Martin Zweig's Winning on Wall Street

1. Don't fight the Fed: Monetary conditions dictate market direction

"Monetary conditions exert an enormous influence on stock prices."

Interest rates drive markets. When rates fall, stocks become more attractive compared to fixed-income investments, and corporate borrowing costs decrease, boosting profits. Conversely, rising rates can hurt stock prices.

The Federal Reserve's actions are crucial. Pay attention to changes in the discount rate, federal funds rate, and reserve requirements. These policy tools directly impact interest rates and market liquidity.

Key indicators to monitor:

• Prime Rate Indicator
• Fed Indicator
• Installment Debt Indicator

Combining these into a Monetary Model can provide powerful buy and sell signals for the overall market.

2. Follow the market trend: Momentum is your ally

"The trend is your friend."

Strength begets strength. Stocks that are performing well tend to continue doing so, while weak stocks often remain weak. This principle applies to both individual stocks and the overall market.

Momentum indicators to watch:

• Advance/Decline Ratio
• Up Volume Indicator
• Four Percent Model

These indicators can help identify strong market trends and potential turning points. For example, when the 10-day Advance/Decline ratio exceeds 2-to-1, it often signals the beginning of a significant bull market advance.

3. Combine monetary and momentum indicators for optimal results

"The Super Model allows for some reasonable trade-off between the monetary and the tape indicators."

Synergy in analysis. By combining monetary and momentum indicators, investors can create a more robust model for market timing. This approach balances the macroeconomic perspective with actual market behavior.

The Super Model, which combines the Monetary Model and the Four Percent Model, has demonstrated impressive results:

• 14 buy signals from 1966 to 1996
• 13 out of 14 buy signals were profitable
• Annualized return of 15.3% vs. 7.4% for buy-and-hold

This model can help investors identify optimal entry and exit points in the market, potentially leading to superior long-term performance.

4. Beware of excessive optimism or pessimism in the market

"When the crowd gets too large, many investors find themselves outside looking in when the market surprises them and changes direction."

Contrarian thinking is valuable. Extreme sentiment in either direction often precedes market turning points. When everyone is bullish, there may be little buying power left to drive prices higher. Conversely, extreme pessimism can signal a market bottom.

Key sentiment indicators to monitor:

• Mutual funds' cash/assets ratio
• Investment advisors' bullish percentage
• Number of bullish ads in Barron's
• Secondary offerings

By tracking these indicators, investors can gauge market sentiment and potentially identify opportunities when the crowd is leaning too far in one direction.

5. Use seasonal patterns to your advantage

"There is an extraordinary tendency for stock prices to rise the day prior to a holiday."

Calendar effects are real. Numerous studies have shown that certain calendar-based patterns exist in the stock market. While not foolproof, these patterns can provide an edge when combined with other analysis.

Notable seasonal patterns:

• Holiday effect: Stocks tend to rise before holidays
• January effect: Small-cap stocks often outperform in January
• "Sell in May and go away": Summer months historically underperform

Investors can use these patterns to inform their trading decisions, potentially timing entries and exits to coincide with favorable seasonal trends.

6. Identify major bull and bear markets early

"The big money is made or lost in stocks during the most violent bull and bear markets."

Catching major trends is crucial. While the market spends much of its time in neutral territory, identifying the beginning of significant bull or bear markets can lead to outsized returns.

Key signals for major bull markets:

• Super-Advance/Decline Ratio (10-day A/D ratio > 2-to-1)
• Super-Bullish Fed Indicator (Fed Indicator rising from ≤ 0 to ≥ +3)

For bear markets, watch for:

• Extreme deflation
• Very high P/E ratios
• Inverted yield curve

By recognizing these conditions early, investors can position themselves to capitalize on major market moves.

7. Select stocks using fundamental and technical analysis

"I try to look for stocks that are acting better than the market."

Combine growth and value. Look for companies with strong earnings and sales growth, reasonable P/E ratios, and positive insider buying. Additionally, favor stocks that are outperforming the broader market.

Stock selection criteria:

• Consistent earnings and sales growth
• P/E ratio in line with or below growth rate
• Positive insider buying or lack of selling
• Strong relative price action

Use a systematic approach to screen stocks based on these criteria, focusing on those that meet multiple requirements.

8. Implement stop-loss orders to manage risk and protect profits

"Your first loss is your best loss!"

Protect your capital. Using stop-loss orders can help limit losses on losing positions and lock in gains on winning trades. This approach allows investors to "cut losses short and let profits run."

Guidelines for using stops:

• Set initial stops 10-20% below purchase price
• Adjust based on stock volatility and market conditions
• Use trailing stops to protect profits as stock price rises
• Don't second-guess your stops; stick to your plan

By consistently using stops, investors can manage risk and potentially improve their long-term returns.

9. Consider short-selling as a valid investment strategy

"Selling short is a very common business practice outside the stock market. They just don't call it selling short."

Short-selling is not un-American. It's a legitimate strategy for profiting from overvalued stocks or hedging long positions. Short-selling can also provide benefits to the overall market by improving price discovery and liquidity.

Key points about short-selling:

• Can be used for speculation or hedging
• Profits are not limited, contrary to popular belief
• Requires careful risk management
• Can be particularly effective in bear markets

While short-selling carries unique risks, it can be a valuable tool in an investor's arsenal when used judiciously.

Last updated: April 1, 2025