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Technical Analysis Power Tools for Active Investors
Gerald Appel Digital Instant Download
Author(s): Gerald Appel
ISBN(s): 9780131479029, 0131479024
Edition: illustrated edition
File Details: PDF, 12.41 MB
Year: 2005
Language: english
Technical Analysis
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Technical
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To my grandchildren—Emily, Caroline, and Alexandra. May children all the world
over enjoy a bright and peaceful future.
 Contents

Foreword / 1
Acknowledgments / 3
Introduction / 7

1 The No-Frills Investment Strategy 11

Part 1: Picking the Right Investment Vehicles / 11
Risk: Reward Comparisons Between More Volatile and Less Volatile Equity Mutual Fund
Portfolios / 12
Gain/Pain Ratios / 13
Drawdown: The Measure of Ultimate Risk / 14
The End Result: Less Is More / 16
Changing Your Bets While the Race Is Still Underway / 17
Relative Strength Investing / 18
Testing the Relative Strength Investment Strategy: A 14-Year Performance Record of
Relative Strength Investing / 19
Results of Quarterly Reranking and Quarterly Rebalancing (1990–2003) / 21
Buy-and-Hold Results: The Standard & Poor’s 500 Benchmark / 21
Increasing the Risk: Maintaining a Portfolio of Somewhat More Aggressive
Mutual Funds / 22
Observations / 23
Upping the Ante: The Effects of Applying the Concepts of Relative Strength Selection to a
Still More Volatile Portfolio of Mutual Funds / 24
General Observations / 25
A Quick Review of Relative Strength Investing / 26
Summing Up / 26

2 Two Quick-and-Dirty Stock Market Mood Indicators 27

Identifying High- and Low-Risk Investment Climates / 27
The Nasdaq/New York Stock Exchange Index Relative Strength Indicator / 28
xii Contents

The Maintenance and Interpretation of the Nasdaq/NYSE Index Relative Strength

Indicator / 30
Observations / 33
Measuring the Market Mood with the Intermediate Monetary Filter / 35
The Monetary Model / 36
The Ingredients / 36
The Calculation and Rules of the Intermediate Monetary Filter / 37
Observations / 40
Combining the Two Indicators / 40
Point and Counterpoint / 40
Observations/ 41
A Final Long-Term Statistic / 41
Summing Up / 42

3 Moving Averages and Rates of Change: Tracking Trend and

Momentum 43
The Purpose of Moving Averages / 43
The Intermediate-Term Moving Average / 45
The Long-Term 200-Day Moving Average / 45
Using Weekly-Based Longer-Term Moving Averages / 46
Moving Averages and Very Long-Term Moving Averages / 47
Moving Averages: Myths and Misconceptions / 48
Using Moving Averages to Identify the Four Stages of the Market Cycle / 49
Stage 1 / 50
Patterns of Moving Averages During Stage 1 / 50
Stage 2 / 50
Patterns of Moving Averages During Stage 2 Advances / 50
Stage 3 / 51
Patterns of Moving Averages During Stage 3 Distribution Periods / 51
Stage 4 / 51
The Rate of Change Indicator: How to Measure and Analyze the Momentum of the Stock
Market / 52
The Concept and Maintenance of the Rate of Change Indicator / 52
Constructing Rate of Change Measurements / 53
Bull Market and Bear Market Rate of Change Patterns / 55
Adjusting Overbought and Oversold Rate of Change Levels for Market Trend / 56
Looking Deeper into Levels of the Rate of Change Indicator / 57
The Triple Momentum Nasdaq Index Trading Model / 58
 Contents xiii

Maintenance Procedure / 59
Notes Regarding Research Structure / 62
Rate of Change Patterns and the Four Stages of the Stock Market Cycle / 63

4 More Than Just Pretty Pictures: Power Tool Chart Patterns 65

The Concept of Synergy / 65
Powerful Chart Formations / 67
Example 1 / 68
Example 2 / 68
Example 3 / 69
The Wedge Formation: Times to Accumulate and Times to Distribute Stocks / 69
The Wedge Formation / 70
Declining Wedge Formations / 70
Appropriate Strategies / 71
Synergy in Chart Patterns / 71
Head and Shoulder Formations / 72
Using the Head and Shoulder Formation to Establish Downside Price Objectives / 73
At Market Bottoms, the Inverse Head and Shoulder Formation / 75
Confirmation by Measures of Market Momentum / 75
Volume Spikes Are Very Bullish If the Stock Market Has Been in Decline / 76
The Selling Climax / 76
Support and Resistance Levels / 77
Support Zones / 77
Support Zones / 78
Resistance Zones / 79
Example: The 1999–2003 Stock Market Climate (Chart 4.4) / 79
Market Downtrends / 80
Major Trend Synergy in Action / 80
Tricks with Trendlines / 81
Inverse Trendline Support and Resistance Zones / 82
Channel Support and Resistance / 83
Early Warnings Provided by Channel Patterns / 83
Extended Channel Support / 84
Rising Resistance Zones / 84
False Breakouts and Breakdowns: Key Market Patterns / 85
A Significant Sell Signal / 85
A Significant Buy Signal / 86
The Key / 86
xiv Contents

5 Political, Seasonal, and Time Cycles: Riding the Tides of Market

Wave Movements 89
Calendar-Based Cycles in the Stock Market / 90
Days of the Month / 90
Pre-Holiday Pattern / 90
The Best and Worst Months of the Year / 90
The Best Six-Month Period, the Worst Six-Month Period / 92
Evaluating the Tabulations / 92
The Presidential Stock Market Cycle / 93
Comments / 94
Time Cycles: Four Days to Four Years / 95
Example of Market Cycles: The 53-Day Market Cycle / 95
Segments of Market Cycles / 97
The Significance of Segmentation / 98
Distinguishing Bullish Cyclical Patterns from Bearish Patterns / 98
Lest We Forget the Concept of Synergy... / 99
Lengths of Market Cycles / 99
The Very Significant and Regular Four-Year Market Cycle / 100
An Intermediate Market Cycle with a Confirming Indicator / 101
How the Confirming Indicator Helps the Cause / 102
The August-September Cycle / 102
The October-November Cycle / 103
The November to Early January Market Cycle / 103
The January-March Cycle / 103
The 18-Month Market Cycle with a Rate of Change Confirming Indicator / 104
Synergy Between Rates of Change and Cyclical Patterns / 104
Enter the Rate of Change Indicator / 105
For Future Readers of This Work / 105
Day Trading with Short-Term Cycles / 106
T-Formation: The Ultimate Cyclical Power Tool? / 107
The Construction of T-Formations / 108
Area 1 / 108
Area 2 / 109
Area 3 / 109
Area 4 / 110
Further Examples of T-Formations, Including the Application of Synergy / 110
T-Formations and Mirror Patterns of Stock Movement / 111
T-Formations and Longer-Term Time Periods / 113
Supplemental Indicators / 114
 Contents xv

One Final Set of T-Formations / 114

In Summary / 115
Seasonal and Calendar Influences on the Stock Market / 115
Time Cycles / 115
T-Formations / 115

6 Bottom Fishing, Top Spotting, Staying the Course: Power Tools That
Combine Momentum Oscillators with Market Breadth Measurements
for Improved Market Timing 117
A Quick Review of Where We Have Been / 117
The “Internal” as Opposed to the “External” Stock Market / 118
Measures of Market Breadth / 119
New Highs and New Lows / 119
New High/New Low Confirmations of Price Trends in the Stock Market / 120
Positive and Negative Confirmations, 1995–2004 / 120
New Lows at a Developing Stock Market Bottom / 122
Creating a New High/New Low Indicator to Keep You in the Stock Market When
the Odds Heavily Favor the Stock Market Investor / 123
Method of Interpretation / 124
The Application of the New High/(New Highs + New Lows) Indicator to the
Nasdaq Composite / 126
Pre-Bear Market Comparisons / 127
The New York Stock Exchange Advance-Decline Line / 127
Relating to Advance-Decline Breadth Data / 127
General Observations / 128
Chart 6.4: The Advance-Decline Line Between 2002 and 2004 / 129
The 21-Day Rate of Change of the Advance-Decline Line / 130
Overbought Levels / 130
Oversold Levels / 130
Breadth Patterns at Bull Market Highs / 130
1997–2000: A Period of Breadth Transition / 130
A Change in Tone / 132
A Major Negative Breadth Divergence Followed / 132
Using a Somewhat More Sensitive Rate of Change Measure of the Advance-
Decline Line / 133
The Ten-Day Rate of Change Indicator / 133
The Weekly Impulse Continuation Signal / 134
But First, an Introduction to the Exponential Moving Average / 134
The Smoothing Constant of Exponential Averages / 134
Example 1 / 135
xvi Contents

Example 2 / 135
Example 3 / 135
Stabilizing the Exponential Average / 136
Some Special Qualities of Exponential Moving Averages / 136
The Weekly Impulse Signal / 137
The Required Items of Data Each Week / 137
Buy and Sell Signals / 139
General Concept of the Weekly Breadth Impulse Signal / 141
Final Comments / 142
The Daily-Based Breadth Impulse Signal / 142
The Construction and Maintenance of the Daily-Based Breadth Impulse Signal / 143
The Performance Record of the Daily Breadth Impulse Signal / 144
The Application of the Daily-Based Breadth Impulse Signal to Trading the Nasdaq Composite
Index / 145
Caveat / 146

