Michael Griffis

Cheat Sheet / Updated 09-20-2022

Forecasting what will happen in the economic future is hard. Nobody gets it right all the time. However, with a grounding in economic indicators, you can improve your investment results and the profitability of your business.

Article / Updated 07-06-2021

If you decide you want to trade for others as well as for yourself, you need to become a registered representative. The most comprehensive test you can take is the FINRA’s Series 7 exam. To qualify for the test, you’ll need a sponsoring broker. When you sign up for the required coursework for this exam, either through self-study courses online or a nearby training school, the school can help you locate a sponsoring broker if you don’t have one. Why you need credentials The license you'll earn allows you to buy and sell all securities products, including corporate securities, municipal securities, municipal-fund securities, options, direct participation programs, investment-company products, and variable contracts. There are other exams for people who want to sell only a specific type of security rather than the broader options that a Series 7 certification enables you to market. Professional certifications are not required to sell securities. Most pros who seek these certifications do so to show their clients that they have attained a level of proficiency and met or exceeded the standards within their specialties. Many schools that train people for professional designations provide ways for you to take the coursework, even if you don’t plan to get the license or certification. You can study for many of these courses at home online. Schools for aspiring securities and financial advisors American Investment Training offers self-study training for all the FINRA licenses. The American College of Financial Services offers online coursework toward the ChFC, CLU, and CFP designations along with other financial services education. College for Financial Planning offers online coursework for the CFP and CMFC designations along with other financial services education. Empire Stockbroker Training Institute offers courses online for all the FINRA Series licenses. FINRA provides detailed outlines of the content that must be covered for all its examinations online. Selling securities is a highly regulated field that requires considerable training before you can sell even your first share of stock. Although some people trade for others without a license, they risk the possibility of an investigation by the FINRA or their state regulators. Be sure that the trading activities you do for others fit within the law, or you can end up in a legal mess facing significant fines.

