PETER NAVARRO - When The Market Moves, Will You Be Ready

WHEN THE MARKET MOVES,

WILL YOU BE READY?

How to Profit from

Major Market Events

Peter Navarro

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,

To the loving memory of Ruby, my honey. Foresight could have

saved her from a fate more cold and cruel than the stock market itself.

Let us always remember to look ahead—and never forget the lessons

in kindness, gentleness, and peace she taught us.

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CONTENTS

Acknowledgments xi

Introduction xiii

Part One The Big Picture 1

1 So You Want to Make a Million in the Stock Market 3

Anatomy of a Crash 4

2 What’s Your Wall Street “IQ”? 7

3 The Four Stages of Macrowave Investing 15

The Four Stages of Macrowave Investing 16

Stage One: The Four Dynamic Factors 17

Stage Two: Three Key Cycles That Shape Market and

Sector Trends 19

Stage Three: Picking Strong and Weak Stocks and Sectors 23

Stage Four: Using Solid Money, Risk, and Trade Management

Tools to Buy, Sell, and Short Stocks 24

Part Two The Four Dynamic Factors 27

4 Follow the Earnings Calendar! 29

Key Point #1: Fall into the Gap? 30

Key Point #2: Buy on the Rumor, Sell on the News 31

Key Point #3: Consensus Estimates versus Whisper Numbers 32

Key Point #4: Sector Watch 33

Key Point #5: Earnings and the Broad Market Trend 33

5 Follow the Macroeconomic Calendar! 37

Key Point #1: The Market’s Major Fuel 38

Key Point #2: Use Macro Scenario Building 38

Key Point #3: Mr. Market Hates Inflation 41

Key Point #4: Mr. Market Hates Recession 42

Key Point #5: Mr. Market Hates Productivity Decreases 43

Key Point #6: Mr. Market (Mostly) Hates Trade Deficits 44

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6 Uncle Sam and the Stock Market 49

Key Point #1: The Tools of Monetary Policy 50

Key Point #2: The Fed Moves in Cycles, Not Isolated Steps 51

Key Point #3: Monetary Policy Ripples through the Stock Market 52

Key Point #4: You Can’t Push on a String 53

Key Point #5: The Two Problems with Financing Fiscal Policy 54

Key Point #6: Fiscal Policy’s Blunt and Irreversible Tool 55

Key Point #7: The Problem(s) with Tax Cuts 55

7 Exogenous Shocks and the Strategy of the Macroplay 59

Key Point #1: The Art of the Macroplay 60

Key Point #2: Contractionary Oil Price Spikes 61

Key Point #3: War Premiums and Penalties 62

Key Point #4: The Terrorism Tax 63

Key Point #5: The Market Stain of Scandals 65

Key Point #6: The Role of Disruptive Technologies 66

Part Three The Three Key Cycles 69

8 Tracking the Market and Sector Trends 71

Key Point #1: The Market Trends Up, Down, or Moves Sideways 72

Key Point #2: Individual Sectors Move Up, Down, or

Move Sideways 74

Key Point #3: Use Exchange-Traded Funds to Track Market

and Sector Trends 75

Key Point #4: It’s Easy in Hindsight to Spot Market and

Sector Trends 77

Key Point #5: Use the 3-Point-Break Method to Spot Changes

in Trends 78

9 The Business Cycle and the Stock Market Cycle 85

Key Point #1: The Business Cycle’s Ups and Downs 86

Key Point #2: The Stock Market’s Crystal Ball 88

Key Point #3: The Stock Market and Four Dynamic Factors 89

Key Point #4: The Profitable Patterns of Sector Rotation 90

10 As the Interest Rate Cycle Turns. . . 95

Key Point #1: The Four Stages of the Interest Rate Cycle 96

Key Point #2: Higher Interest Rates Negatively Affect the

Market and Sector Trends 97

Key Point #3: Some Bond Market Basics 100

Key Point #4: The Term Structure of Interest Rates 101

vi CONTENTS

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11 Unlocking the Mysteries of the Yield Curve 105