7 Volume Extremes, Volatility, and VIX: Recognizing Climactic Levels and

Buying Opportunities at Market Low Points 147
Market Tops: Calm Before the Storm; Market Bottoms: Storm Before the Calm / 148
TRIN: An All-Purpose Market Mood Indicator / 148
The Data Required to Compute TRIN / 149
Calculating TRIN / 149
Interpreting TRIN Levels / 150
TRIN as a Bottom Finding Tool / 151
The Volatility Index (VIX) and Significant Stock Market Buying Zones / 153
The Volatility Index / 154
Theoretical Pricing of Options / 154
Implied Volatility / 155
Ranges of VIX / 155
Bullish Vibes from VIX / 156
Summing Up / 156
The Major Reversal Volatility Model / 156
Calculating the Major Reversal Volatility Model / 157
Major Market-Reversal Buy Signals / 157
The 1970–1979 Decade / 158
The 1979–1989 Decade / 159
The 1989–1999 Decade / 160
Post–1999: Mixed Results / 161
The Ideal Scenario / 163
 Contents xvii

8 Advanced Moving Average Convergence-Divergence (MACD): The

Ultimate Market Timing Indicator? 165
Scope of Discussion / 166
The Basic Construction of the Moving Average Convergence-Divergence Indicator / 166
Basic Concepts / 167
Trend Confirmation / 168
The Signal Line / 169
Very Important Supplementary Buy and Sell Rules / 170
Rationale for Supplementary Rules / 170
Using Divergences to Recognize the Most Reliable Signals / 171
Additional Examples / 172
Improving MACD Signals by Using Different MACD Combinations for Buying and
Selling / 173
Two MACD Combinations Are Often Better Than One / 174
MACD During Strong Market Uptrends / 175
MACD During Market Downtrends / 176
Modifying MACD Rules to Secure the Most from Strong Market Advances / 177
Reviewing Chart 8.9 / 178
Market Entry Supported by Positive Divergence / 178
Moving Averages, MACD Patterns Confirm Advance / 179
Initial Sell Signal Not Reinforced by Any Negative Divergence / 179
Secondary Sell Signal Confirmed by Negative Divergence / 179
Use Moving Average as Back-Up Stop Signal / 179
The Stop-Loss When Trades Prove Unsuccessful / 180
Synergy: MACD Confirmed by Other Technical Tools / 181
MACD Patterns Confirmed by Cyclical Studies / 182
When the MACD Does Not Provide the Most Timely Signals / 183
Money Management with the MACD (and Other Indicators) / 184
An MACD Configuration That Suggests More Active Selling / 185
MACD Through the Years: Long Term, Short Term, and Intraday / 185
The Start of a Bull Market / 186
An Example of the MACD Stop-Loss Signal in Action / 187
MACD Employed for Day-Trading Purposes / 187
MACD and Major Market Trends / 188
The Amazing Ability of the MACD to Identify Significant Market Low Points Following
Severe Stock Market Declines / 190
MACD Patterns and Significant Market Bottoms / 191
Initial Rally at Start of Year / 193
Brief Decline and Well-Timed Market Re-Entry / 193
Rally and Topping Formation / 193
xviii Contents

Waterfall Decline, and Then Bottoming Process / 193

Final Shakeout and Recovery / 194
MACD and the Four Stages of the Market Cycle / 194
Reviewing Rules and Procedures Associated with the MACD Indicator / 195
Creating and Maintaining Your MACD Indicator / 195
Buy Signals / 195
Prerequisite / 196
Sell Signals / 196
Converting the Daily Breadth Thrust Model into an Intermediate Entry / 196
Buy Signals / 197
Sell Signals / 197
Providing That... / 197
Summary of Results / 198
MACD Filtered Breadth Thrust Applied to the Nasdaq Composite Index / 198

9 Moving Average Trading Channels: Using Yesterday’s Action to Call

Tomorrow’s Turns 201
The Basic Ingredients of the Moving Average Trading Channel / 202
Creating the Channel / 203
What Length of Offset Should Be Used? / 203
Moving Average Trading Channels in Operation / 204
Area A: The Chart Opens with a Market Downtrend / 205
Area B: The First Recovery Rally / 205
Area X: The Technical Picture Improves / 206
Area D: The Upper Trading Band Is Reached / 206
Area E: Prices Retrace to the Center Channel / 206
Area F: Improving Market Momentum Confirmed / 207
Bullish Indications / 207
Area G: The Center Line of the Moving Average Trading Channel / 207
Area H: Warning Signs / 207
Area I to J: One Final Attempt That Fails / 207
The Basic Concept / 208
The Evolution of Phases Within the Moving Average Trading Channel / 209
A Classic Topping Formation to End a Major Bull Market / 209
Chart 9.2: The Ingredients / 210
January 2000: The Bull Market in Nasdaq Moves Along Steadily / 210
Area E: The Fun and Games of the Bull Market Come to an End / 210
Area F: Trend Reversal Is Confirmed and Completed / 211
 Contents xix

The Development of a Bottom Formation / 212

Moving Average Channels and the Major Trend / 212
1996–1998: Strong Bullish Upthrust / 213
The First Correction Stops at the Center Channel Line / 213
Resurgence of Market Advance / 214
Technical Warnings Develop / 214
The Top Formation Moves Along / 214
Major Downtrend Gets Seriously Underway / 214
Patterns Suggest a Phasing-Out of Long Positions / 215
Significant Downturn Is Confirmed / 215
How to Construct a Price/Moving Average Differential Oscillator / 216
A Review of the Key Rules Associated with Moving Average Trading Band Trading / 217

10 Putting It All Together: Organizing Your Market Strategies 219

The First Step: Define the Major Trend and Major Term Cycles of the Stock Market / 219
The Second Step: Check Out Market Mood Indicators and Seasonal Cycles / 220
The Third Step: Establish the Direction and Strength of the Current Intermediate Trend
and Try to Project the Time and Place of the Next Intermediate-Term Reversal
Area / 221
The Fourth Step: Fine-Tune Your Intermediate-Term Studies with Studies Based on
Shorter-Term Daily—or Even Hourly—Market Readings / 222
Remember Our Favorite Mutual Fund Selection Strategy! / 222
Lessons I Have Learned During 40 Years as a Trader / 223
Recommended Reading and Resources / 224
Charting Resources / 224
Sources for Research / 225
Books Relating to Technical Analysis / 225
Investment Newsletters / 226

Index 229
Foreword

This is a feast for a serious trader—for a professional looking to improve his or her
performance or a beginner trying to avoid some of the more painful collisions with
reality. I wish I had this book years ago, and I enjoy reading it today, finding pearls
of wisdom to improve my trading.
Jerry is one of the world's top-performing money managers whose dazzling mind
produces more fresh ideas in a month than most people have in a lifetime. He has,
since 1973, been the editor of a technical newsletter, Systems and Forecasts, published
by his firm, Signalert Corporation, is an important money manager, and the author
of several books. He became famous in the era of computerized technical analysis as
the inventor of MACD. Moving Average Convergence-Divergence is now included
in most trading programs.
This book taps into the results of a lifetime of research and money management.
Jerry gives you market mood indicators to identify high- and low-risk investment
climates, backing them up with gain/pain ratios. He lays bare powerful signals from
moving averages and rate of change indicators. He takes one of the most obscure
areas of technical analysis—chart reading—and reduces it to a set of clear and lucid
rules.
All traders and investors study price movements, but only the best pay attention
to time. Jerry teaches you to ride market cycles, supplementing them with powerful
T-formations. He explains why he believes the real market is reflected in market
breadth, such as New High—New Low Index. His chapter on volume and volatility
makes it clear why market tops are “calm before the storm” and market bottoms
“storm before calm.” These and other simple but profound concepts will change the
way you trade.
The chapters on MACD and moving average trading bands take you to the heart
of the master's method. I first heard Jerry speak of them around 1990, and those
ideas continue to influence my trading to this day. Jerry distills his vast market
expertise into a set of what he calls Power Tools.
2 Foreword

I recently visited Jerry and asked why he wrote this book. He laughed, “I enjoy seeing my
picture on book jackets…. It feels good to get your ideas out into the world, leave a little of your
imprint around. I have never lost anything by giving ideas away. If people find it useful, it
makes me feel good.”
The only thing you have to bring to reading this book is a commitment to market work. What
you need to succeed is right here, on the table in front of you. It will be curious to see how many
people actually take this knowledge and work with it to become successful traders and
investors.

Dr. Alexander Elder

Haciendas El Choco
Dominican Republic
January 2005
Acknowledgments

I would like to acknowledge the myriad and endless research, graphics, and edito-
rial contributions to this work made by staff members of Signalert Corporation, in
particular (in alphabetical order) my son, Dr. Marvin Appel; my brother, Arthur
Appel; Joon Choi; Bonnie Gortler; Glenn Gortler; and Roni Nelson, without whose
contributions this book would not have been possible.
I would like to acknowledge as well the myriad of technical analysts and students
of the stock market from whom I have learned over the years and from whom I con-
tinue to learn. Although there have been too many to specify, my appreciation is,
nonetheless, sincere and considerable.
And last, but absolutely not least....
My first book, Winning Market Systems, written 34 years ago, in 1971, was dedi-
cated to my wife, Judy, as "the best investment I have ever made.” At this time, 34
years later and after 48 years of marriage, I make the same dedication, only more so.
Judy has not been simply important to my life. She has been my life….

