The Dividend-Alarm strategy follows specific rules and approaches. The more one orientates oneself to this, the more successful is the long-term performance. It is important to understand that the Dividend-Alarm consists of the interplay of two key points – the phases and the signals.
A buy phase is something else like a buy signal. Both must not necessarily occur at the same time, but if so, then the opportunity-risk ratio, especially for long-term oriented dividend investors, is much better. We would like to show you which combinations of phases and signals there are and how best to act in each case in today’s article.
The two main points of the Dividend-alarm strategy
Not only Dividend-Alarm Members can use the scheme presented today to quickly see what options for action there are. Even non-members can better understand the Dividend-Alarm strategy.
Before we start with the scheme of different phases and signals, we would like to briefly explain the two terms of the Dividend-Alarm strategy.
Dividend-Alarm indicator -> phases of the market
The Dividend-Alarm Indicator monitors the market and identifies buy phases (green), sales phases (red) and a neutral phase (yellow). The Dividend Alert Indicator tells you when the market (according to the Dividend-Alarm Strategy) is in a rare overvaluation or undervaluation. Only with the activation of one of the two phases, the time has come to make transactions – either as a buyer or as a seller.
Dividend-Alarm signals -> signals of the stocks
The Dividend-Alarm signals monitor the individual dividend stocks. There are buy signals (green) as well as sell signals (red). The signals show you which dividend stocks could be eligible for transactions based on their current valuation.
9 possible scenarios
Now I want to come to the presentation of the schema, with its nine possible scenarios. The overview shows the three possible phases of the dividend-Alarm indicator in the upper area. A buying phase, a sales phase and the neutral phase.
The lower part shows the three possible signals of a stock. Crucial here are the buy signals and the sell signals. Outside these two main signals, stocks are in a neutral frame and do not generate a signal. The neutral phase and the neutral signals (= no signal) dominate the other two phases and signals in terms of time.
A buy phase is when the Dividend-Alarm indicator has reached a value below 30%. The entire stock market is at a low point here. Many stocks generate buy signals and very few sell signals. This market phase should be used for long-term entry. No shares will be sold during this phase.
Indicator values between 30% and 70% are referred to as the neutral market phase. The valuations of individual stocks are balanced and market volatility is significantly lower than in the other two indicator phases. The neutral market phase should be used as a maximum for occasional optimizations and for the cash buildup.
We speak of a sales phase when the indicator exceeds 70%. The stock market has reached a level where most of the stocks have achieved high valuations. Many stocks generate sell signals and very few generate a buy signal. This phase of the market was to be exploited through the occasional reduction in cash position. No shares will be bought during this phase.
In each of the three indicator phases, a single stock can generate different signals. Thus, the market can indicate a buying phase, but at the same time generate a sell-signal. How do you deal with it in this case?
The lower part of the overview therefore lists buy signals, sell signals and the option no signal. This results in nine different scenarios for a single stock.
Depending on the phase in which the Dividend-Alarm indicator is located and which signal a stock generates, there are different ways to trade. Only the right interaction of phases and signals makes a long-term investment profitable.
I would now like to discuss the nine individual scenarios in more detail. As always, there is no right and no wrong. I only describe here how I would proceed in principle. Which does not mean that everyone can do it differently. Everyone has to estimate the chances and risks of an investment.
Dividend-Alarm indicator buy phase
buy phasebuy signal If a stock generates a buy signal during a buy phase, then this is exactly the scenario we were waiting for. A better situation cannot happen in practice. There is uncertainty, the market is down and a stock we are interested in has now reached a very strong undervaluation. Almost exclusively, in this very scenario, I buy my long-term and qualitative deposit securities.
buy phaseno signal Same market situation as in the first example, but our stock does not generate a signal. This means our stock is not as cheap as it used to be in the past – so it has not yet turned on a buy signal. At the same time, it is not expensive because it does not generate a sell-signal.
