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.
Our broad market view continues to be negative, and we believe it’s best to practice patience and wait this storm out.
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