Gerald Appel
About the Author

Gerald Appel has, since 1973, published Systems and Forecasts, a leading technical
analysis publication. Appel is legendary for his work in technical analysis and mar-
ket timing, including the creation of Moving Average Convergence-Divergence
(MACD), one of the field's most widely used tools. His numerous books include,
among others, Winning Market Systems: 83 Ways to Beat the Market, Stock Market
Trading Systems (with Fred Hitschler), New Directions in Technical Analysis (with Dr.
Martin Zweig), The Big Move, and Time-Trend III. His company, Signalert
Corporation, and affiliates, currently manages more than $550,000,000 in investor
capital. Appel has trained thousands of traders through his world-renowned video
and audio tapes, seminars, and workbooks. He recently taught a series of four-day
international master classes on investing and trading strategies in partnership with
Dr. Alex Elder. As Appel puts it, “I have never lost anything by giving ideas away. If
people find it useful, it makes me feel good.”
Introduction

This book, Technical Analysis, is meant for every investor who has been hurt trusting
his brokerage firm, trusting his friendly mutual fund manager, or trusting the latest
hot guru. It is meant for every investor who has ever wished for the skills required
to deal with an increasingly volatile and uncertain stock market. It is meant for every
investor willing to take responsibility for the outcome of his own investments. It is
meant for every investor ready to take at least some of the time and to put forth at
least some of the effort required for the quest.
The stock market tends to condition investors to make the wrong decisions at the
wrong times. For instance, the stock market explosion of the late 1920s convinced
investors that the only path for stocks was up, and that the prospects of stocks ris-
ing indefinitely justified even the high levels of margin leverage that could be
employed at the time.
Investors plowed in, the stock market collapsed, and, thereafter, the public
remained fearful of stocks for 20 years, although the stock market actually reached
its lows during 1931 and 1932. In the mid-1990s, the Standard & Poor's 500 Index
was king and index mutual funds were the royal coach. Between 1996 and 1998,
huge inflows of capital were injected into Standard & Poor's 500–based index mutu-
al funds, such as those sponsored by Vanguard. The largest inflows took place just
before a serious intermediate market decline in mid-1998. The market advance that
followed that decline was headed not by the Standard & Poor's 500 sector of the
stock market, but by speculative areas of the Nasdaq Composite: technology sectors
(Internet issues and the like) that, in some cases, sold for hundreds of dollars per
share, even though many companies had no earnings whatsoever. And then came
the crash, in March of 2000. The Nasdaq Composite ultimately declined by more
than 77%.
So, investors returned to the sanctity of total return, value, earnings, and divi-
dends, not the worst strategy during the bear market that took place between 2000
and 2002, but definitely not the best of strategies when the new bull market more
clearly emerged during the spring of 2003. The play returned to technology and the
Internet, with growth back in and total return back out. (During the first nine
months of 2004, however, technology issues once again lost market leadership to
value- and income-oriented market sectors.)
The point, of course, is that the typical investor follows and does not lead trends,
is late rather than early, and is a crowd-follower rather than a self-director.
According to Dalbar, Inc., a financial services research firm, the average equity fund
investor realized an annualized return of 5.32% between 1984 and 2000, while the
8 Introduction

Standard & Poor's 500 Index rose at a rate of 16.3% per annum. Matters become even
worse when comparisons are updated through July 2003. The average investor was
ahead by only 2.6% per year for the 1984–2003 period, compared to annualized
returns of 12.2% for the Standard & Poor's 500 Index.
This book has been prepared to help investors achieve better than average per-
formance—considerably better, we believe.
The structure of Technical Analysis has been designed to provide information and
investment tools, some of which can be put to work immediately, by both sophisti-
cated and relatively unsophisticated stock market investors. I will share with you,
right at the start, my favorite techniques for picking mutual funds and ETFs (securi-
ties that trade on the stock exchange and act similarly to market index mutual funds
but provide greater investment flexibility at lower ongoing internal management
fees, though, possibly, with some initial commission expense, which is often
involved with mutual funds as well).
We move from there to some of the basic tools stock market technicians use to
track and predict market behavior. A certain amount of statistical calculations is
required in applying some of the “practical power tools” you will be learning—noth-
ing truly complex. I have placed a strong emphasis on the “practical” in “practical
power tools.” The KISS (Keep It Simple, Stupid) principle is observed throughout
the book—at least, to the best of my ability.
For example, in Chapter 1, “The No-Frills Investment Strategy,” I show you two
indicators that, together, should require no more than five or ten minutes for you to
post and maintain each week—that's right, each week, not each day. These have a
fine history of helping investors discriminate between favorable and unfavorable
market climates. Nothing in the stock market can ever be guaranteed for the future,
of course, but you will see how powerful these two simple indicators have been
during more than three decades of stock market history in supplementing your
selections for market investment with straightforward but surprisingly effective
market-timing strategies.
Even if you go no further, you will have already acquired a useful arsenal of
tools for improved investment results. By this time, you might well have become
ready for additional, more involved technical tools that I have found over the
decades to be more than useful in my own investment decisions. These include, for
example, T-formations, special time-based patterns of market movement that fre-
quently provide advance notice of when market turning points are likely to occur. In
a subsequent chapter, you learn about the application of moving average trading
channels, a technique for employing certain patterns of past market behavior to pre-
dict likely patterns for the future.
Finally, you get my personal take on Moving Average Convergence-Divergence
(MACD), an indicator that I invented in the late 1970s and, since then, has become
one of the most widely followed of market-forecasting tools employed by technical
analysts, private and professional. You will learn how to maintain the MACD indi-
cator and how to interpret it for time frames ranging from 15 minutes (for day trad-
ing) to many years (for long-term investing).
Each of these indicators alone can be quite powerful, particularly as you develop
 Introduction 9

the facility for combining various elements of your trading strategy for disciplined
decision-making, higher returns, and less risk. Synergy helps the cause. I will show
you many ways to achieve this synergy.
All in all, Technical Analysis is about the best stock-market timing tools that I have
learned in nearly 40 years of studying, trading in, and writing about the stock mar-
ket. These are real tools, practical tools, tools that my staff and I employ every day
in tracking the stock market and investing our own and our clients' capital. These are
tools that you, yourself, can begin to employ almost immediately.
There will be some additional interesting side trips and excursions along the way,
but I think that we will conclude the description of our itinerary at this point. The
time has come to begin the journey....
 1
The No-Frills Investment
Strategy

Part I: Picking the Right Investment Vehicles

Successful investing involves two basic areas of decision: what do you buy and sell,
and when do you buy and sell. We’ll be moving along into the “whens” in chapters
to come, as we develop a broad array of market timing techniques. Before we move
into timing, however, we will consider some principles and procedures that should
prove helpful in selecting vehicles in which to invest.
It’s not how much you make that counts; it’s how much you manage not to lose.
Let’s start by considering just a few numbers. The Nasdaq Composite Index
reached an all-time high on March 6, 2000, closing that day at 5048.60. The ensuing
bear market took the index down to a low of 1,114.40 on October 9, 2002—a loss of
77.9%. Prices advanced from that point. By December 3, 2003, the Composite had
risen to 1960.20—that’s 75.9% above the lows of October 2002. And where did the
buy-and-hold investor stand at that point? Down—very much down still, by 61.2%
from the March 2000 close!
The moral: To make up any losses taken in the stock market, you have to achieve
greater percentage gains than such losses entail. It does not matter whether the losses
or the gains come first.
For example, if you lose 20% of the value of your assets, you have to make 25%
on the remainder to break even. (If you start with $100,000 and lose 20%, you have
$80,000. To bring that $80,000 back to $100,000, you have to show a gain of $20,000
which represents 25% of the $80,000 you have left in your account.)
12 Technical Analysis

If you lose one-third, or 33.33%, of your assets, you will have to make 50% on
your remaining assets to break even. If you make 50% first, a loss of 33.33% will
bring you back to your starting level.
If you lose 25%, you will need to gain 33.33% to bring you back to your starting
level.
If you lose 50%, you will need to make 100% to restore your original capital.
If you lose 77.9%, you will need to make 352.5% on the assets left to break even.
I think you get the idea by now. Capital preservation is, by and large, more
important for successful long-term investment than securing an occasional large
profit. We will, of course, be reviewing a number of timing tools that are designed
to provide more efficient entries and exits into the stock market, thereby reducing
risk and improving the odds of maintaining and growing your capital assets. Let’s
begin, however, with strategies for portfolio selection, which should be very useful
supplements to your market-timing arsenal.

