The benchmark that most money managers are measured against is the S&P 500. It’s common knowledge that most do not outperform it. Amazing that after all the schooling, study, computer analysis and research … most professionals still do not outperform that simple index.
Many have therefore recommended that investors abandon all hope of trying to beat it and simply invest in a fund that tracks the index.
Is there any hope of beating it?
Well, there’s always hope!
Here’s one approach you can try. While there are certainly no guarantees that this will result in outperforming the S&P 500, it’s a very direct approach toward that goal.
Using a line chart, plot the S&P and have it reference the left axis. Then one at a time, add other markets or stocks you’re considering (use the right axis for them) while keeping the S&P on the chart as a constant. Then look at how they compare.
You can even create an indicator that measures the difference between the two markets and plot it at the bottom.
You’re looking for a market that has been under performing the S&P (moving down while the S&P is moving up).
Draw a trend line along the top of the indicator measuring the difference between the two markets. Watch for that trend line to be broken.
The trend line being broken on the indicator is a signal that the market you’re analyzing may be starting to outperform the S&P 500. Certainly there’s no guarantee that it will continue to do so, but when this technique works it can get you in near the beginning of a market rotation.
The chart above shows a current example of TLT compared with the S&P 500 right now.
An important caveat: Just because the indicator trend line is broken, does not mean you should automatically buy. Both markets could be moving DOWN and the trend line can broken if the relative strength changes in down trending markets!
Therefore always look at the chart of the market you’re looking to buy for a valid entry signal … and always put in and keep your stops!
Hi Barry – Thanks again for the great courses and most informative newsletter. I would like to request a newsletter explaining how you use floor pivots and yesterday’s high, low and close for support resistance in day trading, for example NQ.
Dave
Hi Dave,
Thanks for the comment. I’ll certainly address that issue in the future per your request.
The simple reason S&P outperforms most investors is because S&P simply replaces a stock that goes into bankruptcy while you are stuck licking the wound.
When you pick the WorldCom like S&P does, and your $100 million investment turns into dust, S&P simply replaces the WorldCom with another stock the next day, without taking into consideration of its lost. But, you can’t do that. You don’t have that $100 million to buy another company to run along side with S&P. You are already $100 million behind.