Sky's Not Falling, Just Prices

Gil Morales and Chris Kacher
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Posted: May 26, 2011 11:59 PM

Price/volume seems deceptive in 2011, and leading stocks that hold strong fundamentals often sell off hard when the major averages reverse even a couple percent. One might ask themselves what can be done in this environment which seems unusually challenging.

Current market conditions indeed quite challenging.

The market has not had any sustained rallies since the start of the year, and when the major averages drop just a couple percent, some leading stocks tend to get clocked to the tune of 5% or more. Furthermore, certain leading stocks had spin outs such as JAZZ on April 27 when the stock got throttled intraday. Thus this environment is fraught with higher than normal risk.

Fortunately, such periods come to an end, and a new trend emerges when most investors least expect it since the market likes to surprise the masses. It is during such periods that it is best to stay vigilant and watchful of market conditions since markets can turn on a dime. New trends, either up or down, can begin with only subtle warning.

Instead, many investors stop trading altogether when the market falls, and take their eye off the ball as bear markets are notorious for pushing away many investors. While staying out of bear markets is a good strategy, one should still keep their eye on the markets by running screens and keeping a watch list of stocks that may be bucking the downtrend in the general market. Such stocks will often well outperform the major averages when the weight of the market comes off and a new uptrend begins.

Further, many investors fail to realize that good money can be made on the short side, especially now that many inverse ETFs exist that did not exist three years ago. And time value on the short side is enormous since general markets and stocks tend to drop much faster than they rise.

Such is the emotional nature of fear vs greed/hope. The tricky aspect of shorting stocks is timing. It is best to test the waters with a smaller than normal position, then add to the position as it proves itself on a price basis.

Thus, the only positions taken in larger size will be those that continue to move higher, so position sizing/money management techniques play an important role. Buying a smaller than normal position on the first buy point, then subsequently small positions on subsequent buy points puts the average cost at a lower level than where the stock is currently trading, thus the investor can add to their position with psychological ease.

We should all practice patience as we await the next big move in the ETF and/or stock space. Given the challenging environment, initial positions can be smaller than usual, then pyramided into once proven on a price basis. It worked beautifully for the big move in silver earlier this year.


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An Interview with Kansas City Fed President Thomas Hoenig: Larry Kudlow
IG: IRS Agents Falsely Claim Housing Credit: Bob Beauprez
What a Waste!: Bob Goldman
A Securities Law Primer for Startups (Part 1 of 2): Cliff Ennico
Sky's Not Falling, Just Prices: Gil Morales and Chris Kacher
How to Go to Congress and Become a Millionaire: John Ransom
Hyperinflation Nonsense: Mike Shedlock
Obama and the Arab Spring: George Friedman

Read Ransom's Daily Market Commentary at the Ticker

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