Risk: Reward Comparisons Between More Volatile and Less

Volatile Equity Mutual Fund Portfolios

AVG % GAIN IN WINNING MONTHS -- AVG % LOSS IN LOSING MONTHS

BASED ON VOLATILITY GROUPS
4

2
AVG % GAIN/LOSS

-1

-2

-3
9 8 7 6 5 4 3 2 1
VOLATILITY GROUP

High-Risk Funds Low-Risk Funds

Chart 1.1 Average Percent Gain in Winning Months and Average Percent Loss in Losing
Months, Based on Volatility Groups

This chart shows the average gain during months in which the average mutual fund rose in
price (winning months) compared to months in which the average mutual fund declined (los-
ing months). Mutual funds are ranked by volatility, the amount of daily and/or longer-term
 The No-Frills Investment Strategy 13

price fluctuation that takes place in that fund, usually compared to the Standard & Poor’s 500
Index as a benchmark. Group 9 represents the most volatile group of funds; Group 1 repre-
sents the least volatile segment. The period represented by this study was December 1983 to
October 2003. The more volatile the group, typically the greater the gain during winning
months, the greater the losses during losing months.
Calculations and conclusions presented in this chapter and in other areas where perform-
ance data is shown are based, unless otherwise mentioned, on research carried forth at
Signalert Corporation, an investment advisory of which the author is sole principal and presi-
dent. In this particular case, research encompassed mutual fund data going back to 1983,
involving, among other processes, simulations of the strategies described for as many as
3,000 different mutual funds, with the number increasing over the years as more mutual funds
have been created.
Chart 1.1 shows the relationships between average percentage gains during rising
months for mutual funds of various volatility levels (range of price fluctuations) and
the average percentage loss during declining market months, 1983 to 2003. For exam-
ple, the most volatile segment of the mutual fund universe employed in this study
(Group 9) gained just less than 3% during months that the average fund in that
group advanced, and incurred an average loss of just less than 2% during months
that the average fund in that group declined. As a comparison, funds in Group 1, the
least volatile segment of this mutual fund universe, advanced by approximately
1.2% on average during rising months for that group and declined by approximate-
ly 4/10 of 1% during months that the average fund in that group showed a decline.
Chart 1.1 shows us that, basically, when more volatile mutual funds—and, by
implication, portfolios of individual stocks that show above-average volatility—are
good, they can be very good, indeed. However, when such portfolios are bad, they
can be very bad, indeed. Are the gains worth the risks? That’s a logical question that
brings us to a second chart.

Gain/Pain Ratios
We have seen that the more aggressive the portfolio, the larger the average gain is
likely to be during rising market periods. We have also seen that more aggressive
portfolios are likely to lose more during declining market periods. That’s logical
enough—nothing for nothing. But what are the gain/pain ratios involved?
Well, Chart 1.2 shows that, on a relative basis, more volatile mutual funds involve
greater pain to gain, lower profit/loss ratios than less volatile portfolios. For exam-
ple, Group 9, the most volatile portfolio segment, makes about 3% during winning
months for every 2% lost during declining months, a gain/loss ratio of essentially
1.5. Group 1, the least volatile group, has had a gain/loss ratio of approximately 2.7.
You make 2.7% per winning month for every percent of assets lost during losing
months. The amount of extra gain achieved by more volatile funds is offset by the
disproportionate risk assumed in the maintenance of such portfolios.
14 Technical Analysis

AVG GAIN / AVG LOSS RATIO, PER VOLATILITY GROUP

3

2.5

1.5

0.5

0
9 8 7 6 5 4 3 2 1
VOLATILITY GROUP

High-Risk Funds Low-Risk Funds

Chart 1.2 Average Gain/Average Loss, by Volatility Group

This chart shows the ratio of the average gain per winning month to the average loss per los-
ing month, by volatility group. For example, Group 9, the highest-volatility group, shows a
gain/loss ratio of 1.5. Winning months were, on average, 1.5 times the size of losing months.
Group 2, the second-least-volatile group, shows a gain/loss ratio of 2.5. Winning months, on
average, were 2.5 times the size of losing months. The period here was 1983 to 2003.

You might notice that relationships between volatility and risk are very constant and
linear. The greater the volatility, the lesser the gain/loss ratio, the greater the risk—
a relationship frequently lost to investors during periods when speculative interest
in high-volatility stocks runs high.

Drawdown: The Measure of Ultimate Risk

CLOSED DRAWDOWNS BASED ON VOLATILITY GROUP

10%
0%
-10%

-20%
-30%
-40%
-50%
-60%

-70%
Dec 83 - Oct 03
-80%
9 8 7 6 5 4 3 2 1
VOLATILITY GROUP

High-Risk Funds Low-Risk Funds

Chart 1.3 Closed Drawdowns by Volatility

 The No-Frills Investment Strategy 15

Drawdown represents the maximum loss taken from a peak in portfolio value to a subsequent
low before a new peak in value is achieved. The highest-volatility group, Group 9, incurred
losses of as much as 68% during the 1983–2003 period, whereas the lowest-volatility group,
Group 1, had a maximum drawdown of just 15%.
Drawdown, the amount by which your portfolio declines from a peak reading to its
lowest value before attaining a new peak, is one of the truer measures of the risks
you are taking in your investment program.
For example, let us suppose that you had become attracted to those highly
volatile mutual funds that often lead the stock market during speculative invest-
ment periods, and therefore accumulated a portfolio of aggressive mutual funds that
advanced between late 1998 and the spring of 2000 by approximately 120%, bring-
ing an initial investment of $100,000 to $220,000. So far, so good. This portfolio, how-
ever, however, declines by 70% during the 2000–2003 bear market to a value of
$66,000. Although losses of this magnitude to general mutual fund portfolios previ-
ously had not taken place since the 1974 bear market, they have taken place during
certain historical periods and must be considered a reflection of the level of risk
assumed by aggressive investors. Moreover, this potential risk level might have to
be increased if asset values for this portfolio and similar portfolios were to decline to
new lows before achieving new peaks, which had not yet taken place during the first
months of 2004.
Protracted gains in the stock market tend to lead investors to presume that
stock prices will rise forever; buy-and-hold strategies become the strategy of
choice. Interest focuses on gain. Potential pain is overlooked. (Conversely, long
periods of market decline tend to lead investors to minimize the potential of
stock ownership. The emphasis becomes the avoidance of pain; the achievement
of gain seems hopeless.)
Drawdowns—and risk potential—decline dramatically as portfolio volatility
decreases, although risks to capital are still probably higher than most investors
realize, even in lower-volatility areas of the marketplace. For example, maximum
drawdowns between 1983 and 2003 were roughly 16% for Group 2, the second-least-
volatile group of mutual funds, rising to 20% in Group 3, a group of relatively low
volatility. Mutual funds of average volatility, Group 5, showed drawdowns of 35%.
In evaluating mutual funds or a selection of individual stocks or ETFs for your
portfolio, you should secure the past history of these components to assess maxi-
mum past risk levels. ETFs (exchange traded funds) are securities, backed by
related baskets of stocks, which are created to reflect the price movement of certain
stock market indices and/or stock market sectors. For example, there are ETFs
called SPYDRS that reflect the price movement of the Standard & Poor’s 500 Index,
rising and falling in tandem with the index. Another ETF, the QQQs, reflects the
Nasdaq 100 Index. There are ETFs that reflect a portfolio of high-yielding issues in
the Dow Industrial Average, a real estate trust portfolio, and even an ETF that
reflects a portfolio of 10-year Treasury bonds. In many ways, ETFs are similar to
index- or sector-based mutual funds, have the advantages of unlimited trading at
any time of the day, as well as lower internal expenses than mutual funds. There are
certain disadvantages, however, mainly associated with bid-ask spreads, which
add to transaction costs as well as occasional periods of limited liquidity.
16 Technical Analysis

You can fine-tune the total risk of your total portfolio by balancing its compo-
nents to include lower-risk as well as higher-risk segments. For example, a mutual
fund portfolio consisting 50% of intermediate bond funds (past maximum draw-
down 10%) and 50% Group 8 mutual funds (past maximum drawdown 50%) would
represent a total portfolio with a risk level of approximately 30%, probably as much,
if not more, risk than the typical investor should assume.

The End Result: Less Is More

GAIN PER YEAR, BASED ON VOLATILITY GROUPS - 20 YEARS

12%

10%

8%

6%

4%

2%

0%
9 8 7 6 5 4 3 2 1
8= HIGHEST VOLATILITY, 1= LOWEST VOLATILITY

High-Risk Funds Low-Risk Funds

Chart 1.4 Twenty Years of Results, Based on Volatility Group

All things considered, investors gain little, if anything, by placing investments in higher-risk
holdings. Lower-volatility groups have provided essentially the same investment results over
the long run as higher-volatility groups, but with much less risk.

Chart 1.4 pretty much tells the story. With the exception of mutual funds in Group 1
(which includes many hybrid stock, bond funds), equity and balanced mutual funds
of relatively low volatility produced essentially the same returns over the 1983–2003
decade as mutual funds of higher volatility. Generally, the highest average returns
were secured with mutual funds of approximately average volatility, where the
curve of returns appears to peak. However, differentials in return between Groups
2–3 and Groups 4–6 might or might not justify the increases in risk that are involved
in stepping up from the very low-volatility groups to those at the average level.
To sum up, for buy-and-hold strategies, higher volatility has historically pro-
duced little, if any, improvement in return for investors, despite the greater risks
involved. These actual results run counter to the general perception that investors
can secure higher rates of return by accepting higher levels of risk, an assumption
that might be correct for accurate and nimble market traders during certain periods
but, in fact, is not the case for the majority of investors, who are most likely to posi-
tion in aggressive market vehicles at the wrong rather than the right times.
 The No-Frills Investment Strategy 17

Lower-volatility mutual funds typically produce higher rates of return and less
drawdown, something to think about.
In as much as accurate timing can reduce the risks of trading in higher-velocity
equities, active investors can employ more volatile investment vehicles if they man-
age portfolios in a disciplined manner with efficient timing tools. Relative returns
compared to lower-volatility vehicles improve. Aggressive investors with strong
market-timing skills and discipline might find it worthwhile to include a certain
proportion of high-velocity investment vehicles in their portfolios—a certain pro-
portion, perhaps up to 25%, but not a majority proportion for most.
Again, we will continue to consider tools that will improve your market timing.
However, before we move into that area, I will show you one of the very best strate-
gies I know to maintain investment portfolios that are likely to outperform the aver-
age stock, mutual fund, or market index.

