First In A Series In one corner, you have conventional wisdom and many experts like Burton Malkiel. In the other corner, you have IBD's founder and chairman, William O'Neil, and plenty of other experts.
These two sides disagree in a fundamental way over whether or not one can time the market.
Malkiel's book, "A Random Walk Down Wall Street," states that there's "no point in following any technical trading rule for the timing of purchases or sales. A simple policy of buying and holding will be at least as good as any technical procedure.
Meanwhile, O'Neil, his investing books and his newspaper, IBD, have been among those arguing the opposite for years — saying you can and should in fact time the market.
So what's an investor to do
This series should serve as an introduction to or refresher on IBD's approach to market timing. Learn the strategy to become better armed to make up your own mind on the matter of timing.
The first thing you need to know about IBD's method is the follow-through-day concept. A follow-through confirms that the broad stock market has switched to rally mode after spending a considerable time retreating, also known as correcting.
You get a follow-through when a major stock index (the S&P 500, Nasdaq or NYSE composite) closes up significantly from the prior session and in greater .
What's meant by "up significantly" these days? IBD generally looks for a gain of 1.3% to 1.4% or more.
The most powerful follow-through days happen — not always, but often — on Day 4 through Day 7 of an attempted rally. Within this window, you frequently get a clear signal of a new uptrend, and it can end up being a really strong move up, with many leading stocks providing big profits to their holders.
On the other hand, you also can get follow-through days outside that window of Day 4 through Day 7, as happened in December 2011. All three indexes followed through on Dec. 20, 2011. (1) That was Day 17 of a new rally attempt.
Keep in mind that a follow-through doesn't have much to do with that week's headlines.
In mid-December 2011, there was plenty of dismal news, from weaker-than-expected retail sales to experts seeing no solution to the eurozone debt crisis.
Not every follow-through works. Some are head-fakes. But every major market bottom going back to 1900 had one.