I just finished reading a book: When the Market Moves, Will You Be Ready?, authored by Peter Navarro.
Peter Navarro is the author of "If It's Raining in Brazil, Buy Starbucks", one of the famous books on Sector Rotation.
I found this book to be very well written. It is clear, concise and easy to understand, even for beginners.
Basically, the book introduces a top-down, step-by-step approach of investing, from the basic of fundamental analysis, technical analysis to risk management, money management, trade management, and execution.
Here are the main points what the book is all about:
There are 4 stages of Macrowave investing:
Stage 1: To analyze the 4 dynamic factors that have impacts to the broad market trend:
a) Company earnings: Especially for the big companies. Must take note of their earnings calendar.
b) Macro-economic events, such as government reports on inflation, employment, productivity reports, trade deficit, etc.
c) Fed policy changes (monetary vs. fiscal policy).
d) Exogenous shocks, such as oil price spikes, wars, terrorism, company scandals, etc.
Stage 2: To understand and determine the 3 key cycles that shape the market and sector trend: Business cycle, Stock market cycle and Interest rate cycle
With regards to the stock market & business cycle, Navarro emphasized the importance of Sector Rotation:
It’s well-known that to be successful in investing, one should follow the broad market trend because about 3 out of 4 stocks will follow the broad market. However, that principle only is actually not enough.
At different points of market cycle, there are some sectors that outperform both the general market and the other sectors. Therefore, investors should regularly change sectors as the stock market moves through the patterns of sector rotation.
If you’re in the right sector at the right time, you can make a lot of money very fast.
The following are 3 golden rules of Macrowave investing:
1) Buy strong stocks in the strong sectors in an upward trending market.
2) Short weak stocks in the weak sectors in a downward trending market.
3) Stay out of the market and in cash when there is no definable trend
This part of the book explained further the stages of stock market cycle, which sectors that normally outperform the others during each stage of the cycle, and the logics why it is so. Some ways to track the market and sector trend are also discussed.
With regards to the interest rate cycle, the author explained the 4 stages of interest rate cycle, and how interest rates affect stock and bond market.
In addition, Navarro also explained the Yield Curve and how the shapes the curve could possibly signal the possibility of market expansion / boom, or recession.
Stage 3: To screen and pick the strong stocks in the strong sectors or weak stocks in the weak sectors, based on fundamental and technical analysis.
The author offered some ways to screen stocks with strong fundamental and discussed some basics of technical analysis.
Stage 4: To use solid risk management, money management, and trade management as well as the execution itself.
I personally like how the author explained about the basic of money management. Very clear and systematic with a few examples. I think it’s the best explanation on the basic of money management as compared to other books or articles that I ever read on the topic so far. However, he did not explore too much on various money management techniques.
The trade management covers the comparison between market vs. limit order and when to use it, setting trailing stop to prevent a profitable trade from turning into a losing trade, using buying stop order for breakout play, etc.
On the execution, the author discussed the advantages of using Level II quotes as compared to Level I.
You can also take look at the Table of Content as well as excerpt of the book from the link provided above.
I think, it’s really a book worth reading.