Changing Your Bets While the Race Is Still Underway

Let’s suppose you have a choice.
You go to the racetrack to bet on the fourth race, research the history of the hors-
es, evaluate the racing conditions, check out the jockeys, evaluate the odds, and
finally buy your tickets. Your selection starts well enough but, by the first turn, starts
to fade, falling back into the pack, never to re-emerge; your betting capital disap-
pears with the horse. The rules of the track, of course, do allow you to bet on more
than one horse. The more horses you bet on, the greater your chances are that one
will come through or at least place or show, but then there are all those losers....
Then you find a track that offers another way to play. You may start by betting
on any horse you choose, but at the first turn, you are allowed to transfer the initial
bet—even transfer your bet to the horse leading at the time. If the horse is still lead-
ing at the second turn, you will probably want to hold your bet. If the horse falters,
however, you are allowed to shift your bet again, even to the horse that has just
taken the lead. Same at the third turn. Same at the final turn. You can stay with the
leaders, if you like, or, if your horse falls back into the pack, you can move the bet
to the new leading horse until the race comes to an end. (I have, of course, taken
some liberties with the analogies, to make a point.)
Which way do you think you’d prefer? Betting and holding through thick and
thin, and, perhaps, through your horse running out of steam? Or shifting bets at
each turn so your money starts each turn riding on a leading horse?
The first track is a little like the stock market, whose managers seem always to be
telling investors what to buy, sometimes when to buy, but rarely, if ever, when to
change horses. Buy-and-hold strategies do have their benefits, particularly over the
very long term. It is possible, after all, for all stock market investors to make money
in the end, which is not true for all bettors at the track.
The second track, however, is more likely to give an edge to the player. Strong
horses tend to remain strong, especially when you don’t have to ride them to the fin-
ish line if they begin to lose serious ground. That brings us to relative strength
investing.
18 Technical Analysis

Relative Strength Investing

The basic principles of relative strength investing are as follows:
• Identify the leaders.
• Buy the leaders.
• Hold the leaders for as long as they lead.
• When the leaders slow down, sell them and buy new leaders.
Simple enough?
Let’s get more specific.
For investors of average to below average risk tolerance, start by securing a data-
base or two of a large number of mutual funds. I prefer a database of at least 1,000
mutual funds—preferably more, but for the purposes of a single investor instead of
a capital manager, a few hundred is almost certainly sufficient.
You need quarterly data, so almost any source that tracks mutual funds and pro-
vides quarterly performance data serves your purpose. Barron’s the Dow Jones
Business and Financial Weekly, for example, provides good coverage. Other sources
can be found on the Web.
For example, in the Finance areas of Yahoo.com and MSN.com, you can find
charts and information regarding mutual funds. A number of investment advisory
newsletters provide performance and other information regarding mutual funds.
Newsletters that provide recommendations and data specific to the sort of invest-
ment approach I am suggesting include my own newsletter, Systems and Forecasts,
and the newsletter No-Load Fund X. You can find information regarding these pub-
lications at www.Signalert.com and www.NoloadfundX.com, respectively.
Conservative investors should eliminate from the array of funds covered those
that are normally more volatile than the Standard & Poor’s 500 Index. Such funds
often provide excellent returns during strong and speculative market climates, but
you will probably secure better balances between risk and reward if you concentrate
your selections on mutual funds that are, at most, just somewhat above (preferably
approximately equal to or below) the Standard & Poor’s 500 Index in volatility. Your
portfolio, when fully invested, will probably include holdings that are, on average,
approximately 80–85% as volatile (risky) as the Standard & Poor’s 500 Index. Actual
risk is likely to be reduced below these ratios as a result of the exceptional relative
strength of your holdings. (More on this comes shortly.)
When you have isolated a universe of mutual funds whose volatility is more or
less equal to or less than the Standard & Poor’s 500 Index—for example, the Dodge
and Cox Balanced Fund and First Eagle Sogen—determine from the performance
tables which funds have shown performance results over the past three months
that rank in the upper 10% (top decile) of all the mutual funds of similar volatility
in your database. These are funds that have shown the greatest percentage gain for
the period.
Buy a selection of at least two—preferably four or five—funds in the top decile of
the mutual fund universe that consists of funds of equal or less volatility than the
Standard & Poor’s 500 Index. Some level of diversification is significant. Even a
 The No-Frills Investment Strategy 19

portfolio of as little as two mutual funds provides considerable increase in safety

compared to a single-fund portfolio. Look for funds that charge no loads for pur-
chase and involve no redemption fees for holding periods of at least 90 days.
Review your portfolios every three months, as new quarterly data becomes avail-
able. If any funds have fallen from the top decile, sell those funds and replace them
with funds that remain or have just entered into the top decile in performance.
Maintain current holdings that retain their positions in the top 10% of performance
of all mutual funds of that volatility group.
Funds should be ranked against their own volatility peers. During rising market
periods, funds of higher volatility tend to outperform funds of lower volatility sim-
ply because higher-volatility mutual funds and stocks tend to move more quickly
than funds and stocks of lower volatility. Conversely, higher-volatility positions
tend, on average, to decline more quickly in price than lower-volatility vehicles. We
are seeking funds that produce the best returns for varied market climates, includ-
ing both advancing and declining market periods. You can secure volatility ratings
of mutual funds from a variety of sources, including Steele Mutual Fund Expert (see
www.mutualfundexpert.com), an excellent reference for mutual fund information.
If you follow this procedure, you will regularly rebalance and reapportion your
mutual fund holdings so that, at the start of every quarter, you will hold a portfolio
of mutual funds that have been leading their peer universe in strength. Your portfo-
lio will consist of mutual funds with the highest relative performance, horses that
are leading the pack at every turn of the course.

Testing the Relative Strength Investment Strategy: A 14-Year Performance

Record of Relative Strength Investing

Relative Strength Investment Approach

Volatility Group 1-5
Top performing funds have continued to beat the market.
Top Decile, Best Results 14.14%
450%
Ranked Quarterly
Rebalanced Quarterly
350%
Total Return

10.13%
250%

5th Decile, Avg Results

150%
4.63%
50%
Bottom Decile, Worst Results

-50%
Jul-90

Jul-91

Jul-92

Jul-93

Jul-94

Jul-95

Jul-96

Jul-97

Jul-98

Jul-99

Jul-00

Jul-01

Jul-02

Jul-03

Chart 1.5 Performance of the Relative Strength Investment Approach (1990–2003)

Exploring the Variety of Random
Documents with Different Content
fell around him. Suddenly he dropped, and hearts sank, thinking his
brief career ended; but he had only tripped over some obstacle. Often
he stumbled, sometimes he fell prostrate, but was quickly up again,
and finally disappeared limping, over the summit, and the Fifty-fifth
saw him no more for several months. As the boy sped away the last
time, the colonel shouted to him: “Bring calibre fifty-four.” General
Sherman’s letter to the War Department will tell the rest of the story.

Headquarters Fifteenth Army Corps,

Camp on Big Black, Aug. 8th, 1863.

Hon. E. M. Stanton, Secretary of War,

Sir:

I take the liberty of asking through you that something be done for a young lad
named Orion P. Howe, of Waukegan, Illinois, who belongs to the 55th Illinois, but
is at present from home, wounded. I think he is too young for West Point, but
would be the very thing for a midshipman.
When the assault at Vicksburg was at its height, on the 19th of May, and I was
in front near the road which formed my line of attack, this young man came up to
me wounded and bleeding, with a good, healthy boy’s cry: “General Sherman,
send some cartridges to Colonel Malmborg, the men are all out.” “What is the
matter, my boy?” “They shot me in the leg, sir, but I can go to the hospital. Send
the cartridges right away.” Even where we stood the shot fell thick, and I told him
to go to the rear at once, I would attend to the cartridges, and off he limped. Just
before he disappeared on the hill, he turned and called to me as loud as he could:
“Calibre 54.”
I have not seen the boy since, and his colonel gave me his address as above, and
says he is a bright, intelligent boy, with a fair preliminary education. What
arrested my attention there, was, and what renews my memory now, is, that one
so young, carrying a musket-ball wound through his leg, should have found his
way to me on that fatal spot, and delivered his message, not forgetting the very
important part even of the calibre of the musket, 54, which you know is an
unusual one. I’ll warrant the boy has in him the elements of a man, and I
commend him to the government as one worthy the fostering care of some of its
national institutions.
I am, with respect, your obedient servant,

W. T. Sherman,
Major-General Commanding.

BE PATRIOTIC.
 It may be, my boy, that you will never be able to guide a regiment
of soldiers as did Nathan Beman, or carry cartridges as did young
Howe, but that is no reason why you should not be just as patriotic.
That boy who is law abiding, who opposes everything that tends to
undermine the national fabric, who decries Sabbath desecration, vile
language, bad literature, and all vices, is a patriot in the true sense of
the word, and can be relied upon in times of peace as well as war to
do his best for the country.
Be patriotic. Cultivate the spirit of admiration toward the national
flag. Dowered with priceless traditions its stars and stripes speak of
the sufferings of the past, the prosperity of the present, and the
glories of the future which shall attend the onward march of this
great Republic. It is the hallowed emblem of the world’s greatest
nation, and of its most resplendent civilization. Of Sherman it was
said that he never failed to salute the flag by taking off his hat in its
presence. That flag is the emblem of all we are and all we expect to
be.
“It floats that all the rights of men may every people bless
And God’s own kingdom walk the world in peace and righteousness.”