Article / Updated 06-29-2021

Traders can open brokerage accounts in a couple of different ways: as a cash account or a margin account. However, if you open a margin account, you also must open a cash account. You also may open separate accounts for retirement savings. Because retirement accounts have more restrictions, your trading alternatives are more limited in those accounts. Cash accounts The traditional brokerage account is a cash account, which also is known as a Type 1 account. With a cash account, you must deposit the full cost of any purchases by the settlement date of the transaction. At many brokerage houses prior to 2002, you were permitted to place an order to buy stock even if the cash was not yet in your account. Today, however, few brokers give you that kind of flexibility. Most brokers require funds to buy stocks to be in your cash account before you can place an order. The amount of cash you need to have on deposit varies by broker. Margin accounts You don’t have to have as much cash on hand to buy stock when you open a margin account. This type of account enables you to borrow certain amounts of money using cash or securities already in the account as collateral. Each respective brokerage firm has its own screening procedure to determine whether you can buy on margin. The Federal Reserve requires a $2,000 minimum deposit to open a margin account, and it currently limits the amount you can borrow on margin to 50 percent of the initial purchase price. Not all stocks can be bought on margin. When buying stocks on margin, you pay an interest rate on the margin loans, but most brokerage firms charge relatively low rates to encourage the transaction business. When opening a margin account, the firm also requires you to sign what’s called a hypothecation agreement, which stipulates regulations for the account and permits the broker to have a lien on your account whenever the balance in your account falls below the minimum maintenance margin. The agreement also enables your broker to loan your shares to short sellers. That’s where shorted stock comes from. You’re taking a risk by purchasing shares of stock with borrowed money and using shares you own as collateral. If your stock holdings fall in value below the minimum maintenance margin requirement, your broker can force you to sell stock you don’t want to sell and use other assets you may not want to use to cover the outstanding loan. Options If you want to trade options, your broker will require you to sign a special options agreement acknowledging that you understand the risks associated with trading options or derivative instruments. This practice became common after brokers were sued by some clients because they suffered huge losses when trading options and claimed they were unaware of the risks. This protects the broker from a lawsuit. IRAs and other retirement accounts IRAs and other accounts in which you’re saving for retirement sometimes allow you to trade options, but margin trading is not allowed at all. These limitations are for your protection to avoid risking major losses in your long-term investments that never should be put at such high levels of risk. The amount you can contribute each year to all retirement accounts is limited by the Internal Revenue Code. Although you may be able to find a brokerage firm that allows you to trade using options — puts and calls, which are a type of option — you nevertheless risk penalties for certain trading activities that occur in your retirement account whenever the IRS determines the account is being used for trading purposes rather than long-term investing. Officially, the Internal Revenue Code prohibits the “IRA or Keogh Plan account holder from loaning money to the account. Likewise, the holder cannot guarantee borrowing by the account or cover its losses.” That’s why margin accounts, which entail a type of borrowing, are not allowed. Because these accounts are either tax-free or tax-deferred, you can’t write off any losses in them against any gains from investments held outside of them in other taxable accounts. You don’t have the same tax-planning choices with IRAs or retirement accounts to offset gains and losses. All money taken out of an IRA at retirement is taxed at your current income tax rate. For these stocks, you can use stock losses to minimize the tax you might have to pay on stock gains. If you hold the stock for longer than a year, you are taxed based on the lower capital gains rate of 15 percent for most taxpayers rather than your higher current income tax rate, which can be as high as 35 percent for some taxpayers. Here are some additional trading limitations of retirement accounts: Margin is not allowed: Using funds within a retirement account as collateral for trading on margin isn’t permitted. It’s against the law. You won’t find a broker that will permit you to place retirement funds in margin accounts. Short positions are prohibited: Speculative trading using short positions requires a margin account. When someone shorts a stock, he or she borrows the stock and sells it in the hope of buying it back later for less. Selling short requires the use of margin and is therefore not permitted in a retirement account. Trading policies are more stringent: All brokers have more stringent trading policies for retirement accounts. Before you open a retirement account, check with your broker about their trading limitations to be sure they match your intentions for the account. Options trading may not be permitted: If you’re an experienced trader, you can find some brokerage firms that allow options trading in your retirement account. Not all types of options, however, can be traded in a retirement account. The ones that you most likely can trade are covered calls, long call and put positions, or cash-secured puts.

