It’s All about Trade Location — 2010 Investment Theme Part 3

Location, location, location may be the mantra for sound real estate investing, but did you know that the principle of location also can be applied to equity investing? I am speaking here about what I call “trade location,” which simply refers to establishing a good entry point for any equity position you enter into.

What do I mean by good trade location? Well, this refers to buying a stock, mutual fund or exchange-traded fund (ETF) before it’s gone too far above both its short- and long-term moving averages. To illustrate what I mean by a good trade location, let’s take a look at the chart below of the SPDR S&P 500 (SPY).

As you can see, SPY has traded above both its short-term, 50-day moving average (blue line), as well as its long-term, 200-day moving average (red line) for quite a while. This bullish trend is good if you already own this fund, but if you are looking to enter into SPY, your trade location is not very favorable. Favorable trade locations in SPY would have been in late March, early July, and early November, when the fund initially breached its 50-day moving average.

Now, in contrast to SPY, we have the SPDR Gold Shares (GLD). This gold fund was on a rocket ship ride higher from September to December, but then the value of gold pulled back sharply.

That pullback below the 50-day average, and the subsequent rise of GLD above its 50-day mark, is an example of good trade location. This is because you are buying a fund that has yet to become overextended. This strategy also gives you a good chance of buying a fund that’s breaking out toward a sustained run higher. In fact, subscribers to my Successful Investing advisory service just received two new buy recommendations in funds with this outstanding trade location model.

To be certain, just because you have a good trade location doesn’t mean you are going to make money in a position. It also doesn’t mean you can’t make money with an unfavorable trade location. But having a good trade location is a great way to put the odds of winning in your favor.

Finally, good trade location is part of what I am calling the “equity endgame,” which also happens to be Part 3 of my series on Investment Themes for 2010. Playing the equity endgame, i.e., knowing how to get into this market when the current bull stops stampeding, is going to be one of the keys to your success in 2010 — and it all starts with good trade location.