Be patriotic. Study the questions that have a bearing upon the

well-being of the people. In the past hundred years, more than
twenty-three million foreigners have settled in this land. Many are
God-fearing men, but many more are entirely out of harmony with
our principles and institutions. Truly America is
“The mother with the ever open door,
The feet of many nations on her floor,
And room for all the world about her knees.”

Of the seventy million inhabitants twenty-five per cent. are yet in

gross ignorance, thirteen per cent. cannot read the ballots they cast,
and thousands of such are annually coming to our shores, imbued
with the notions, failings and vices of their native lands. True
patriotism desires and labors not only for a free people, but an
educated one.
To be patriotic requires candor. We must be fair in our judgment
of others who may differ from us concerning methods of dealing with
some vital questions which are always before the nation. We do not
always see and understand alike, but we must strive to promote and
preserve the integrity of the nation. In the opening hours of the
French Revolution Mirabeau roused the rabble of Paris, which
whirled the social order into chaos, provoking Madame Roland’s
dying words, “Oh, liberty, what crimes are done in thy name!” We
have Mirabeaus here, but as educated lovers of our country, we must
antagonize wrong, uphold right, and defend the principles of the
Declaration of Independence.
To be patriotic in the true sense is to permeate every question with
Christianity. It was religious liberty that became the mother of
political liberty in England. De Toqueville said, “America’s liberty
considers Christianity the guardian angel of her struggle and victory,
the cradle of her life, the Divine source of her right.” “God and my
country” is the true patriot’s cry. In the words of the almost forgotten
Oliver Ellsworth to the Grand Jury of Savannah in 1779, “Let us rear
an empire sacred to the rights of men; and commend a government
of reason to the nations of the earth.”
 PART III
Relation to God
 CHAPTER XXI
Be a Christian

INTRODUCTION TO CHAPTER XXI

By Samuel Fallows
“Early let me seek Thy favor;
Early let me do Thy will;
Blessed Lord, and only Savior,
With Thy love my bosom fill;
Blessed Jesus,
Thou hast loved me, love me still.”

What is it to be a Christian? It is to be born again. What is it to be

born again? The New Testament gives the answer. He that “believeth
that Jesus is the Son of God is born of Him.” (1 John 5:1). He “that
loveth is born of God.” (1 John 4:7). He “that doeth righteousness is
born of Him.” (1 John 2:29).
Faith, love righteousness and trust in Christ, love for Christ, right
deeds through this faith and love in every sphere of life, deeds of
justice, of mercy, of goodness, of purity, of charity for the welfare of
his fellowmen,—these make a Christian.
Be such a Christian, my boy. Be a trusting, brave, noble, strong,
gentle, pure, loving and self-sacrificing follower of Jesus Christ.
 CHAPTER XXI
Be a Christian

Having fairly embarked on the voyage which ceases not till the port
of eternity is reached, it is an exhibition of good seamanship to take
one’s bearings. By the log is estimated the progress of the vessel; by
the compass, the direction the ship is pursuing, and by the altitude of
the stars the latitude in which it is. In like manner the Moral
chapters indicate the progress boys should make; the Social, the
course they should take, and the Religious, the latitude in which they
should live. Of these the religious are the most essential, for a boy
cannot be truly religious without being moral and social.
When the Rebellion began a young man went to his mother and
said: “Mother, may I volunteer? I argue the matter in four plain
ways. First, my country needs me. Second, she calls me. Third, I am
able to go. Fourth, I am willing. This makes the duty very clear to me,
unless you interpose a veto, and I think you are too good a patriot to
do that.” She gave her consent, and before he departed, she said:
“You know, my son, how much I have wished to see you a Christian.
Now I want you to look at the claims of Jesus exactly as you have
looked at those of your country, simply and honestly, and see if those
same four plain propositions will not lead you into the service of
heaven.” “I’ll think of it, mother,” was his answer, and they parted.
He did not forget his promise. On his first Sabbath in camp he
resolutely set himself to the fulfilment of his mother’s request.
Remembering how he had argued duty to his country, he brought
before his mind in the same manner the subject of the divine claims
upon his heart and life. “Does Jesus want me? Does He call me? Am I
able to serve Him? Am I willing?” With an open Bible, the first three
questions were quickly answered. At the last one he hesitated, but
duty seemed so clear that he dared not falter, and falling on his knees
he gave himself to Christ. The next letter home announced him to be
a Christian soldier.

A CHRISTIAN.
 Many names and titles are significant, but none means so much or
has so much honor attached to it as the word “Christian.” Young
said, “A Christian is the highest style of man.” A Christian is a Christ-
lover and a Christ-worshipper, because he sees God in Christ, and in
the God-man he sees the world’s Redeemer and his own personal
Saviour. He lives in the world, but is not of the world. While in the
world he blesses it by living a godly, upright life. His life work and
influence are a benediction to those among whom he moves. His
purpose is “not to make a living,” as Governor Russell, of
Massachusetts, used to say, “but to make a life.” He is far more
concerned about this than about dying. Death is the least of his
concerns. To live is Christ, and because of this, his life is proof of his
profession.

HOW TO BE A CHRISTIAN.

To become a Christian is not a hard matter, though to live the life

of one is a battle with the world, the flesh and Satan. It is because of
the simple rules laid down whereby one can become a Christian that
many of mature life neglect it. Were it culture, polish, or liberality,
many more would be enrolled as Christians, but because a change of
heart, affections or living is demanded, many cling to their ordinary
life, but at the last deplore it, earnestly pleading for forgiveness and
acceptance by Christ.
Three propositions are given in the New Testament, which,
accepted, will lead any boy to know what it is to be a Christian. First,
repentance: “Jesus came into Galilee, preaching ... repent ye.” (Mark
1:14, 15). Repentance means such sorrow for past conduct as leads to
amendment of life. Second, confession of sin. “If we say we have no
sin, we deceive ourselves, and the truth is not in us. If we confess our
sins, He is faithful and just to forgive us our sins, and to cleanse us
from all unrighteousness.” (1 John 1:8, 9). Third, faith in Christ to
save. Paul said to the jailer, “Believe on the Lord Jesus Christ, and
thou shalt be saved.” (Acts 16:31).
A father and son were once following a perilous path among the
Alps. In passing along they gathered some beautiful flowers, but the
boy, seeing a lovely one waving in the breeze, thoughtlessly hurried
to secure it. His foot slipped and he rolled down an incline until he
was stopped by some tall bushes. With all his strength he seized hold
of the shrubbery and commenced to call for help. The brush grew on
the brink of a yawning abyss. It was impossible for the father to
reach his son with his hands, but he carried a staff on one end of
which was an iron hook. The boy had around him a leathern belt, so
the father reached down and fastened the hook in his girdle. The lad,
however, could not be drawn up without releasing his hold on the
bushes. He could not see his father, nor did he in his fright even feel
that his father held him up; he only heard his voice: “Let go of the
bushes, my son, and I will save you.” To the boy it seemed as though
he would thus hurry himself to destruction, but, relying on his
father’s word, he forsook his hold and was drawn in safety to his
father’s side.
That boy was saved through faith. His firm belief in his father’s
word saved him. Had he persisted in holding on to the bushes
through doubt or hesitation it would have meant his death. To be
saved, every boy must forsake his hold on sin, yield himself to
Christ’s power and mercy, and then will he find to his joy, that Christ
saves to the uttermost. (Heb. 7:25).

THE TIME TO BE A CHRISTIAN.

Solomon said there is “a time to every purpose under the heaven,”

(Eccl. 3:1) and no purpose is greater and no time more important
than when a boy becomes a Christian. Youth is the most important
period of one’s life. It is the time when the faculties are most
susceptible, heart tender and will pliable; the time when tastes and
biases are created, habits acquired and character formed for future
weal or woe. No other period affords greater possibilities of long
usefulness as well as opportunities for peculiar usefulness.
A staff-officer, riding over the field of battle during the Civil War,
was attracted by a body lying under a tree, handsomely dressed, with
a fancy sword. He removed the covering and looked into the sweetest
and handsomest face he had ever seen. It was that of a boy, a
temporary aide to some officer. In his pocket was found a Testament
in which was written “James Simmons, N. Y. My son, ‘Remember
now thy Creator in the days of thy youth.’” (Eccl. 12:1).
That is it, youth. The best and most profitable time for piety.
Jeremiah and John the Baptist loved and worshipped God in their
youth. Josiah knew the Lord at eight years of age. Timothy knew the
Scriptures and loved Christ from a child. Polycarp accepted Christ at
nine, Jonathan Edwards at seven, Isaac Watts at nine, Adam Clarke
at four, William Penn at nine, Matthew Henry at eleven, Robert Hall
at twelve, Augustus Toplady at sixteen, while Joseph Griggs not only
became a Christian very young but wrote the hymn—
“Jesus! and shall it ever be
A mortal man ashamed of Thee!”

when but ten years of age.

Some years ago the “Golden Rule” sent letters of inquiry to
prominent men of the land asking several questions, one of which
was: “At what age did you become a Christian?” It was found on
receiving the answers that out of one hundred and forty-nine less
than one in ten became Christians later than twenty years of age;
twenty-nine were so young that they did not remember; at least
sixty-three professed Christ before they were eighteen. Nine-tenths
of all saved persons are saved before twenty. “Why this?” you ask.
Physiologists say “the cells of the brain change as we grow old until
finally there are ruts in them.” Carlyle explains it thus: “In younger
years the whole mind is, as it were, fluid, and capable of forming
itself into any shape that the owner of the mind pleases. The mind is
in fluid state, but it hardens up gradually to the consistency of rock
or iron, and you cannot alter the habits of the old man, for as he
began he will go on to the last.” To procrastinate in youth is to
jeopardize one’s soul in age.