Article / Updated 02-02-2017

When to trade a stock is the million dollar question. A stock can transition from a downtrend to an uptrend in several different ways. It can, for example, fall precipitously, turn on a dime, and begin heading higher. Although turning on a dime from downtrending to upward trending sometimes presents profitable trading opportunities, these transitions are difficult to identify and are even more difficult to base a trade on. Cup and handle formation Another widely followed transitional formation is called a cup and handle. In a cup and handle formation, a stock’s price levels form a rounded curving bottom that looks a bit like a cup or a saucer, which often is followed by a modest shakeout formation that, if you use your imagination, looks a bit like the handle on a coffee cup. The Apple, Inc., stock (AAPL) illustrates the cup and handle formation. Credit: Chart courtesy of StockCharts.com The entry strategy for this pattern is similar to that used for the trading range breakout. The trigger occurs when the stock price breaks above the handle on high volume. In the Apple example, it occurs in late April and is accompanied by a small breakout gap. Notice that the stock traded in a very narrow range during the next couple of days, retesting the former area of resistance. As often is the case, that former resistance level actually provided support after it was crossed. You’ll see this phenomenon occur frequently. The cup and handle is a reliable trading pattern, but that doesn’t mean the pattern never fails. It does, and you need an exit strategy for when it does, just like every other trade. What to do with a double bottom Another transition pattern that often leads to profitable trading opportunities is the double bottom. Visually, a double bottom looks like a W on the chart, so it is very easy to see. However, a double bottom doesn’t need to form a perfect W to be valid. In fact, many traders actually prefer the right-hand trough to be a little lower than the left-hand trough. When a minor new low forms, it tends to shake out the weakest owners of the stock and makes it much easier for bulls to drive the price higher. Here is a well-formed double bottom on the Newmont Mining Corp. (NEM) stock chart. The left-hand trough occurred in June 2007; the right-hand trough in August 2007. Credit: Chart courtesy of StockCharts.com The entry criteria for this pattern are similar to that of the trading-range breakout. In this case, the trigger point occurs when the stock breaks above the mid-point peak between the two troughs. This peak is sometimes called the pivot point. Ideally, higher-than-average volume confirms the trigger. The trigger price on the chart is just below $43.00, which corresponds to the $42.91 close on July 24. The stock gapped above the trigger point on September 6 with a volume of more than 15 million shares. That’s 50 percent more than the average daily trading volume. Also notice the bullish single-day bar pattern on the breakout. The stock pulled back to test resistance at the mid-point close price and then rallied. An alternative double-bottom strategy One scenario where aggressive traders may want to anticipate the formation of a double-bottom pattern is when the “W” is particularly deep and the pivot is many points away from the trough. When that happens, taking a position as the stock is forming the right-hand trough sometimes makes sense. If the price holds near or just below the left-hand trough and volume confirms the reversal, then aggressive traders can enter a position. You may also want to enter a position if signals from other single-day patterns confirm the reversal. The risk is relatively small, and the potential reward is relatively large. If the stock falls below the lowest low, you’ll know your trade has failed and you must exit. Otherwise, hold the position until the stock tests the pivot point. Using the NEM chart to illustrate this strategy, the buy trigger occurred on August 16 when NEM showed the single-day reversal pattern at the bottom of the trough. Your entry point would be the next trading day, and your stop would be below $37.60, the low for that reversal bar. Other patterns Many other reversal patterns are published in technical analysis books and magazines, but be careful when determining which are the most reliable. Inexperienced traders always want to find the Holy Grail, that pattern or indicator that enables them to profitably trade the turn-on-a-dime V pattern. In truth, however, V bottoms don’t happen all that often. And when they do, many reasons express why it’s probably not the best trading opportunity available to you. If you talk shop with other traders, you’re certain to hear them discuss many esoteric patterns. Experienced traders rarely trade on these patterns. There’s no need to look for the obscure when the simple does the job just as well.

Article / Updated 02-02-2017

You need only a handful of tools to determine the dominant trend or phase of the market and these can help you know when trading is a good idea. Significant changes in the markets happen slowly and thus show up better in weekly charts than they do in daily charts because insignificant changes are filtered out. Traders typically monitor charts of the major indexes such as the S&P 500 (SPX) or the NASDAQ Composite Index (COMPX). Doing so makes visually identifying bull markets and bear markets easy. They appear as trends. A bull market appears as a series of higher highs and higher lows on weekly index charts. A bear market appears as a series of lower highs and lower lows. These are the dominant trends. Pullback patterns, such as the flag, pennant, and other retracement patterns, correspond to the bullish pullback and bearish pullback conditions. And bullish transition and bearish transition phases may signal a trend reversal in much the same way that reversal patterns and trading ranges often lead to a change in direction. This weekly chart of NASDAQ Composite Index reflects a bull market. The weekly chart of NASDAQ Composite Index below reflects a bear market. Credit: Chart courtesy of StockCharts.com Most trend identification tools apply to these weekly charts. For example, you can easily spot the higher highs and higher lows that occurred in late 2006. These higher highs and higher lows correspond to a bull market. You also can easily see the lower highs and lower lows; they accompanied the long-running bear market. Credit: Chart courtesy of StockCharts.com You also need to be able to identify the moving average convergence divergence (MACD) crossover points and divergent patterns on these charts. MACD signals provide you with additional information to augment the way you categorize current phases of the market. You can create this index chart at StockCharts.com by clicking on the tab for FreeCharts and then putting NASDAQ Composite ($COMPQ) in the box labeled Create a Sharp Chart. At the top of the chart, set the period to weekly. Then at the bottom of the chart, set the Chart Attributes as follows: HLC Bars, no overlays, and MACD Indicator with parameters 12, 26, 9 below the chart. Using MACD to indicate bull and bear markets is straightforward: A bull market is indicated when the MACD line is greater than the zero line and greater than the trigger line. A bear market is indicated when the MACD line is less than the zero line and less than the trigger line. However, pullback and transition phases are not as clearly defined: Either a bullish transition — or a bearish pullback — is indicated when the MACD line is less than the zero line and it crosses above the trigger line. Either a bearish transition — or a bullish pullback — is indicated when the MACD is greater than the zero line and it crosses below the trigger line. Use the bullish percent index (BPI) in conjunction with pattern analysis to help distinguish between the transition and pullback phases. You can see where the MACD indicator on the weekly chart is less than zero and crosses above its trigger line. When the MACD crossed above its trigger line, it suggested the market may have been trying to turn from a bear market to a bull market in a bullish transition phase. You can see two instances where the MACD signaled these bearish pullbacks or bullish transitions in 2008. Both failed, resulting in a dramatic continuation of the bear market.

