Focus On Solid Rules
The market has decided to extend the fireworks long after the 4th
of July! Last Friday’s trade saw the major averages post a huge rally. When
trading resumed Monday, a heavy-volume, three-day sell off ensued.
In a nutshell, the Bear Market drags on.
We may be carving out a
double-bottom base in the market, with the September lows marking the first
bottom; or we may be at the beginning of another leg lower. Either way,
investors should be following a strategy that offers protection for their
capital, such as cash or cash equivalents during bad times, or a passive
investment strategy such as dollar-cost averaging into professionally managed
vehicles. The important thing to remember is not to let the stock market affect
your finances and your life in a negative way.
As I watch the market, I am looking for solid evidence that institutions, the
real “market movers,” are buying stocks again. The first sign of this will be
the same thing preached day in day out by Investor’s Business Daily: One of the
major averages will begin a rally on day 1. Four or more days later, the market
will need to rally at least 2% on volume that is heavier than the previous day.
When this occurs, I will look to leading sectors and stocks for confirmation
that the market is indeed headed higher.
At the current time, very few stocks are holding up very well under the market’s
intense selling. The key is to look around and find a company or an industry
that is declining less than the market, or more specifically, the S&P 500.
As I write this at about 3pm EST on Thursday, July 11, the market has been
trying to mount a rally. Yet I am noticing the leading groups for the day all
hail from very beaten-up sectors looking for a mere bounce. Groups such as Fiber
Optic Networks, Medical-Genetics, Telecom-Wireless Services are leading the day.
Unfortunately, most of these types of groups have such beaten-down stocks that
the rally will most likely be short-lived due to so much overhead supply. This
is why it is important to have strong leadership that can “pull” the market
higher.
Take Digital Lightwave
(
DIGL |
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PowerRating), for example. The stock has so many “losing
shareholders” to battle through, the recovery may consist of many advances and
pullbacks, which could take years or even decades to accomplish before this
stock could provide market leadership.
Former high-flier Affymetrix
(
AFFX |
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PowerRating) is another example.
Stocks like Sprint
(
PCS |
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PowerRating), AT&T Wireless
(
AWE |
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PowerRating) and
Nextel
(
NXTL |
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PowerRating)) look like
they have fallen off a cliff too many times to count. Each fall left
shareholders hanging onto heavy losses that they are waiting to recover. As
these stocks inevitably bounce, they will almost immediately and continuously
face selling pressure.
Solid investment plans and knowledge are what get investors through tough
times such as this. I am a growth investor because I believe it is the best
strategy to follow and not only profit on in the good markets, but preserve
capital during the bad markets. When I begin to see the market firm up, I will
begin looking for companies with sound fundamentals emerging from solid
technical, base patterns.
It is very important not to listen to the noise of the market and get thrown
off. The constant chatter in the media about corporate irresponsibility or
threats of terrorism, are all reflected in the market itself. Things were bad for
the U.S. after 1929, and again in the 1940s, but eventually a roaring bull
market took off in the 1950s, not to mention large rallies in the 1930s and
1940s. If we as investors focus on solid rules for what has worked in the past,
and do not get distracted, things will work out for us once again. The question
is not if it works, but when it will work.
Have a great weekend,