“REMEMBER.”

“Remember now thy Creator in the days of thy youth,” (Eccl. 12:1)
is the most important exhortation of the Old Testament. Remember
is just the opposite of forget, and the one to remember is the most
exalted and important in the universe, “thy Creator.” Remember His
Word and believe it, for the promise is: “He that heareth My Word
and believeth on Him that sent Me, hath everlasting life.” (John
5:24). Remember His work and accept it, for He was made to “sin for
us, Who knew no sin; that we might be made the righteousness of
God in Him.” (2 Cor. 5:21). Remember His love and return it, for
“herein is love, not that we loved God, but that He loved us,” (1 John
4:10) and “gave His only begotten Son, that whosoever believeth in
Him should not perish but have everlasting life.” (John 3:16).
Remember this Creator now. Only one time is mentioned in the
Scriptures at which eternal life is promised. Cowley sang of an
“everlasting now,” but there is no such time, and no wise boy desires
that there shall be. There is an eternity of the past, an eternity of the
future, but “now” is limited to now. “Behold, now is the accepted
time; behold, now is the day of salvation.” (2 Cor. 6:2). And this—
“Opportunity lost, however deplored
Is eternity gone and is never restored.”

After the overthrow of the French empire by the Germans, Prince

Napoleon joined the English army, and went among the savage tribes
of South Africa. One day while with a squad of soldiers outside the
camp, he was warned by one of the company, who said: “We had
better return. If we don’t hasten we may fall into the hands of the
enemy.” “Oh,” said the Prince, “let us stay here ten minutes and
drink our coffee.” Before the ten minutes had passed a company of
Zulus came upon them and in the skirmish the Prince lost his life.
His mother, when informed of the facts, said, “That was his great
mistake from boyhood. He never wanted to go to bed at night in
time, nor to arise in the morning. He was ever pleading for ten
minutes more. On this account I sometimes called him ‘Mr. Ten
Minutes.’”
The habit of delay was to him what it is to thousands who pass the
tenth, fifteenth and twentieth milestone without accepting Christ, his
ruination. Such delay weakens the force of the will, unfits for action
when opportunity presents, robs the present and blasts the future.

REASONS FOR BEING A CHRISTIAN IN YOUTH.

 “If youth,” as Ruskin said, “is essentially one of formation,
edification, instruction,” then is it the proper time to be a Christian,
for “There’s never an hour of it but is trembling with destinies, not a
moment of which, once past, the appointed work can ever be done
again, or the neglected blow struck on cold iron.”
A boy should be a Christian for the sake of safety. As one grows
away from boyhood, he grows away from the opportunities for
salvation. He is liable to drift. There is a point on Niagara River
called “Past Redemption Point,” where the current is too strong for
human power to battle against. Manhood and age have no special
promise like “they that seek Me early shall find Me.” (Prov. 8:17).
A boy should be a Christian that he may be happy. To properly
remember God, to lose oneself in adoration of Him, is to be like Him,
to be “holy as He is holy,” (1 Pet. 1:15, 16) consequently it is to be
happy as He is happy. Holiness and happiness are inseparable. True
love and true joy come together.
A boy should be a Christian to be useful. God’s promise to
Abraham was: “I will bless thee, and thou shalt be a blessing.” (Gen.
12:2). When Joseph dwelt in Potiphar’s house, we read: “The Lord
blessed the Egyptian’s house, for Joseph’s sake.” (Gen. 39:5). And
the boy who loves Christ will be a rich blessing in many ways to
others.
A boy should be a Christian because it is right. Right is better than
might, and worth more than gold. “In the matter of right,” said
Martin Luther, “I will take my stand, I yield to none.” “I’d rather be
right than President,” said Henry Clay. The only proper life to live is
the Christian life. It is sweet on earth, which makes heaven the
sweeter.
My boy, be a Christian. “All men at the head of great movements,”
said Mr. Gladstone, “are Christian men. During the many years I was
cabinet officer, I was brought into association with sixty master
minds, and all but five were Christians.” To be a Christian is the most
satisfactory, honorable, influential course to pursue. It gives
unspeakable joy in life, peace in death, and glory hereafter.
Remember then—
God wants the boys—all kinds of boys—
To love Him, serve Him, do His will;
He wants those boys that make much noise,
And those who keep so very still.

God sent His Son to die for all,

And on the cross His blood was shed.
No boy need spurn His gracious call
Or of the “Bread of Life” be fed.

Then why not to this Christ now flee

And on His mercy cast thyself?
O hear His words: “Come unto Me,”
And answering back, “I yield myself.”
 CHAPTER XXII
Be Prayerful

INTRODUCTION TO CHAPTER XXII

By A. C. Lorimer, D. D.
When I was a youth, I loved to climb Arthur’s Seat early in the
morning, for the purpose of breathing the air borne to our inland
home from out the mighty seas; and so it is well for every lad each
day to seek the summit of highest faith, that he may hold
communion with God; that he may inhale something of the
atmosphere of eternal worlds.
It is said that Daniel opened his window when he prayed, toward
Jerusalem. It was doubtless that he might think of the hallowed city.
Better far, however, to open the windows of the soul toward heaven,
not merely that we may think of the hereafter, but that the invisible,
at the present moment, may stream into our being.
Prayer is the soul’s voice. It is the aspiration of the highest part of
man. It is the sublime confidence, that, though foreign, still it is
within the range of possibility to hold communion with the Creator
of us all. Every time we bend the knee before the Throne of Grace, we
declare our belief in our own God-likeness and in our indestructible
affinity for the divine. Therefore, pray, my boy, and keep on praying;
for it is the true Jacob’s ladder that will lead you, round by round, up
to the Everlasting Throne.
 CHAPTER XXII
Be Prayerful

A noble characteristic of any boy is love for prayer. Too many

consider common amusements more important than going to some
chamber or church to commune with the loving Saviour. They are
not. The former bring transient happiness and with it a weary frame,
the latter an unexplained peace, rest of body and soul. The former
gratifies for a time without changing selfish desires or promoting
lofty aspirations, the latter moulds into the image of the Christ-
character.
Prayer is not simply a petition or mere forms of a vain repetition.
It is a turning of the life toward God, an opening of the soul toward
heaven, a reaching out of one’s being with desire to appropriate the
Divine. It was a shoemaker’s shop, with bench, half-worn shoes and
not a few boxes. The proprietor was an old friend of the writer, so
deaf that few could converse with him. Visiting the village in which
he lived, I called upon him. After a chat by means of the lips, signs
and paper, he asked if I would like to hear his son play the harp.
Assenting, he called the lad, who brought a beautiful instrument.
Placing his feet on the pedals, he ran his fingers over the wires and
melodious music resounded. When it stopped, I turned to the old
man, and asked by signs: “Did you hear it?” Shaking his head, he
answered, “Not a note.” Then stepping to the stove, he picked up a
long black poker, and putting one end between his teeth and the
other on the harp, he motioned the boy to play. The lad’s fingers
moved as if by magic. The room was flooded with music and passing
pedestrians stopped to listen. Suddenly the musician stopped. I
propounded the same question: “Did you hear anything?” He
laughed and answered: “All that you heard, I heard.” How? That
dirty poker was changed into a conductor of sound. It brought harp
and listener in contact with each other. In like manner prayer brings
God and petitioner into near relation. What one pleads, the other
hears, and answering, God makes music in the soul.

GREAT MEN GREAT IN PRAYING.

 Many great men have been great in praying. Men of the Bible, men
of science, history and influence have been firm believers in it.
Charles Simeon and Joseph Alleine spent from four to eight o’clock
in the morning waiting upon God. Wesley gave two hours a day,
Luther the first three hours. Samuel Rutherford was up at three in
the morning to give God praise. Archbishop Leighton was so much
alone with God that he seemed to be in a perpetual meditation.
Bishop Ken was so much alone with God, that his soul was said to be
God-enamored. David Brainerd prayed hour after hour. John
Fletcher spent whole nights in prayer, John Welsh often seven to
eight hours a day. When the hour for devotion arrived, General
Gordon displayed a white handkerchief outside his tent, and as long
as it remained, no one was allowed to disturb him. General Stonewall
Jackson’s servant used to say that when his master got up several
times during the night to pray there was to be a battle next day.
Abraham Lincoln acknowledged that he had been driven to his knees
“by the overwhelming conviction that he had nowhere else to go.”
Gathering his pupils about him at the opening of his school, Agassiz
said, “It is becoming that we first of all bow in the presence of the
Infinite One.” Well might these exclaim with thousands of others:
“For this cause I bow my knees unto the Father of our Lord Jesus
Christ.” (Eph. 3:14).

PRAYER MAKES A BOY BRAVE.

