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With many major indices at all-time highs and most of the rest at multi-year highs, many investors are faced with a dilemma. After being burned multiple times in the past, they were reluctant to jump back into the market when technical indicators turned positive back in August. Then after stocks advanced so strongly in September, they were hesitant to buy because it seemed stocks should be due for a correction and because October hasn’t always been the best month for stocks.

So here we are in November and stocks have rallied since mid-summer. Now these investors who are on the sidelines are wondering, “Is it too late for me to get in?”

The true answer is that no one knows.

Buying a stock position is like taking a small boat out on a large body of water. Conditions might seem perfect when you set sail, but a couple hours later unexpected high winds can have you in real peril. Of course, there are a number of precautions you can take to try to make sure the odds favor success. You can watch weather reports. You can wear a life preserver. You can stay close to shore.

We can do the same thing with investing. So if we assess the current situation, what do we see? Let’s use a chart to help us.

This chart shows the activity of the Nasdaq for 2006. For now, ignore the red letters and just look at the direction of the black line on the top portion of the chart. This shows that the price of the Nasdaq has moved up steadily since mid-July. That powerful uptrend with only minor pullbacks is all one needs to see to determine that this is a good time to buy. With that type of trend, all technical indicators will be positive. Is the rally about to end?

Since technical indicators primarily look backward, we need to consider fundamental indicators to get a better idea of what the market is likely to do in the near future. Right now, fundamental factors also appear positive. The economy is strong. Unemployment is very low. Interest rates are stable. Corporate earnings are generally quite strong. So fundamental factors are confirming that the advance should continue. Given the information we have right now, this is still probably a good time to buy.

Now let’s get to the nitty gritty of why so many investors always seem to buy and sell at the wrong times. Look at the chart again. It seems obvious that buying at point A and selling at point B would be smart. Unfortunately, none of us are that smart. Look at what the Nasdaq was doing prior to point A. There was no trend. It would have been virtually impossible to determine whether the next move would be up or down. Most investors trade based on emotion. In that case, point B would probably seem to be a better time to buy. At point B the index had been moving up for several weeks and had broken above its trading channel. However, an investor who bought at B would have quickly seen the trade turn against him and he probably would have bailed out somewhere around C or D, locking in a nice loss.

Now let’s consider how a simple technical tool can help us make better decisions on when to buy and sell. The bottom portion of the chart is a Moving Average Convergence Divergence (MACD). One way we can use this tool is to buy when the brown line crosses above zero and sell when it crosses below zero. Using that signal, we would have bought the Nasdaq at the beginning of 2006 and sold it in May at about point C, giving us a slight loss. However, we would have missed some of the losses that followed. The indicator told us to buy again in mid-August, and we would still be invested today after making a nice gain.

There are dozens of technical tools an investor can help use to determine better times to buy and sell. None of them are perfect. But almost all of them are better than relying on emotion or intuition. For example, an investor who buys at point E probably feels pretty good about his decision. The MACD turned positive a few days earlier and stocks have advanced nicely since. But immediately after this investor buys, the Nasdaq goes through six or seven losing sessions in a row. At that point the investor no doubt questioned his decision. But if he trusted the indicator and hung on, the index recovered and continued to advance.

Would you be brave enough to buy at point F? After several weeks of a strong advance, the Nasdaq stalled in mid-October. Then the Nasdaq saw a sharp drop. In hindsight, the pullback at F would have been a good time to jump in, because the Nasdaq has risen steeply since then. But few investors actually have the guts to buy when the market is falling.

One of Wall Streets oldest axioms is: Buy on weakness, sell on strength. When looking at a chart it makes perfect sense. But it is hard to put into practice when your stomach is churning and you are worried about being wrong. And when an investment is rising, our greedy nature makes it difficult for us to pull the plug, even if we will do so with a nice profit.

For most of us, short-term trades are almost doomed to be losses. Short-term redemption fees and restrictions mean individual investors need to look for trends of several months duration to be profitable. The current rally is the first real opportunity investors have seen since 2003.

Trends can help investors overcome mistakes. For example, the Nasdaq looked like it had formed a bottom in mid-June. But an investor who tried to get a jump on the MACD signal and bought too early at point D soon saw a quick gain turn into a loss. But if that investor were patient, it did not take long to erase that loss.

That brings us to another Wall Street axiom: Don’t fight the trend. In other words, even if you haven’t gotten invested yet, now is the time to take advantage of what the market is offering. Chances like this don’t come along often enough.

We obviously won’t have a report next week because of the Thanksgiving holiday. I hope you all have the opportunity to spend that time with family and friends. Have a great week and a great start to the holiday season.

F.S.