20,495). When you invest money in anything you cannot afford to have emotional ties to it. You must be willing to sell when the time comes. Most people don’t want to sell for two reasons. They won’t take a loss; however, the main reason is psychological - they don’t want to admit they were wrong. When I was a broker I would watch people trade. Almost none of them were trading to make money although that was what they said. They were trading to find out how much pain they could stand from losing. They were trading for emotional reasons.

The difference between professional traders and a non-professional investor is the ability to divorce themselves from the emotions of the trade. Win, lose or draw the pro knows the risk and is willing to take that loss quickly if it should occur.

Emotional involvement in investing is one of the best ways I know of to lose money. You must be able to look dispassionately at your stocks, bonds and mutual funds and be able to sell them when they turn negative. Negative does not mean go to a loss. It may mean they are no longer making a good return every year with your money and it is time to move to some other stock or fund. You might have a stock that has doubled since you bought it, but that was 2 years ago and it has done nothing since then. Time to sell. Look at your annual ROI (return on investment) of each individual issue to determine if your money is doing better than the overall market or whatever your personal criteria might be.

Many years ago I heard how they caught monkeys. The hunters would drill a hole in a coconut shell just small enough so the monkey could fit his open hand through the hole. It was tied to a tree with a strong cord. Inside there was fruit and sugar. The monkey put his hand in, grasped the goodies, but could not get his closed fist out. He would not even let go when the hunter came to capture him. Unfortunately, there are many investors grasping at losing positions. Isn’t time to let go of some of those stocks you have been holding because you "like" them?

Let go of those emotional ties. You will make more money.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

Let’s hope you did not have any of the Enron stock. Maybe you know someone who did and lost everything, but you certainly might know several people who owned stock that lost almost everything. They probably aren’t talking about it.

According to Investor’s Business Daily newspaper there are 1,387 companies that lost more than 90% of their value from the highest point during the last 5 years. That is almost as bad as Enron except the folks that own this junk have hopes that someday their stock will go back up. And pigs can fly.

Do you realize that if a stock loses 50% from its high it must gain 100% to get back to the old high? And there are literally thousands of stocks that fall into that category. The people that own these dogs are waiting for them to rally so they can get out "even". What this means is that the stock has an effective cap or ceiling on it’s price. Each time it sticks its head up it will meet with thousands of folks who will sell. The chance of it ever getting back to the old high is almost nil, never, nada, zip. From my experience as a professional floor trader on the exchange I can tell you it will take a minimum of 5 years of repeated rallies before the investors who are waiting to get out are finally exhausted.

There is a better plan. Why would anyone buy something and let it go against them 60 or 80%? Why do investors believe the greatest Wall Street lie of Buy and Hold? Psychologically people don’t want to admit they are wrong. Your broker tells you you don’t have a loss until you sell. Believe that and I have a nice bridge in Brooklyn I will sell you.

If you consider yourself a conservative investor then you must set limits on how much you are willing to lose if the stock you buy does not go up and instead goes down. One of the best rules of thumb is about 10% either from where you bought it or from its most recent high. That 90 dollar Enron stock would have been sold at about $80 and you would have a nice profit instead of a loss.

Your broker will discourage you from putting in a loss limit order called a stop-loss because then he will have to watch it which he won’t. You see, and I know you know this, there is only one person who cares about your money and that is you.

Setting small loss limits when you buy something and following up a winner with a stop-loss so you won’t give back profits you have made are the way to guarantee that your investments will grow every year.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

An insane person cannot evaluate an insane evaluation system.

As you know I have been trying to restore sanity to the insane premises Wall Street has been teaching its brokers and you for all these years. Their insanity has become so pervasive that it has become conventional wisdom. The brokerage houses have taught everyone to act insanely and to think that what they are doing is sane.

Wall Street has taught you the insanity of doing research, dollar cost averaging and buying and holding. Anyone who can rub two braincells together can figure out that all these are lies. A book written 40 years ago by Nicholas Darvas called "How I Made $2,000,000 in the Stock Market" came to the same conclusions I have, namely, brokers don’t know anything and research is worthless. He gives a good explanation as to why he came to those conclusions. You might still be able to get the book at the library as it is out of print.

Why is research worthless? There is one good source of information about almost any listed company as well as many unlisted companies from Morningstar. They are the nexus for stock market information. You can find out more things about a company than you will ever need to or want to know. You will be inundated with information, but there is one thing they do not know. Will the stock go up after you buy it? And that is the only thing that counts.

When you ask your broker about a stock he will go to the company file that has all the statistical information about almost any company. He thinks that stuff is good. If it is so good why doesn’t he buy it? Because down deep he knows it is worthless, but he can’t admit that to you or even to himself.

His company has taught that you must do research. In his defense he does not realize he has been a good student, but has had a bad teacher. You would think that after doing this nonsense all those years he would catch on, but he doesn’t because everyone around believes it is true. He is in an insane asylum. Everyone looks normal.

You cannot evaluate an insane evaluation system with insane evaluation. Once you realize it is insane you must leave it. Don’t argue with the insane person. Now you have shaken lose from that weird thinking you will be able to look back on it to wonder why it took you so long to come to your senses.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

Every day on CNBC-TV they show a 200-day moving average line superimposed on the stock price history. It seems they give great credence to this manufactured line as it represents 10 months of price action. What is it? Does it really mean anything?

