The Nine Rules of the Ned Davis Research Group

1. Don’t Fight the [Ticker] Tape The tape provides a stop-loss for “should-be” beliefs. The trend is your friend. Go with Mo (momentum, breadth thrusts, signs of churning). Listen to the cold, bloodless verdict of the market. (Pay special notice to indicators on the leading edge of the market like volume, new highs or lows, the Dow utilities, bonds, relative strength.) Moves with a lot of confirmation are the healthiest, and huge moves are often global in nature.
2. Don’t Fight the Fed Remain in harmony with interest-rate trends (rates dropping is good; rates rising is bad). Money moves markets. Stay in line with monetary trends (money [minus] economic demands equals liquidity left over for financial markets). Economic strains: Inflationary pressures lead to Fed tightness (up commodities, up gold, down dollar, rising real interest rates). Economic ease: disinflation leads to Fed ease.
3. Beware of the Crowd at Extremes Go with the flow until it reaches a psychological extreme. At that point, it pays to take a contrary approach. Liquidity and psychology are inversely related. Extreme optimism equals low cash. Extreme fear equals high cash.
4. Rely on Objective Indicators Rather than using gut emotions to determine the supply and demand balance, use the weight-of-the-evidence approach (computer-derived mathematical measurements).
5. Be Disciplined Our mandate is to follow our models, forcing us to be disciplined. Our benchmark or anchor composite model determines core invested position.
6. Practice Risk Management We are in the business of making mistakes. Winners make small mistakes; losers make big mistakes. We focus on a risk management strategy to keep mistakes small.
7. Remain Flexible Indicators change and data is revised. Scenarios change. Review models on an objective and timely basis.
8. Money Management Rules We are more interested in making money than being right. Be humble and flexible (be ready to turn emotions upside down and thus be open-minded). Let profits run, cut losses short. Think in terms of risks, including the risk of missing a bull market. Buy on the rumor, sell on the news.
9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes Go back as far as possible. Use bull, bear, and neutral cycles.