Article / Updated 02-02-2017

A simple moving average (SMA) is a simple trading indicator to calculate and use. To calculate it, you add a number of prices together and then divide by the number of prices you added. An example makes the SMA clearer. A nine-day moving average of Intel’s (INTC) closing price is calculated throughout May 2008 and then is plotted on a price chart. To start the SMA calculation, use the closing prices. Add the first nine closing prices together, from May 1 through May 13, and divide by 9. The resulting value is placed alongside the ninth trading day, May 13. Continue for each subsequent day in the month. DateCloseSMA 5/1/2008 22.81 5/2/2008 23.09 5/5/2008 22.91 5/6/2008 23.23 5/7/2008 22.83 5/8/2008 23.05 5/9/2008 23.02 5/12/2008 23.29 5/13/2008 23.41 23.07 5/14/2008 23.49 23.15 5/15/2008 24.60 23.31 5/16/2008 24.63 23.51 5/19/2008 24.51 23.65 5/20/2008 23.73 23.75 5/21/2008 23.31 23.78 5/22/2008 23.53 23.83 5/23/2008 23.06 23.81 5/27/2008 23.25 23.79 5/28/2008 23.12 23.75 5/29/2008 22.80 23.55 5/30/2008 22.84 23.35 The SMA data is superimposed on the bar chart’s price data. Notice that you need nine prices before you can plot the first SMA point. In other words, the first SMA point appears on the ninth price bar, and the first eight price bars do not display an SMA value. Credit: Chart courtesy of StockCharts.com To calculate the second SMA point, add the prices from May 2 through May 14 together, divide by 9, and place the result as the SMA data point next to May 14. Another way to think of calculating SMAs is that you drop the oldest price in the calculation and add the closing price from the next price bar. Continue this series by dropping the oldest price, adding the newest price, and dividing by 9 for the remainder of the month. If you’re mathematically inclined, here’s what the series looks like as an equation: SMA = (P[1] + P[2] + P[3] + . . . P[N]) ÷N Where: N is the number of periods in the SMA P[N] is the price being averaged (usually the closing price) Traders used to calculate SMAs by hand, but fortunately, computers now relieve traders from this rather mundane chore. Luckily, you don’t have to do this calculation yourself. You can let StockCharts.com automatically calculate it for you. You’ll find the simple moving average as one of the overlays in the Chart Attributes section. You select the type of overlay you want, such as Moving Avg (simple), and then put in the number of periods. The simple moving average lines will be automatically generated on your chart.

