Stock Market Basics

There are some simple concepts that must be clearly understood in order to use ULTRA stock market timing products.

The Stock Market

The stock market is where shares of stock are traded. A share of stock is an ownership share in a corporation.

For example, assume XYZ Inc. has issued 100 shares of stock. If you own one share, you actually own a 1.0% stake in XYZ Inc.

Shares of stock issued by large U.S. corporations are publicly traded at stock markets or stock exchanges such as the New York Stock Exchange. The prices of these shares are constantly changing as they are determined solely by supply and demand. Anyone can buy shares in these corporations by simply setting up an account with a stock broker and submitting a purchase order. The order is electronically transferred to the stock exchange, where the order is executed.

Stock Market Indexes

A stock market index is a number computed from the prices of a group of stocks. It is computed daily to gauge the movement in the market for that day. Here are some examples:

Dow Jones Industrial Average (DJIA)
The DJIA is computed by adding all the daily stock prices of a group of 30 major U.S. corporations and dividing that total by a number called the divisor; this is called a price-weighed method. This divisor will change whenever one of the 30 companies declares a stock split. A company will split its stock when the price becomes high, making it more affordable. By changing the divisor, the index value is unaffected by stock splits.

The DJIA has two disadvantages as compared to other types of indexes:

S&P 500 Index
The S&P 500 doesn't have the disadvantages of the DJIA. It is made up of 500 stocks. The total market value of each company is computed and summed. A company's market value is simply the share price times the total shares outstanding. The sum of all 500 companies' market values is then divided by a divisor. The result is that each company influences the index based on its total market value rather than its share price. This type of index is a capitalization-based index.

NASDAQ 100
Like the S&P500, the NASDAQ 100 is capitalization-based. It consists of 100 high tech, financial, and other growth companies that are traded on the NASDAQ Stock Exchange.

Stock Mutual Funds

A stock mutual fund is a portfolio of stocks that has been purchased by a fund manager using money that has been invested by many individual investors. At the end of each trading day, the total value of the portfolio is determined and divided by the total number of outstanding shares, resulting in the Net Asset Value (NAV). All new investments the fund has received prior to that market close (4:00 p.m. EST) are exchanged for shares in the fund using the NAV price. The fund manager then invests the new investment capital.

For example, assume that before the market close on Thursday, November 10, 1991, you invest $1000 in a mutual fund called XYZ Fund. At the close on this day the fund has the following portfolio:

At this time the fund has sold 20,000 total shares. This results in a share value of $9.50 per share. Therefore, your $1000 investment will buy 105.263 shares of the fund and there will now be 20,105.263 total shares outstanding. Note that 105.263 new shares were created, but the value of each share is still $9.50 per share ($191,000 / 20,105.263 shares). The next day the fund manager will invest the new $1000 as he so chooses. When you decide to sell your shares, the price per share you will receive is the computed NAV at the next market close.

There are some big advantages to investing in mutual funds:

If you choose mutual funds as your trading vehicle, the most important decision you must make is your timing of buy and sell decisions. ULTRA Stock Market Timing Products are is designed to help you make these decisions.

Stock Market Movement

Most stocks move with the market. For example, if the general market is in a downtrend (a bear market), even stocks that are fundamentally excellent values, will trend downward. In fact, aggressive growth mutual funds whose portfolios consist of professionally selected stocks get absolutely devastated in bear markets. Many investors, who are not able to sit by and watch their funds lose 40-50% of their value actually end up selling out at exactly the wrong time. Whether you invest in stocks or funds, it is absolutely necessary to know when to be very conservative about your stock market investments.

Positions

Your position is based on which way you are betting the market will go. We refer to these positions as long, short, and cash.

Long Positions- If you buy stock or mutual fund shares hoping they will increase in value, you have taken a long position.

Short Positions- If you believe the market will fall, you can profit by selling short. This is referred to as a short position. Selling short is selling borrowed shares of stock or shares of a mutual fund, hoping to some day buy them back at a lower price and return them to their owner.