During the Civil War a dozen soldiers were playing cards one night
when one exclaimed: “What on earth was that?” Listening attentively
a moment, he heard a low, solemn voice, coming from the next tent,
occupied by several recruits, who had that day arrived in camp.
Accompanied by the others he approached the tent on tip-toe. “Boys,
he’s praying, or I’m a sinner!” he roared out. “Three cheers for the
parson!” shouted another man of the group as the prayer ended.
“You watch things for three weeks. I’ll show you how to take the
religion out of him,” said the first speaker, laughing. He was a large
burly fellow, prominent in mischief. The recruit was a slight, pale-
faced boy. During the next three weeks the latter was the butt of the
camp. Then several of the boys, conquered by the lad’s gentle
patience and uniform kindness, begged the others to stop annoying
him. “Oh, the little ranter is no better than the rest of us!” answered
the ringleader. “When we get under fire, you’ll see him run. These
pious folk don’t like the smell of gunpowder. I’ve no faith in their
religion.”
In a few weeks, the regiment broke camp, marched toward
Richmond, entered the Wilderness and engaged in that fearful battle.
The company to which the young recruit belonged had a desperate
struggle. The brigade was driven back, and when the line was formed
behind the breastworks they had built in the morning, he was
missing. When last seen, he was surrounded by enemies, fighting
desperately. At his side was the brave fellow who had made the poor
lad a constant object of ridicule. Both were given up as lost. Suddenly
the big man was seen tramping through the underbrush, bearing the
dead body of the boy. Reverently he laid the corpse down, saying as
he wiped the blood from his own face: “Boys, I couldn’t leave him
behind, he fought so. I thought he deserved a decent burial.”
During a lull in the battle the men dug a shallow grave and
tenderly laid him to rest. Then, as one was cutting the name and
regiment upon a board, the big man said, with a husky voice, “I guess
you’d better put the words ‘Praying soldier’ in somewhere. He
deserves the title, and maybe it’ll console him for our abuse.”
There was not a dry eye among those rough men as they stuck the
rudely carved board at the head of the grave. “Well,” said one, “he
was a praying Christian soldier if ever there was one! And,” turning
to the ringleader, “he didn’t run, did he, when he smelt gunpowder?”
“Run!” answered the big man, his voice tender with emotion. “Why,
he didn’t budge an inch! But what’s that to standing for weeks our
fire like a man, and never sending a word back! He just stood by his
flag and let us pepper him, he did; and boys, I have made up my
mind if prayer will make a man as bold, as loving, as forgiving, as
good, as it did that boy, I’m going to resort to it. It did him good and
it’ll do me good,” and as the other fellows bent their heads he prayed
for forgiveness and salvation, at the close of which the others said,
“Amen!”

HOW TO PRAY.
 Prayer is a blessed privilege, a vital necessity, an imperative duty,
but many there are who do not know how to pray. A mere repetition
of words or reading prayers is not prayer. Prayer may be a sigh, a
tear, a groan, a bungling utterance, “a true wish” as Phillips Brooks
used to say, “sent God-ward.” It is—
“the soul’s sincere desire
Uttered or unexpressed.
The motive of a hidden fire
That kindles in the breast.”

Prayer should always be accompanied by thanksgiving and

confession. David said, “I will confess my transgressions unto the
Lord,” (Psalm 32:5) and Paul exhorts, “Giving thanks always for all
things unto God and the Father in the name of our Lord Jesus
Christ.” (Eph. 5:20). Prayer should be offered in faith. Faith is taking
one at his word and thus Christ said, “If ye ask anything in My name,
I will do it.” (John 14:14). To pray without faith, the Bible informs us,
is sin, and this is the reason why many of our petitions are not
answered. They are like those blossoms which fall blasted to the
earth. They had a certain beauty and fragrance, but for want of some
conformity to the law of growth, they never developed into fruit.
They are, as Mrs. Stowe says, “drowsy mutterings of unawakened
souls, talking in their sleep.” But real prayer is always answered.
There may be delays as in Daniel’s petition, or tests to strengthen
faith, as when Jesus said to Jairus, “Fear not, only believe,” (Luke
8:50) for what Christ has promised, He will certainly perform.

WHEN AND WHERE TO PRAY.

Prayer should be our vital breath. As with Paul, it should be

“without ceasing,” (Thess. 5:17) our inward desire continually going
up to God. It should be the first exercise of the morning and the last
in the evening. “It is the first hour of the morning,” says a Chinese
proverb, “that gives color to all the others that follow.” Louis XIV.
was awakened every morning with the words: “Arise, Monsieur, you
have great things to do to-day.” But how could they be done properly
without God’s blessing, and how could God’s blessing be secured
without asking? When Arthur P. Stanley the first night went to the
dormitory at Eton School where he with others had to sleep, he knelt
down to say his evening prayers. Instantly a shower of pillows and
shoes flew about him. He prayed on. “Stanley,” said one of the boys
next day, “I ought to have done as you did. I haven’t said my prayers
at night because I was afraid of the ridicule of the boys.” It was not
long before a score of them followed his example. President Garfield
when a boy undertook with a number of students from Williams
College to climb Mount Greylock. Their plan was to spend the night
on the mount. Seated around the campfire they sang college songs
and told stories all the evening. At bedtime Garfield took a
Testament from his pocket and said: “Boys, it is my custom to read a
chapter in the Bible and have prayer before going to bed. Shall we
have it all together?” and though it seemed rather hard to do,
Garfield did it and all were blessed for it.
Two places are mentioned in the Scriptures where a boy should
pray. Those places are the Christian’s arsenal. One is the secret
chamber where communion is sweet because undisturbed, the other
is the church, where in unity believers call upon God. To the devout
boy both are the “Holy of Holies” where God delights to meet him at
the “Mercy Seat.” Blessed is the place of public prayer! Never neglect
it. But the place of secret prayer is still more blessed. Cyprian would
resort to a shady arbor where “no profane listener may hinder my
musings, and no domestic clamor drown them.” Robert Murray
McCheyne declared, “It is my noblest and most fruitful
employment.” Henry Martyn mourned at the close of his saintly life,
that he had devoted “too much time to public works and too little to
private communion with God.” God said, “In quietness and in
confidence shall be your strength.” (Isa. 30:15).
O, the sweetness of one hour at the feet of Jesus. It changes
dispositions, purifies character, overcomes obstacles, imparts
strength to resist temptations, yes, it makes life worth living.
“We kneel, and all around us seems to lower;
We rise, and all, the distant and the near,
Stands forth in sunny outline, brave and clear;
We kneel, how WEAK! we rise, how full of POWER!”

WHAT PRAYER WILL DO.

 More things are wrought by prayer than anything else. It opens
heaven’s door, commands God’s ears to hear and hand to bestow,
makes darkened clouds withdraw, climbs—
“the ladder Jacob saw,
Gives exercise to faith and love;
Brings every blessing from above.”

Prayer has brought rain a thousand times since Elijah prayed,

softened kings’ hearts since Nehemiah won the sympathy of
Artaxerxes, shut lions’ mouths since Daniel was cast into their den,
given victory to armies since Amalek was discomfited, liberated
captives since Peter was delivered from prison, abated storms since
Christ said to wind and wave: “Peace! be still,” (Mark 4:39) arrested
hundreds of prodigals since Monica prayed for her wicked son
Augustine, restored health, supplied food, transformed lives and
revolutionized nations.
Prayer is the means that aids to keep in subjection the sinful
tendencies of human nature and though living in the world keeps us
separated from it. It is the means to aid us in winning souls for Jesus.
John Wesley was once riding along when he saw a man kneeling by
the wayside breaking stones. “Ah,” cried he, “I wish I could break the
hearts of some who hear me as easily as you are breaking those
stones.” The man looked up and said, “Did you ever try to break
them on your knees?” Pleading with God should always precede
pleading with souls to come to God, and it is a question whether
anyone has ever come to God who was not earnestly prayed for by
some one.
Prayer will also make a death-bed glorious. “Yea,” saith the
Psalmist, “though I walk through the valley of the shadow of death, I
will fear no evil, for Thou art with me, Thy rod and Thy staff they
comfort me.” (Psalm 23:4). A boy was dying at midnight. He had just
awakened from sleep. “Is it near morning?” he asked his father. “It
soon will be,” replied the parent. “Do you think I will get well?” “I
hope so,” sobbed the father. There was a long silence, then the lad
moved restlessly on the pillow and said, “Hold me up, father, I want
to say my prayers.” Then, clasping his hands together, he repeated:
“Our Father, which art in heaven, hallowed be Thy name, Thy
kingdom come. Thy kingdom come. I can’t remember, father! I can’t
remember!” A short time after the morning light stole into the room.
“Forever and forever,” uttered the boy and he fell asleep in death.
O, my boy, cultivate this glorious habit of praying. To be intimately
acquainted with God cheers, inspires, ennobles. An old man lay
dying. His sons stood around his bed to receive his parting counsel,
and his last blessing. He had fought the battle of life successfully;
and, so far as this world was concerned, had come out crowned with
honors. He had been a pillar in the church; his seat had never been
vacant, his hand always freely opened to every call. For months he
had been laid aside by a lingering and painful illness. “Boys,” he said,
“God has been good to me. He has given me many friends, good
children, a loving wife, and abundant means; but what I thank Him
for now most of all is this long and painful illness. Without it my life
would have been a failure; I should have gone hence without
knowing as I should the only One worth knowing. Boys, whatever
you do or whatever you leave undone, whether you make another
cent of money or not, take time to get acquainted with God.” That’s
it. So acquainted with Him that with simple words you can breathe
your heart’s desire. So acquainted as to talk with Him the first thing
in the morning and the last in the evening. So acquainted as to seek
His favor in everything and to praise Him for anything.
“Implore His aid, in His decisions rest,
Secure, what’er He gives, He gives the best.”
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