Monday, August 17, 2009

Rally officially over (IBD reports)

The market is now officially in a correction according to Investor's Business Daily. It's now a time to raise cash. It's more probable the market has experienced a key reversal. We have had a string of higher volume down days which indicates the 'big money', the money that actually moves the market, is pulling their money out. Once again, after CNBC and everybody else has been telling people to get into the market (entering the market during the bubble), the big money/smart money has been pulling their money out.

It's almost like the big money crowd wants CNBC to pump up the market so they can dump their shares on the unsuspecting public and leave them holding the bag. Then we hear the same old song. It goes....

Why is it every time I get into the market it goes down, and every time I get out it goes up?
It's because CNBC gets everybody excited and thinking, the rally is real, we got to get in. We can't miss it this time. Jim Cramer comes on the TV telling everybody, they have to get in. They pull out the pom poms, you see the market reaching new recent highs everyday. You hear about your friend, neighbor, etc. talk about the big money they recently made so you get in. There is nothing wrong with chasing the market, just make sure you aren't the last one in. And if a trade starts to turn against you...
Don't sit there like you are on the stupid bench and do nothing. And please don't sit there saying, "I'll wait until it comes back." It may never come back.
Just as soon as you sell that stock, you may see it go back up, but don't worry about that one. Worry about the ones that continued to go down. Also, when you sell a stock, you can always buy it back. Your broker may tell you, "What! You are going to get out now? You are down." That thinking is a recipe for disaster.

How do you prevent a small loss from becoming a big loss? Keep your loses small. Consider your small loss an insurance policy premium. Remember, you can always buy a stock back.

Once you are out of stock, you can think more clearly before repurchasing. It's hard to think clearly when you are sitting there watching the stock go down hoping it comes back up. If hope worked in the market, a lot of stocks would never go down.

Another rule, don't sit there and let a large gain turn into a loss!!! You may feel stupid watching your stock go from $50/share to $60/share and back to $50. You'll feel even worse if you let it drop down to $40/share so sell it if it drops back down. Nobody has ever gone broke selling a stock at a small profit.

We are in a correction. We are a minimum of 4 days away from another confirmed rally or uptrend. Raise cash, keep your eyes on your current winners and for those of you who must buy stocks because of the recent dip, keep your stops tight. I favor a more diversified approach. Diversify by shorting or for those with IRAs, consider an inverse ETF. For those who cannot sell their shares due to the tax consequences, they should really consider an inverse ETF to hedge against a downturn, but then again, if the market goes low enough, you want have to worry about any profits to be taxed against.

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