Article / Updated 02-02-2017

The moving average convergence divergence (MACD) indicator is a trend-following momentum indicator. MACD is designed to generate trend-following trading signals based on moving-average crossovers while overcoming problems associated with many other trend-following indicators. MACD also acts as a momentum oscillator, showing when a trend is gaining strength or losing momentum as it cycles above and below a center zero line. MACD is an excellent indicator. How to calculate MACD Charting packages routinely calculate MACD for you, but knowing how this indicator is created is important for gaining a better understanding of how it works. The MACD calculation isn’t complex; it’s just three exponential moving averages. Here are the steps: Calculate a 12-period EMA. Calculate a 26-period EMA. Subtract the 26-period EMA from the 12-period EMA to create the MACD line. Use the resulting MACD line to calculate a 9-period EMA to create the signal line. Plot the MACD as a solid line; plot the signal line as either a dashed or lighter-colored line. An additional indicator, the MACD histogram, is usually shown as part of the MACD. It uses a histogram to show the difference between the MACD line and the signal line. The histogram is plotted above the zero line when the MACD line is above the signal line, below the zero line when the signal line is above MACD, and at zero when they cross. Consider this weekly chart of AGCO Corp. (AG) along with an MACD indicator and an MACD histogram. The indicator was originally designed to be used as a weekly chart, and a weekly MACD indicator provides more useful information about the strength and direction of a trend and potential trend reversals. You will find that other traders use this indicator for both longer and shorter periods as well. Credit: Chart courtesy of StockCharts.com AG experienced a long period of consolidation before starting to rally in early 2006. The stock continued its ascent through 2006 and 2007. Notice the corresponding periods on the MACD. The MACD line (the solid line) crosses over the zero center line during the third week in February. This was a buy signal for this stock. You may also notice that the MACD line crossed the signal line in early January 2006. This MACD crossover signal is another early indication suggesting a possible new uptrend. You can automatically generate an MACD indicator at StockCharts.com as well. Use the dropdown menu in the Indicators section of Chart Attributes to find MACD. Then set the parameters and position it above or below the chart. The parameters for the MACD line suggested above would be 12, 26, 9. You should also select the MACD Histogram with the same parameters. How to use MACD MACD provides a remarkable amount of information in a concise format. MACD oscillates above and below a center zero line and is a good indicator for showing the direction of the dominant trend, signaling An uptrend when the MACD line crosses above the center line A downtrend when the MACD line crosses below the center line Some short-term traders use the signal line to trigger Buy signals when the MACD line crosses above the signal line Sell signals when the MACD line crosses below the signal line That short-term technique can be unreliable because it generates too many false signals. Instead, consider using the position of the MACD line relative to the zero line as an indication that the stock has begun trending. The weekly prices for the S&P 500 Depository Receipts is sometimes called SPDRs or Spyders. (The stock symbol is SPY.) SPY is an exchange-traded fund that tracks the S&P 500 index. Credit: Chart courtesy of StockCharts.com Notice how the SPY establishes a series of higher highs and higher lows during the period from June through October 2007, but the MACD line establishes a series of lower highs during this period. This creates what’s known as a divergent pattern. This particular example of a divergent pattern is a bearish divergence. In a bearish divergence, the stock establishes a series of higher lows and higher highs, while the MACD establishes a series of lower highs. A bullish divergence is the reverse: The stock establishes a series of lower lows and lower highs, while the MACD establishes a series of higher highs. Divergences that occur in the same direction as the dominant trend are often useful for entering positions. However, a divergence that is counter to the dominant trend is less likely to be a reliable trading signal. This bearish divergence on SPY is best interpreted as a signal showing that the momentum of the multiyear S&P 500 bull market was slowing. In fact, the market peaked in October 2007 and remained in a downtrend for many months. Each time the MACD line crosses above or below the signal line suggests a potential change in the direction of the dominant trend. Although it’s not an outright buy signal or sell signal, it does suggest that a change may be in the wind. In the case of a bearish divergence, the best way to exploit that information is to monitor individual stocks and ETFs for weakness and either close long positions when they deteriorate or initiate new short positions as they present themselves. Most charting packages enable you to fine-tune the MACD calculation. Many traders vary the 12-, 26-, and 9-week values. Although nothing is inherently wrong with this approach, you nevertheless risk the curve-fitting problem whenever you try to find parameters that give you better results for a specific stock. That said, Gerald Appel, the man who developed MACD, uses values different from the original 12, 26, and 9. He also uses different values to generate buy signals than he does to generate sell signals. So feel free to experiment and have fun after you gain some experience with the default parameters.