The line represents the addition of the closing prices of that particular stock, mutual fund or index for the past 200 trading sessions that have been added up and divided by 200. That is then placed on the chart at that point. For example if the price of the equity started at zero and went up exactly one point for 200 days the average would be 100. A dot is then place on the chart at 100 even though the equity price is now at 200. Each day the new closing price is added after dropping off price number 1 and the new group is added up and divided by 200. This is done each day. Nothing complicated.

Does this mean anything?

This is considered to be a very useful technical indicator, but like all technical indicators you must understand how to use it. There is one rule for any technical indicator: no single one is a Holy Grail for predicting future price action of a stock, fund or index. WAIT! Don’t throw out the baby with the bath water.

The 200-day MA is not a predictor, but it does establish the current trend of whatever you wish to measure that has a recurring event. You can use it for the average price of housing, cost of gold, global weather temperature, medical costs, etc., etc. that can then be plotted on a chart.

You don’t have to stay with 200 days. You may modify it to any number of days or time periods you wish from two on out past 200. Many technical analysts use 10, 20, 50, 100 and then plot these on the same chart simultaneously to see when one crosses over another. These are called oscillators and thousands of traders use them to determine buy and sell signals.

Because the 200-day MA is composed of 200 price entries it has been determined that it works best when used with something that has many factors represented. In the stock market this is indexes and mutual funds. Mutual funds are composed of many stocks or bonds and the price action of any single equity does not cause a major price swing.

If you will keep in mind that the 200-day MA will show only the major long term trend it can be a very useful investment tool.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

What does it mean to short a stock?

This means that you borrow the stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit. Put another way, a short seller does not own the stock before they sell it. Instead, they borrow it from another investor who already owns it. At a later date, the short seller buys back the stock they shorted and returns the stock to close out the loan. If the stock has fallen in price since they sold short, they can buy the stock back for less than they received for selling it. The difference is your profit.

Short selling is a transaction made on margin. This means that you must open a margin account to sell short. Most online brokers allow you to open a margin account if you qualify according to their rules and regulations. Criteria related to minimum balances and cash reserves may apply. You will sign an agreement with your broker to open a margin account, this agreement says that you will maintain a cash margin or pledge your stocks as margin. (Note: Call your individual brokers for additional questions that you may have).

Shorting can be difficult even during a bear market. The conditions must be exactly right for a stock to be considered a short. Just because a stock looks overvalued or high doesn’t mean that it is time to sell this stock short. As I have said before, what looks high to one investor may still be low to another. Two things to take into consideration would be dividends and thinly traded stocks. A stock paying a dividend must be paid by you the short seller when this position is on. Low volume stocks can be very volatile and market makers and money managers can run up the price quickly crushing your short play and adding to your overall loss.

If the stock rises above your sell price, eventually you will have to cover your short for a loss. If you have not placed a stop loss, the stock can continue to go higher as your portfolio heads for disaster. Theoretically, a stock can rise infinitely, meaning your losses can rise infinitely. Imagine shorting NVR at $200 a share because you though it was overvalued, only to see it go to $700 per share. I am sure this type of trade would wipe out or leave a big dent in anyone’s portfolio.

Many great shorting opportunities come from the same small and mid cap stocks that were once high flyers in previous months or years. For example, TZOO and DCAI were high flyers in 2004 before they became red flags and shorting opportunities. Even large cap companies such as eBay, SBUX and HD can present shorting opportunities at certain points.

Ideal shorting candidates will have built several bases over a long period of time resulting in faulty late stage bases as the stock starts to fall. We look towards stocks that have built four or more bases over a few years although this is not always necessary. Stocks such as the mortgage lenders (LEND & CFC) have built many bases since 2002 and have run up several hundred percent. Home builders also fall under this category but have not made our shorting lists as of yet. They have been showing some red flags but support has been noted at or slightly above the 50-d moving averages.

Additional criteria for shorting candidates will be decelerating earnings and sales and a relative strength line heading down. Basically take the characteristics that we use for long positions and reverse the criteria to develop a list of possible short candidates. Even familiar chart patterns can be used to spot shorts; the reverse cup shaped base, the head and shoulders pattern and/or the flat base with a stock breaking out to the downside on above average volume. Industry groups that are becoming weak or are showing multiple stocks falling and breaking through key trend lines should be noted on a watch list. If one stocks looks like a short candidate, look for additional sister stocks that may have the same set-up. Remember, stocks usually move in groups whether they go up or down.

I tend to look for stocks that are below both the 50-d and 200-d moving averages. Once they slice through both of these lines, I then look for a strong down-trend and a failure to break above the 200-d moving average. This is my ideal time to short a particular stock.

Always have a sound exit plan in place with a predetermined stop loss to protect your capital. We typically use a 7-10% stop loss for our long positions depending on the market strength but I would advise a larger buffer for short candidates. A stop loss placed 10-12% from your sell point would be ideal as most stocks have a natural tendency to go up or contain volatility near the shorting sell point.

Shorting stocks can be more difficult to learn than buying stocks because a whole new set of rules and bearish short patterns must be learned, on top of your buying rules and chart pattern skills. Shorting can take many more years to master and can provide a shorter window of opportunity as bear markets typically don’t last as long as bull markets do. No matter what strategy you develop with shorting or buying long, you must always stick to strict sell rules. Never argue with a position that goes against you, emotions and pride mean nothing in the market, especially in the short market. Sell all losers immediately before they devastate your portfolio and your confidence going forward.

The next article from this two part series will detail the strategies or reasons why you may want to short a stock and a few examples of how shorting stocks can benefit a portfolio during bear markets or sideway corrections, similar to our current situation.

Chris Perruna - http://www.marketstockwatch.com

Chris is the Founder and President of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make your own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.