For example:
Aassume you borrow 100 shares of XYZ Corp. and sell them for $5 per share. You will receive $500 proceeds from the sale. At some later date, XYZ Corp.'s stock has dropped to $3 per share and you decide to buy the shares and return them to the person you have borrowed them from. This is called short covering. To repurchase the shares you will have to pay $300. Since you received $500 on your short sale, and paid $300 to cover your short, you have gained a $200 profit on the trade. This is a very common transaction. A stockbroker who will charge you a commission handles all of the details.

Mutual funds can be shorted through some discount brokers but it really doesn't make much sense. In a bear market the wise short seller will short stocks that are likely to go down the most. But, during a bear market the mutual fund will hold stocks that they think are likely to go down the least. So, it doesn't make much sense to short a group of stocks that a professional stock picker believes will be least effected by the bear market.

Some mutual fund families such as Rydex (see below) offer inverse funds. For example the Rydex URSA fund moves -100% of the SP500. Therefore, if you think the SP500 is going to drop, you can buy the URSA fund and you will profit if the SP500 does indeed drop.

Cash Positions- If you are not short selling when you believe the market is going to fall, you will simply sell your long position and place the proceeds in an interest bearing account. This is a cash position.

Beta

Beta is a measure of volatility of a trading vehicle such as a mutual fund. The general market as measured by the S&P 500 is considered to have a beta of 1.0. Stocks or funds that gain more than the general market in bull markets and lose more in bear markets have betas of greater than 1.0. Conservative funds and stocks may also have betas that are less that 1.0.

For example:
Aassume you invest your money in an aggressive growth fund that has a beta of 1.5. If the S&P 500 gains 10%, this fund should gain 15% (1.5 X 10%). If the S&P 500 loses 10%, this fund should lose 15%.

Rydex Mutual Funds

One mutual fund company (Rydex) offers some truly cutting-edge mutual fund products. They specialize in Index Funds. Index Funds attempt to replicate the performance of stock market indexes such as the S&P 500.

Unlike almost all mutual fund companies, Rydex does not limit the number of times you switch in and out of their funds. And, they do not charge commissions on trades. Rydex can be reached at 800-820-0888 (rydexfunds.com).

We believe that investing should be as simple as possible. Therefore, we generally base our historical timing results on models of two Rydex mutual funds.

Trying to pick the best performing fund is an unnecessary complication. The Rydex funds are really all you need to beat the S&P 500 year after year, a feat that very few funds can do.

In fact, you could beat the SP500 easily without taking extra risk by investing 67% of your capital in Rydex Nova and 33% in an interest bearing account. Since Nova returns 1.5 times the SP500, your 67% position would return 100% of the SP500. And, you'd receive interest on your 33% cash position.

Spend Most of Your Time Deciding WHEN to Buy Instead of What to Buy.

Do you really think that the wealthiest and smartest investors in the world are actually buy-and-hold investors? Individuals who have built multi-million dollar fortunes are not big on losing money. Sure, they may ride out losses on venture capital type investments just as a business owner wouldn't sell his business because of temporary losses. But, the majority of their portfolios are protected from bear markets with active managment and hedging strategies which is simply market timing.

Think about this. Does it make logical sense to enter into an investment that is trading at 100 times earnings? Would you buy a company that only makes a $10,000 yearly profit for $1 million? Of course not, but that is exactly what you are doing if you are convinced to buy a stock that is trading at 100 times earnings?

Of course that stock could go higher, but doesn't it make sense that stock investments, like every other investment on earth, are sometimes not a timely opportunity? The investment industry wants desperately to convince you otherwise.

The investment industry is built upon the hope that you will be convinced to buy a stock or fund and hold it forever. This keeps the investment company's costs low and profits high. Your success will vary and really isn't of much concern to them.

As of November 2003, millions of investors who believed the industry lies have lost enormous amounts of money. Don't you be next.

With ULTRA you will easily be able to develop very advanced strategies, trading many different assets, that are not dependent on the hope that the market will recover, go to new highs, and you'll need no strategy other than writing a check to some big investment house.