Article / Updated 03-26-2016

The economy cycles through periods of growth and contraction. Knowing the following signs of each economic phase makes planning your investment or business strategies easier: Expansion: During expansion, consumer spending is growing, especially for purchases of big-ticket products. Although interest rates are relatively low at the beginning of an expansion, they generally rise as the economy grows. Stocks that perform well during expansion include technology companies, durable goods manufacturers like auto companies, and so-called cyclical industries like steel manufacturers and construction companies. Peak: At this point, most businesses are thriving. However, interest rates are climbing because investors and the Federal Reserve are concerned about the risk of rising inflation. Rising interest rates make new homes less affordable for some consumers. As a result, the number of layoffs rises in the housing sector and other interest-sensitive sections of the economy. The stock market typically anticipates economic peaks, so it's usually in decline by the time the peak arrives. Recession: Early in recession, sales of consumer products like cars and kitchen appliances begin to fall, leading manufacturers to cut production and staffing levels. Unemployment rises, and personal income falls. Interest rates are generally highest at the beginning of a recession and fall throughout the recession. Most stocks perform poorly during a recession, but stocks of consumer staple companies (like those that produce food, beverages, and household and personal care products), pharmaceutical firms, financial companies, and dividend-paying utilities often hold their value because these firms sell goods and services that people need even when times are tough. Trough: During an economic trough, businesses have lowered prices for big-ticket products enough to start attracting bargain hunters. The economy begins to find its footing as consumer spending starts to pick up. Sales of new homes often start to rise as buyers lock in attractive prices and low-interest-rate mortgages. The stock market tries to anticipate the coming economic expansion as transportation and cyclical stocks begin to rise. The key to understanding the current economic situation is identifying when an economic expansion is over (when the peak has occurred) or when a new one is about to begin (when the trough has occurred). Though the periods of peak and trough are relatively brief and difficult to pinpoint, understanding economic indicators can help you identify them.

Article / Updated 03-26-2016

Looking for the best economic forecasting tools? Here are a few investor favorites that you can use to improve your investment decisions: Unemployment insurance: A rise in unemployment insurance claims is one of the earliest signs of a faltering economy. A one-week rise doesn't foretell a recession, but a persistent increase usually does. The Unemployment Insurance Weekly Claims Report tracks job losses throughout the country. Personal spending: Consumers make the U.S. economy grow. When consumer spending rises, so does the economy. Likewise, when spending slows, a recession is likely to follow. Stay up to date with consumer spending habits with the Personal Income and Outlays report. Consumer sentiment: Consumers cut back on their spending when they're worried about their financial future. The University of Michigan's Consumer Sentiment Index is an excellent way to find out if people are worried or optimistic about their economic future. Business sentiment: Purchasing managers are the consumers of the business world, which is why it makes sense to ask them how businesses feel about the economy. The Institute of Supply Management does just that with its Manufacturing Report On Business®. Inflation: When the Federal Reserve (the Fed) is on the lookout for inflation, it puts investors on pins and needles. If the Fed thinks inflation is rising, it'll put on the economic brakes by raising interest rates. Although knowledgeable investors and economists at the Fed use the PCE price deflator (PCE stands for personal consumption expenditures; the deflator is also called an implicit price deflator) to track inflation, the most popular inflation indicator is the Consumer Price Index (CPI).

Article / Updated 03-26-2016

Economic indicators were first published for government leaders who needed a better understanding of the country's current economic condition. Today, those indicators are useful across a wide variety of professions. Here's how economic indicators can help you: Investors: Use economic indicators to fine-tune your investment strategies, improve your buy/sell decisions, and match your asset allocation decisions to the economic cycle. Business leaders: Make better staffing-level and hiring decisions, match inventories to the business cycle (businesses that are sensitive to the economic cycle need larger inventories during periods of economic growth than during recessions), improve business forecasts, and evaluate new business opportunities based on current economic conditions. Purchasing managers: Improve raw-material price forecasts and adjust negotiating strategies to lock in longer-term pricing agreements during periods of economic slowdown when material prices tend to be lowest. Policy analysts: Use these information-laden reports to guide your economically sensitive policy decisions. Business students: Develop a thorough understanding of economic indicators to improve your general business knowledge and make you more valuable to future employers.