I’m starting to get a reputation in this industry for talking a lot about my market indicators. From my “Two-Minute-Tuesday” weekly update videos to normal conversations with clients, I somehow always revert the discussion back to the indicators.

It’s time to reveal what my indicators are.

First, let’s clean up a major misunderstanding. The indicators I use are not on/off switches. I don’t have any flash-in-the-pan indicator that says, “Hey last week the President tweeted this and that, which will most likely be well-received by the markets. So you need to go all-in, Mr. or Mrs. Client.”

My indicators don’t work that way. They’re not on/off switches. They can’t tell us to get out before something terrible happens. (Even though in the past they’ve signaled potential trouble looming and were pretty much right on target.)

What my indicators do measure is the level of risk in the market. When several indicators show a very bullish (offensive) or bearish (defensive) posture, there’s a potential for some sort of impact on your investment portfolio or 401(k) at work.

I monitor both the indicators and the charts of the investments we own every single day. It’s important to remember that my indicators are telling me the threat (or risk) level. The markets can go up when the risk is high and down when the risk is low.

As investors, we have to be hyper-sensitive when the market is moving up in a defensive period, or a period where there is “high” risk. In that sensitivity, we need to think about our potential exit plan and the kind of strategy will we employ to protect our clients’ profits on the way down.

I have short-term, intermediate-term and long-term indicators. Short-term indicators, as you might guess, are changing on a week-to-week basis. Intermediate-term indicators are a little longer, and our long-term indicators are just what the name implies.

Using these indicators I try to paint a broad picture for my clients of what the market is telling me, using these short-term, intermediate or long-term scenarios.

You may be surprised to know that the charts I utilize have not one piece of information on them that shows where a particular company had a bad quarter or when the overall economy was bad. All that’s on my charts are prices, dates and columns of X’s and O’s. They go up and down based simply on supply and demand.

My indicators are extremely helpful and I rely heavily on them on a daily basis. (Feel free to look me up if you’d like to see one in action!) But remember, these indicators are not an on/off switch, but more like a dimmer switch.

When Being in the Top Percentile Doesn’t Pay

Would you like to have your investment portfolio or your workplace 401(k) managed by the top 15% of all money managers in the world?

It’s a serious question: Having a professional who is considered to be in the top 15 out of 100 money managers in the world managing your money.

When I ask this question most investors say, “Sure, that would be great! How can I do this?”

The answer is very simple. Just invest in the Standard and Poor’s 500 Index (S&P 500). In the past 14 years the S&P 500 beats 85 percent of all money managers out there.

But let’s be real: Is that really what you want?

Let’s say you invest in the S&P 500 and it’s down 10 percent in a year but your manager loses only 9 percent. He’s outperformed the S&P 500. You lost 9 percent. The money manager gets an extravagant vacation, a huge bonus and most likely a promotion.

The next year the S&P 500 is down 10 percent again and he’s down 9 percent. So on paper, he’s outperformed for the second straight year. He’s in the top 15 percent of all money managers in the world. Another vacation, a meatier bonus and even bigger promotion.

But you lost another 9 percent in the past year, and 18 percent of your investment over two years. So while your money manager is rested, tan and rich, you’re down 18 percent.

Now, I’ll pose the question again: Would you like to have your portfolio managed by the top 15 percent of all money managers in the world?

Let’s put this same analogy to the test in terms of the market indices. The traditional Standard and Poor’s 500 Index is a “cap-weighted” index. What this means is that the larger companies, the ones with the biggest market capitalization, carry the most weight or the biggest impact.

So let’s say a “Company A” has 100 million shares outstanding and the share price is $5 per share. Then the market cap is 100 million shares multiplied by $5, or $500 million.

“Company B” also has 100 million shares outstanding, but the share price is $10 per share. So 100 million multiplied by $10 is $1 billion in market cap. On a cap-weighted basis “Company B” at a billion dollars is twice the size of “Company A.”

So the big dogs, or the big companies at the top of the list control how the index does as a whole. Right now the biggest company in the S&P 500 is Apple, followed by Microsoft and Amazon. A lot of the performance of the S&P 500 is tied to what these three particular companies do.

The top 50 stocks in the S&P 500 represent nearly half of the index. So 50 of the 500 stocks represent 50 percent of the index. The other 450 names represent the other half.

Here’s a tip: You can outperform the S&P 500 with the S&P 500.

Huh?!

Yep, you can outperform the S&P 500 with the S&P 500. See, there are actually two S&P 500s. There’s the cap-weighted S&P 500 index. This is the one most folks normally invest in when they’re putting their money into the S&P 500. But you can also invest in the S&P 500 on an “equal-weighted” basis.

The equal-weighted S&P 500 owns the exact same 500 stocks as the cap-weighted index, but each stock has an equal weight. What this means is that each stock gets only one vote. Apple, the number one stock on the index, is equal to News Corporation Class B, the number 500 stock in the index.

This is important to know because since 2003 (when the S&P 500 equal-weighted index was created) the index has outperformed the traditional S&P 500 in 10 out of 14 years. It has also outperformed more than 96 percent of all money managers in the world, according to The Index Group, Inc.

Your homework for this month is to ask your advisor a simple question: “Did you know there are two S&P 500s?” If the answer is yes, you have a keeper. If they look at you like you have a lampshade on your head, it’s time to start shopping for a new financial advisor.

MANA welcomes your comments on this article. Write to us at [email protected].