The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
A Simple ETF Strategy for Investors
06/20/2013 7:45 am EST
Tim Reazor of Investor's Business Daily says his ETF strategy is simple, but profitable, for the short and long term.
Nancy Zambell: My guest today is Tim Reazor of Investor's Business Daily. I'm sure that most of our viewers understand what Investor's Business Daily is, Tim, but why don't you tell us a little bit about what you guys are doing in the educational area?
Tim Reazor: Investor's Business Daily education programs are designed to help individual investors find consistent success in the market, which has been very difficult to do of late—especially over the last five years.
With IBD's Market Pulse and Big Picture columns, which run every day in the paper, we've been able to actually help individual investors do just that—find that consistent success. We're using historical references to determine the best time to enter the market and get into individual stocks, or exit the market.
We identify uptrends—those three or four stocks that are actually trending higher. We also identify uptrends under pressure, which is indicative of a sideways market where we get lots of chop, especially of late. The last several days in the market, you've had 100 points up, 100 points down, and that's indicative of markets that are under pressure.
Then, we have another identification called correction, and that is indicative of the market that is actually trending lower. Just like uptrends, three to four stocks are now trending lower.
Nancy Zambell: You're talking about major trends, not daytrading?
Tim Reazor: No, absolutely. We're looking to capture, as I call it, the filet mignon of the movement, the big part of the movement. We want to get investors in the market right before stocks make their biggest price moves, and then we want to get them out of the market when those stocks are finished going up in price.
What most people don't know is that we're actually working with the top 2% of the entire market. All of the stocks inside of IBD are screened for fundamental and technical superiority, so we've eliminated 98% of the entire stock market. Consequently, you're only focusing on the best stocks.
Then, when you're buying those stocks in an uptrend, that just enhances your chance. Historically, you have a 75% chance of picking the stock that's going to go up in price. Not every uptrend works out, but history has been on our side.
We just developed an ETF strategy that has been proving to be very powerful for individual investors. For example, you could buy equal parts of the Nasdaq-100 ETF (QQQ), and you could buy equal parts of the SPDR S&P 500 (SPY).
You would actually have phenomenal control going back to 2003 with our ETF strategy—almost a 2:1 advantage of just coming into the market when IBD identifies the market in a confirmed uptrend, then exiting that market when we go to market uptrend under pressure.
Nancy Zambell: That sounds pretty simple, and it's a lot easier than just following individual stocks for those investors that just don't have the time to do that.
Tim Reazor: I'm going to tell you something: I actually developed this ETF strategy for my parents, for this very reason.
The other facet that I love about the ETF strategy is it avoids earnings season, which can make or break you. It's very difficult to place a hold on individual stocks into earnings season, because it seems like you have a 50-50 chance of that stock going up or going down.
Just for example, Lululemon (LULU) reported a great quarter, but their CEO stepped down.
Nancy Zambell: Exactly...that was a surprise!
Tim Reazor: Exactly. There's no way you would have known that. The individual investor wouldn't have been prepared for that. The IBD ETF strategy actually has had you out of the market for this correction.
What's interesting is, as you and I are talking this afternoon, the market actually followed through, so the ETF strategy is back in play. You would buy equal parts of the SPY and equal parts of the QQQ.
Nancy Zambell: With IBD, do you think it's easy for novice investors to get started? Go right to IBD and figure out what to do?
Tim Reazor: Absolutely. That's the beauty of Investor's Business Daily. It simplifies the process of knowing when the market's trend is in your favor, and it simplifies the process of finding stocks that have the best potential to go up in price.
Then, we have these proven sell rules that help individual investors actually get out of the market when the market is not in your favor, or that stock has turned against you. As you know very well, anyone can get you into a stock, but the investors that understand how to sell, those are the ones that stay in the game longer, that can actually build that lifelong well.
Knowing when to sell is confidence. It gives you the confidence to enter the market, because you actually have a game plan to get out. That's what I think IBD does better than anybody else out there in the investing landscape.
Nancy Zambell: Right now, you said your signals are looking like the market has not topped out.
Tim Reazor: Right now, as of Thursday afternoon, the S&P 500 has followed through.
We call that a follow-through day, meaning price and volume have both risen to a technical level that says that institutional money—the people that control the market, your mutual funds, your pension funds, your hedge funds—they've come back into the market, and they're supporting the market. That's exactly what we want to see.
Now listen, this uptrend could fall apart tomorrow. It doesn't usually fluctuate so quickly, but I always do throw caution out there, because the prudent investor, the cautious investor, they've been in this game longer. And like I say, they're able to build that lifelong well.
We don't gamble. We don't guess. We use fact and history on our side. So as of this afternoon, it looks like the market has indeed followed through, and the trend has turned back up.
Nancy Zambell: Even if the investor is interested in individual stocks, and looking at the stocks that IBD follows, you're not doing those speculative, under-$2 type of deals, right?
Tim Reazor: No, not at all. As you know, our founder William O'Neil likes to say, "Anything under $10 is usually the junk pile."
We're looking for stocks of high liquidity. There are small, small-cap stocks and they meet our rigorous demands for screening, but they absolutely have to be of substance.
Nancy Zambell: Right. OK, my last question. You mentioned to me earlier that you have a special offering for MoneyShow viewers, some educational material.
Tim Reazor: Absolutely! Anyone listening to this interview, or reading the transcript, can call Investor's Business Daily to get a free month's digital subscription to IBD. Call 1-800-821-2525, and mention MoneyShow. It's the exact publication that comes to your doorsteps every day, but I think it's better to have the digital edition, because you get it the night before.
When you call in, I will e-mail you personally a series of pamphlets that will help you get started, and succeed with Investor's Business Daily.
Related Articles on STRATEGIES
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...
The stock market is still bullish but it’s flashing yellow caution signals that are even brigh...