Key Point #1: Constructing the Yield Curve 106

Key Point #2: Shapes of the Yield Curve 107

Key Point #3: Some Historic Evidence of the Yield Curve’s

Predictive Powers 110

Part Four Picking Strong and Weak Stocks and Sectors 115

12 It’s Finger-Lickin’, Stock-Pickin’ Good 117

Key Point #1: Buy Low on the Dips, Sell High on the Peaks 118

Key Point #2: Buy High, Sell Higher 119

Key Point #3: High Volume Movers 121

Key Point #4: The Ratings Game 122

Key Point #5: Buy What You Know 123

Key Point #6: The Way of the Red Herring 124

Key Point #7: Ignore Hot Stock Tips 125

13 It’s Absolutely Fundamental 129

Key Point #1: An Efficient and Random Market? Not! 131

Key Point #2: Exploit Price Deviations from “Fair Value” 132

Key Point #3: Many Fundamental Analysts Are “Value Investors” 133

Key Point #4: The Fundamental Analyst’s Tools 134

Key Point #5: Use the Internet to Simplify Your Fundamental

Screening 135

Key Point #6: The Fundamental Analyst’s Traps 137

Key Point #7: Use Both a Fundamental and Technical

Analysis Screen! 139

14 Technically Speaking 143

Key Point #1: Learn the Lingo and Underlying Psychology 144

Key Point #2: Price Chart Patterns Identify Trends! 147

Key Point #3: Some Common Chart Patterns Can Be Helpful 150

Key Point #4: Volume Speaks Volumes 154

Key Point #5: Moving Averages Clarify the Trend! 155

Key Point #6: The Signals of Momentum Indicators 157

Key Point #7: Au Contrarian! The Logic of Market Sentiment 159

Key Point #8: Use a Technical Screen! 160

Key Point #9: Some Tools Work Better Than Others,

Depending on the Market Trend 163

CONTENTS vii

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Part Five Buying, Selling, and Shorting Stocks 169

15 Managing Your Risk 171

Key Point #1: Risk Represents Both Danger and Opportunity 172

Key Point #2: The Three Dimensions of Risk 173

Key Point #3: The Myriad Sources of Risk 174

Key Point #4: The Reward-to-Risk Ratio 175

Key Point #5: Some Useful Yardsticks to Measure Risk 176

Key Point #6: What Does “Well Diversified” Mean? 177

Key Point #7: Some (More) Risk Management Rules 177

16 Managing Your Money 181

Step #1: Calculate Your Investing Batting Average or Win% 183

Step #2: Determine Your Risk Capital 184

Step #3: Determining Your Reward-to-Risk Ratio 186

Step #4: Determining Your Position Limit and Position Size 189

Step #5: Increasing Position Sizes by Adding Units of Risk 190

17 Managing Your Trades 195

Key Point #1: Market versus Limit Orders 196

Key Point #2: Set Intelligent Stop Losses—Don’t Be Shaken Out! 199

Key Point #3: Use Trailing Stops to Lock in Profits 200

Key Point #4: Use Buy Stops to Play Breakouts 201

Key Point #5: Never Average Down a Loss 201

Key Point #6: Don’t Churn Your Own Portfolio! 202

Key Point #7: Some Inside Tips 203

Key Point #8: David Aloyan’s Top Ten Investor Psychology Tips 203

18 Executing Your Trades 207

Key Point #1: The Three Methods to Execute Your Trades 208

Key Point #2: Level I versus Level II Trading 209

Key Point #3: The Slippage Problem with Level I Brokers 211

Key Point #4: Direct Access Trading Eliminates Slippage 213

Key Point #5: The Virtues of Programmed Ordering 215

Part Six Macrowave Investing in Motion 219

19 Preparing for the Investing Week 221

The Savvy Macrowave Investor Newsletter 222

20 The Stimulation of Portfolio Simulation 229

Key Point #1: Simulate Your Portfolio With STOCK-TRAK 230

Key Point #2: The Tuition Bill Always Comes Due 230

viii CONTENTS

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Key Point #3: Stop the Bleeding and Find the Right Bandage 231

