Notes To Martin Zweig’s Winning On Wall Street by Redfield, Blonsky & Co.

The following are notes I took during my second reading of Martin Zweig’s “Winning on Wall Street”.   We previously discussed Marty Zweig on March 9, 2004.  These are not fully inclusive notes.  These are merely notes that I find useful in my own research.  Please understand that these notes may have errors, and should not be relied upon when making investment decisions.

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Notes to Winning on Wall Street

  1. "Don't Fight the Fed" a discussion of monetary indicators.  These are the two indicators which I like using.  Zweig has other indicators, such as the "Installment Debt Indicator".  It is of my composition to focus on the two below.  Zweig, would certainly focus on others, but he is clear to emphasize that one work within their own comfort zone, and to make sure that there is personal competence in that approach.  I need to emphasize that I admire Marty, but I do not live by his methods.  I do use his methods as a part of my research and application of research. Yet, I pay much closer attention to long term financial statement analysis.  Here are some of my favorite methods that Marty uses.
  2. Prime Rate Indicator -  The prime rate is the interest rate that banks charge their best customers.  Zweig likes the indicator because it does not change that frequently.  He also claims that it is a lagging indicator.  He arbitrarily discusses that 8% or above is a relatively high interest rate, and below 8% is relatively low.  This is interesting for me, as the current prime rate is 5.25%.  The last rate hike was on December 14, 2004.  This raised the rate from one year ago by 1.25%.
Leading rates
Updated 01/05/2005 This week Month ago Year ago
WSJ Prime Rate 5.250 5.000 4.000
Federal Discount Rate 3.250 3.000 2.000
Fed Funds Rate 2.250 2.000 1.000
11th District Cost of Funds 2.025 1.960 1.821

He explains that minor increases at levels greater than 8% is enough to give bearish signals.  What is difficult to decipher in this environment  is that we have had a series of rate hikes ( I believe that to be 5 so far).  Hence, the increases are still less than 8%, yet the increases certainly have not been minor in number.  Zweig writes on page 45 of revised edition the following, "But at levels below 8%,somewhat larger increases in rates are needed to give bearish signals.  While the 8% demarcation is open to debate, clearly both the level and the direction of rates are important, although all of my studies show that the trend of interest rates is more significant than the level itself."

Buy Signals:   1. Any initial cut in the prime rate if the prime's peak was  less than 8%.  2. If the prime's peak is 8% or higher, a buy signal comes on either the second of the two cuts or a full 1% cut in the rate.

Sell Signals:    1. Any initial hike in the prime rate if the prime's low is 8% or greater.  2.    If the prime's low is less than 8%, a sell signal comes on the second of two hikes or a full 1% jump in the rate.

  1. Fed Indicator - Zweig mentions that the Fed has two potent vehicles in its arsenal.  One is the discount rate, the other is the reserve requirements.  You need to monitor the direction of change in either of the two tools.  This tool is known as "the lazy man's indicator"

Rules: Grade the discount rate and reserve requirements separately.  Then their scores are combined.  According to Zweig, the Fed hadn't changed the reserve requirement for over 13 years from the books edition (1994).

Negative Points:    An increase in Discount rate is bearish.  A hike in either one receives minus one point.  The negative point remains for 6 months, after which it becomes "stale" and is discarded.

Positive Points:    Moves by the Fed toward easing have a greater positive impact on stock prices than the negative effect created by tightening.  An initial cut in either of the two tools, wipes out any negative points that have been accumulated.  It also kicks in 2 positive points.  After 6 months of staleness, one point is taken away.

Extremely Bullish +2 or more points
Neutral 0 or +1 point
Moderately Bearish -1 or -2 points
Extremely Bearish - 3 or more points

I pulled the following table from the Federal Reserve Board website on January 10, 2005.

Primary* Credit 2
New York
2.25% 09-Jan-03
2.00% 25-Jun-03
2.25% 30-Jun-04
2.50% 10-Aug-04
2.75% 21-Sep-04
3.00% 10-Nov-04
3.25% 14-Dec-04
3.50% 02-Feb-05

It looks as though the score would now be a -5.  The indicator appears to be in "extremely bearish" mode.  The first hike was on June 30, 2004. On August 10, 2004, the indicator became moderately bearish.  On September 21, 2004, the indicator became extremely bearish.   Yet, when you look at the chart of the DJI since September 21, 2004, it is yet to tell us a bearish picture.  This will be something to watch.

  1. Advance/Decline Indicator - This is a momentum indicator.  Take the number of stocks that rise in a given day over the number that declines.  Zweig likes to use a 10 day period.  He claims that there were only eleven cases since 1953 through 1994 where the A/D ratio was 2:1 or more.  He feels you should wait for a confirmed trend before jumping in.  He claims that you won't get in at the bottom, nor will you get out at the top, using this method.  I don't often apply momentum indicators.  Again, that is my preference in investing, and that might not be yours or anyone else's.
  2. The Four Percent Model -  This was developed by Ned Davis.  I am only interpreting this model in a simple sense.  You use the weekly close of the Value Line Composite.  When the index changes by greater than 4% from the previous week close, the buy or sell indicator generates a signal.
  3. Sentiment Indicator - Zweig discusses when to part company with the crowd.  He states, "The crowd tends to follow the wrong signs near the market tops and bottoms."  He discusses that at the greatest depths of a bear market, the economy is generally in recession and business profits are tumbling.  Investors are punch drunk from suffering huge losses for a year or two of falling prices.  Bad news dominates the headlines.  Most people only see the downtrend continuing.  This is the gloom and doom that bear markets bottom and bull markets begin.  Watch for loosening credit and interest rate decreases.  I guess one could argue that as of this date (1/11/05), that we are seeing the opposite.

Zweig sums it up with what he calls a few clear and simple rules: "Buy strength, sell weakness and stay in gear with the tape."

Martin Zweig's Winning on Wall Street

Martin Zweig's Winning on Wall Street by Martin Zweig