The 1-2-3 Model for stock market performance

The model takes its name from the three major factors that affect the market :

1. Is the market too expensive? YES/NO
    ~The clearest, time-tested measure of whether stocks are cheap or expensive is price-earning ratio(PER)
    ~It is a indicator of how much investor willing to pay per dollar of earning. For example, P/E 10 means investor pay $10 for $1 of current earning.
    ~Compare the company in the same industry. Different industry deserve their PER accordingly. Company historical P/E also a good reference.
    ~In general, high P/E suggest that investor are expecting higher earning growth in the future compare to company in lower P/E. Otherwise, its deem expensive.

2. Are the Feds in the way?  YES/NO
    ~The second factor in determining the stocks direction is the availability of money.
    ~When interest rate are high, its bad for stock market.
   ~Company incur a higher borrowing cost to run the business. Directly it will effect the earning. Drag the share price.
    ~When interest rate fall, people tend to move money out of the bank and seek for higher return. Those fund usually end up in the stock market.

3. Is the market going up? YES/NO
    ~This is refer to whether market momentum is strong or week. When Buy exceed Sell, price goes up. Otherwise, it will be weak.
    ~To see market action, we use all sort of technical indicator like MACD, RSI, ADX or SMA(Simple
      Moving Average)
    ~Share price above SMA means market is going up. Below SMA means stock prices are weak.

Now, ask yourself about the three questions above.

• If you answer to two or three of the 1-2-3 model question is YES ... its time to SELL               At this time, search for undervalue company using Graham's number technique(Net current asset value). Graham suggests that you can safely buy a stock that sells for 66% of Graham Number.
• If you answer to only one of the three question is YES....you can HOLD                              Here is a rule of thumb. Subtract your age from 100. The resulting number is the percentage of your investment portfolio you might consider holding during this mode. 
• When you answer NO to all three questions above.....STRONG BUY