Key Point #4: Conquer Shortaphobia 232

Answer Key 235

Answers to Questions for Chapter 1 235

Answers to Questions for Chapter 2 235

Answers to Questions for Chapter 3 236

Answers to Questions for Chapter 4 237

Answers to Questions for Chapter 5 238

Answers to Questions for Chapter 6 240

Answers to Questions for Chapter 7 241

Answers to Questions for Chapter 8 242

Answers to Questions for Chapter 9 243

Answers to Questions for Chapter 10 244

Answers to Questions for Chapter 11 246

Answers to Questions for Chapter 12 247

Answers to Questions for Chapter 13 248

Answers to Questions for Chapter 14 250

Answers to Questions for Chapter 15 252

Answers to Questions for Chapter 16 253

Answers to Questions for Chapter 17 254

Answers to Questions for Chapter 18 256

Answers to Questions for Chapter 19 257

Answers to Questions for Chapter 20 258

Afterword 261

The Savvy Macrowave Investor Pledge 261

Index 265

CONTENTS ix

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ACKNOWLEDGMENTS

David W. Aloyan at Platinum Capital contributed the chapters on Money

Management and Technical Analysis. David’s grasp of both of these very difficult

topics is one of the very best in the business, and I find myself fortunate to have

his strong contribution.

Working with the inestimable Bob McCormick of the KNX Business Hour on

our regular radio feature “The Savvy Investor Minute” helped me clarify and

frame much of the material.

I am likewise indebted to John W. O’Donnell and Mike McMahon of the

Online Trading Academy. They provided an excellent draft of the chapter on

Trade Execution and many useful comments.

Lisa Waataja was meticulous in her preparation of the final manuscript while

Laura Coyle from Active Trader magazine performed her always-impressive

graphic artistry with the figures, charts, and tables.

Pedro Sottile provided insightful comments and a very thorough manuscript

review. And Stephen Isaacs offered the steadiest of editorial hands at McGraw￾Hill from concept to completion.

Any errors and omissions remain, of course, very much my own.

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INTRODUCTION

My name is Peter Navarro, I’m a business professor at the University of

California—Irvine, and I’d like to welcome you to the world of the savvy

macrowave investor.

This book is a very hands-on companion to my best-selling first investing book,

If It’s Raining in Brazil, Buy Starbucks. In that book, I introduced the revolution￾ary concept of “macrowave investing”; and since the publication of that book, I

have received countless requests from readers to illustrate, in a very hands-on way,

just how to apply macrowave investing concepts to the day-to-day management

of their individual portfolios.

This, of course, I am happy to do, and that is the purpose of this new book. In

When the Market Moves, Will You Be Ready? I will walk you step-by-step through

the savvy macrowave investor method. As you work through this book—which in

many ways is a workbook—you will see that each chapter is followed by some

review questions you will be asked to answer. I’ve also provided you with a set of

some very interesting exercises that you will be asked to perform. Of course, you

can choose not to perform these tasks and just keep reading—and that’s just fine

with me.

However, if I have learned anything in almost 20 years of teaching at one of the

top-ranked business schools in the country, it is this: To truly master a set of ideas,

you must do much more than simply, and passively, read about them. Instead, you

must also actively test your reading comprehension and then logically apply that

comprehension to very practical applications. That’s the purpose of the review

questions and investor exercises following each chapter.

As a final note, you certainly do not need to read my first book If It’s Raining in

Brazil, Buy Starbucks to benefit from this one. While I am sure you would enjoy

and learn much from If It’s Raining in Brazil, Buy Starbucks, this new book stands

quite sturdily on its own. With that said, let’s get to work!

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