Suttmeier's 'Buy and Trade' Investment Strategy

Investors are often told that their best move is to implement a "Buy and Hold" strategy. With this mantra, investors are taught that the market will "always" go up over time and thus stock positions will increase in value given a long enough time horizon.

"Buy and Hold" has maintained its influence because performance chasing -- also referred to as "P/E multiple expansion"-- is the fundamental form of technical momentum. Because of this flawed momentum play, equity money managers and individuals have been trapped in a strategy that buys high and sells low.

Over the last decade, Richard Suttmeier developed a strategy he calls "Buy and Trade" that is tailor-made for volatile markets and allows investors to move with markets rather than lose their capital when the markets take a turn for the worse. With "Buy and Trade," you make gains by capturing market volatility with a set of pre-determined price targets based on his proprietary market analytics.

Suttmeier is not a technical analyst; he chuckles at the notion that a stock will move higher if it trades above a certain level or move lower if it trades below another level. Think about this for a moment: A buy-rated stock gets cheaper fundamentally on weakness and a sell-rated stock gets more overvalued on strength. The only reason to sell a long position is if it reaches your upside target or loses its buy rating. The only reason to cover a short is if it reaches your downside target or losses its sell rating. You thus want to add to long positions when they are down and add to short positions on strength.

It works like this: Suttmeier assumes that a stock's price is the most important element in stock selection and in stock trading. By analyzing the past nine weekly, monthly, quarterly, semiannual and annual closes --under the assumption that nine years of data is enough to assume all possible bullish or bearish events -- we can calculate the most important "action prices" for any stock, commodity, currency, market index or U.S. Treasury yield.

Using this form of analysis since 1984, Suttmeier developed a trading system which utilizes "value levels," "risky levels" and "pivots." Once you know the critical price levels for a given stock, commodity, currency, market index or U.S. Treasury yield, you can use "Good until Canceled" (GTC) limit orders to buy weakness to a value level and sell strength to a risky level. In this manner, you are building positions at the right price levels no matter the overall market direction.

When Suttmeier shows a Value Level near a low or a Risky Level near a high, it's time to "Buy and Trade." Investors should always seek to capture the volatility in between these critical price levels and take advantage of trading ranges -- while all the while being cognizant of the trend for the stocks being traded.

By using Suttmeier's proprietary action prices, you can capture a portion of the volatility as stocks move up and down. When using Value Levels, Pivots, and Risky Levels, it does not matter why you wish to own or be short a specific stock or market. Once you select your trades, simply use weakness to a Value Level as an opportunity to increase a long or to become less short and use strength to a Risky Level to become less long or to increase a short.

Another key element of Suttmeier's strategy is a prudent usage of cash reserves as a safety buffer. Cash should be relatively low when bullish and relatively high when bearish. Keeping some cash on the sidelines helps to lock in gains rather than losses, but you won't often get this advice from money managers seeking maximum commissions.

Stock selection is based upon the ValuEngine Forecasting Model, which includes Buy, Sell and Hold ratings including Strong Buy and Strong Sell. Market timing is helped by the ValuEngine Valuation Model, which calculates the number of overvalued and undervalued stocks among more than 4,000 stocks. Timing is also aided by the valuations of 16 sectors.

Defining Terms:

  • A Value Level is a price at which investors should add to long positions, or become less short on share price weakness.
  • A Risky Level is a price at which investors should reduce long positions, or add to short positions on share price strength.
  • A Pivot is a price that should be a magnet during the time frame specified. This is a level at which to consider more aggressive position adjustments.

Where to Buy and Where to Sell

A "Support" or "Value Level" is a price at which buyers should add to positions on market price weakness.

A "Resistance" or "Risky Level" is a price at which sellers should reduce holdings on market price gains.

A "Pivot" is a support or resistance (Value Level or Risky Level) that was violated in its time horizon, acting as a magnet during the remainder of that time horizon.

These levels are calculated in weekly (W), monthly (M), quarterly (Q), semiannual (S) and annual (A) time horizons, based on the past nine closes in each time horizon.

Suttmeier's theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock. These levels are the most important element of my Buy and Trade Strategy.

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