In this case, it is time to wait, because in order to trigger a buy signal, the stock still has the potential to further develop price losses. Especially on several consecutive panic-like market days, the buy-signal can be activated at short notice. In the worst case, no buy signal is generated during the current buying phase. Then you should accept this, focus exclusively on buy a stock with buy signal and hope for a better start on the next buy phase.
buy phasesell signal Imagine this situation times before. The market is low and a stock in your portfolio is historically so expensive that it generates a sell signal. Exactly such stocks you need as compensation in the depot, if the markets smear. There are always companies and industries that develop counter-cyclical.
Since we are currently in a buying phase, I would not sell or buy a stock with a sell signal! Otherwise, you would get rid of your stable depository pillar, because your account is currently doing just fine because of such stocks. As soon as the market recovers, defensive stocks will recover from their high stock prices. Therefore, making a purchase at this point makes no sense.
Dividend-Alarm indicator neutral phase
neutral phasebuy signal The neutral phase outweighs in terms of time the Dividend-Alarm indicator. If a stock generates a buy signal during this phase, it should be checked if there is a valid reason for doing so. Does the company have specific problems, or does it affect a whole industry? How does the company stick to its dividend policy?
In this neutral phase, I would only in exceptional cases buy a few shares or increase existing deposit positions. A good option would be a depot optimization. This would be the case if at the same time a deposit value within the same industry generated a sell-signal. Rebalancing options allow you to exchange individual shares and multiply your dividend income. An example of this can be found in the paragraph of the sell signal, because the starting point for a rebalancing option should always be a stock in the depot with a sell-signal.
neutrale phaseno Signal The market is very neutral and not very volatile. There is no clear trend towards a bull market or a bear market. Our stocks also generate no signal. Neither a buy signal nor a sell signal. Obviously, our stock is valued fairly, which historically is not uncommon. There is no need for action here.
neutral phasesell signal Rebalancing options are characterized by high optimization potential. Two stocks from the same industry generate different signals. For example, a deposit value is expensive, hence the sell-signal, and only offers a dividend yield of 2.0%. Alternatively, there is currently one stock within the same industry that is undervalued and generates a buy signal. In addition, this stock offers a dividend yield of 4.0%.
After a positive review of both values, you could make an exchange in the depot. We sell the expensive stock and buy the stock with the buy signal. All in all, we doubled our dividend income from this one position.
Dividend-Alarm indicator sell phase
sell phasebuy signal Similar to the buy phase, we are currently in another extreme market phase. However, things are much more civilized here than during the panic buying phase. The market has reached a very high rating and most market participants do not even notice it. While many stocks are really expensive, you have a stock in the depot that generates a buy signal. It is cheap as it is rare. Nobody is currently interested in her. Instead of taking this as a unique opportunity, you should get to the bottom of the fact. Sometimes there are problems that only concern the company, or the industry does not have a good position at the moment.
Since we are currently in a sales phase, I would not buy or sell a stock with a buy signal! Imagine, the market is going into reverse soon. The probability (seen from the top) is relatively high. What do you think will happen to the stock price of your stock? Why should the market buy this stock just then? The risk would be clearly too high for me. Now focus solely on the stocks in your depot that generate a sell signal.
sell phaseno signal Same market situation as in the first example, but our stock does not generate a signal. This means that our stock is not as expensive as it used to be in the past – so it has not yet activated a sell-signal. At the same time, it is not really cheap because it does not generate a buy signal either.
In this case, it is necessary to wait, because in order to trigger a sell-signal, the stock still has potential to make further price gains. It can also happen that the stock does not generate a sell-signal during the current sales phase. Then you should accept this, focus exclusively on stocks with a sell-signal and hope for a better exit in the next sale phase.
sell phasesell signal When a stock generates a sell signal during a sell phase, this is exactly the scenario we were waiting for. A better situation cannot happen in practice. There is peace and joy in the market. Increasingly high price targets are being issued and many market participants are daily posting new highs in their deposits. During this time, one stock from our custody account generated a sell-signal. In the meantime, it has reached a historically high level. As described in detail in my sales phase workflow, I focus solely on finding out if and at what price I can sell my affected stocks with sell signals.
With the single 9 scenarios, you now know when you should deal with your depot. The scheme also shows how simple the Dividend-Alarm strategy basically works.