What to Do When Sellers are in Control of the Market
By
Michael Cintolo, Vice President of Investments, Editor of
Cabot Market Letter and
Cabot Top Ten ReportFrom
Cabot Wealth Advisory 1/19/08
The you-know-what really hit the fan this week–not only did the major indexes continue to slide, but leading stocks were absolutely obliterated, with just about every sector being taken down. Moreover, the drops generally came on huge volume, telling you loudly and clearly that the sellers remain in control.
So what should you be doing? Below are some answers to a few FAQs in recent days:
Q. I have a ton of cash sitting around, and have avoided most of this decline. Should I do some bottom fishing?
A. We’d either sit tight, or do just a little nibbling–but nothing substantial at all. Sure, things seem like they can snap back–and, in fact, we do believe some type of rally can occur in short order–but you could have said that a week or two ago as well. It’s best to just hold your cash and let the market find at least some type of temporary bottom.
Q. I have a bunch of cash, but still hold a few stocks that are getting crushed. What should I do?
A. First, you should watch your loss limit–there’s no reason to break this rule, even though you might hope the stocks will bounce back. If your loss limit in a particular stock hasn’t been tripped, and you already have a ton of cash, we’d try to hold on and see if the stock and the market can catch a bounce.
Q. I’m heavily invested–help!
A. Don’t panic…even though you probably want to. We suggest you take emotion out of the game and sell a few holdings here. Which ones? Simply start with the stocks you have the biggest losses in (or smallest profits) since your initial purchase–sell some here, raise cash, and then see what next week brings. Another option is to sell half of a few stocks, hold the cash, and then try to sell the rest on a bounce.
Q. Should I be shorting stocks here?
A. Shorting stocks is a tough job in any environment–your timing must be far more precise on shorting, because fear is a more intense emotion than greed, and thus the downside tends to be sharper and happen more quickly. In any case, while many recent breakdowns offer shorting opportunities, remember that (a) you only want to short after a multi-week rally, which we haven’t seen, and (b) the big money is made is buying leaders in a bull market, and shorting is unlikely to add much, if anything, to your portfolio.
This waterfall decline has certainly raised the level of worry and pessimism in the market, which is a good thing. In fact, as we write this, our data shows that the NYSE and Nasdaq have a combined four stocks hitting new 52-week highs. Four! That is the lowest total we’ve seen in years, if not ever. We seriously wouldn’t be surprised if the Dow bounced 500 points in the days to come…but we’re not predicting that. We would just continue to play defense, hold plenty of cash, and take things day by day.
Remember, the goal at this point is to get from today to the beginning of the next bull market with as much capital as you can. The more capital you keep, the more you can make once the bear runs its course.
Also, not to play the role of Mr. Sunshine, but declines like these have in fact happened before–and the market and the economy have come out of them in fine shape. So while it’s scary, you shouldn’t stick your head in the sand; stick to sound rules, and you’ll be in good shape to ride the next upmove.
At this point, selling is as much of a money-management decision (how much cash you have, how big your loss is, etc.) as anything, since just about every stock looks crummy by now.
Today, our broad market view continues to be negative, and we believe it’s best to practice patience and wait this storm out.
More Stock Investing advice:
Two Lessons from Stock Performance Champs 2/11/10
Paul Goodwin finds there's no substitute for buying well and a supportive market.
Cabot's Position on Shorting Stocks 1/27/10
Cabot Market Letter Editor Michael Cintolo explains Cabot's position on shorting stocks.
Why the Lost Decade is Good News for the Future 12/16/09
So-called “lost decades” for investors in the past have usually ushered in powerful new bull periods.
Ten Tips for Your Investing Toolkit 12/10/09
These tips will set you on the path of investing success.
Three Short Lessons for Investors Just Getting Started 12/4/09
These three short lessons will help you get started on the right track.
Three Characteristics of Winning Investors 11/26/09
Here are three particularly important traits of successful investors.
The Three Most Important Investing Lessons 11/6/09
Timothy Lutts focuses on the three most important lessons for successful investing.
Dispelling Investment Myths 10/15/09
Mike Cintolo busts five common investment myths.
A Simple Way to Assess Your Risk 10/1/09
A "position sheet" will give you a great view of your portfolio's risk and rewards.
Three Reasons to Own Individual Stocks 6/22/09
Paul Goodwin offers three reasons to invest in individual stocks over mutual funds.
Guidelines on Handling Earnings Gaps 4/22/09
Here are four guidelines to help you profit from earnings gaps.
How to Handle Earnings Season 4/19/09
Michael Cintolo offers three options for handling earnings season.
Three Clues to Determine the Market's Next Move 1/22/09
Here are a few clues to watch, so you can be one of the early ones on board the next move...whether it's up or down.
Advantages to Being an Individual Investor 1/12/09
Three ways individual investors have advantages over mutual funds.
Dispelling Six Common Investing Myths 7/3/08
Avoid some of what doesn't work in the stock market and improve your returns.
Listen to Your Stocks 4/23/08
A big earnings gap lower, especially after a stock has enjoyed a huge advance, often spells the end for a stock's up cycle.
Practice Patience Early in a New Bull Market 3/29/08
Considering the risk that you might buy at a false bottom, we don't think the risk is worth the reward.
Tips on Handling Market Stress 3/15/08
Having a system will help you manage market stress especially when the market's most volatile.
How to Invest During a Recession 1/17/08
Timothy Lutts is watching charts and finding bargains.
On Improving Your Personal Side of the Investing Equation 2/25/08
Eight ideas to help you improve your personal moneymaking habits from "New Market Wizard" by Jack Schwager.
SNaC to Keep Your Portfolio in Shape 2/11/08
SNaC stands for Story, Numbers and Chart, and it's the method Paul Goodwin uses to pick stocks for the Cabot China & Emerging Markets Report.
Be Ready to Buy when Market Leading Stocks are on Sale 2/1/08
The worse the economic chaos gets…and the lower the market goes…the better you like it.
Why Recession Really Doesn't Matter to Investors
Should you wait until the recession ends before you invest? No—because all stocks trade on expectations of the future.
Technical Analysis: Free Yourself from Why
The best investors generally free themselves from the question of why a stock or the market is going up or down.
Keeping Your Balance during Market Turbulence
If you're an investor, you're worried. That's what you get paid for. Here's something to keep in mind during turbulent times.
Growth or Value Investor? Depends on your Investing Temperament
Which strategies are best for you? It’s all a matter of temperament.
Are you a Growth Investor or Value Investor?
The most important thing for you to understand about investing in stocks is yourself.
Know Thyself. Match your Investing System to your Personality
What really matters is matching the system's pros and cons with your own personality.
10 Things to Know About Investing
After 22 years in the business, Timothy Lutts shares 10 things he knows.
Stock Prices: Important and Nothing
It's value and opportunity, not the price of the stock. And then there's December...
Follow Your System
Your first task is to clearly identify your system; your second, and most difficult, is to follow that system.
Fundamental or Technical Analysis: The Perils of Purity
Following either of these investing styles exclusively can be risky for your total portfolio.
Wise Words from Warren’s Wife: Don’t get too attached to the outcome
People have been trying to follow Warren Buffett’s investing advice for years but maybe his wife’s advice can also be helpful.
A Stock, Like Love, Thrives on Romance and Dies on Statistics
If the RP line falters over a period of weeks, you’ll know the romance has ended.
Markets Are Never Wrong; Opinions Are
A rewarding strategy is to identify the current trend and stay with it as long as it persists.
Run, Sheep, Run
By watching investor sentiment and adjusting your investments accordingly, your investment results are sure to improve.