From IBD:
Investor's Corner
Monday, November 20, 2000
Printer-Ready Version
Do You Have Skills
To Survive Bear Market?
By Jonah Keri
Investor's Business Daily
Giant paw prints have been spotted everywhere. Portfolios
have been ransacked. There's no getting around it. The
Nasdaq is firmly entrenched in bear country.
Yet many investors haven't caught on yet. Option players are
still buying more bullish calls than bearish puts. Other traders
are heavily on margin. They're betting their savings, hoping
their beaten-down holdings will somehow recover.
It's time to face facts. The Nasdaq is down 41% since March.
Former market leaders have broken down. Attempted
breakouts are failing left and right. Try to swim upstream
against that kind of down current, and you'll end up a
helpless salmon, devoured by ravenous bears.
No Error For Margin
Instead of fighting the tide, take action.
Start by getting off margin. Even in a sky-high bull market,
leveraging your buys with borrowed funds carries risk. In a
bad market, you're playing with fire.
A bear market is filled with false rallies. Don't rush out on
margin to try to recoup your losses quickly. You risk causing
more damage to your portfolio.
Always cut losses. This is your single most important defense
in any market. When your stock falls 7%-8% below your buy
point, sell it. Don't rationalize. Don't hold out for a rebound.
Sell immediately.
Image: Ways To Protect Your Account
If you sell at an 8% loss, all you need is an 8.7% gain to
break even. Let it fall to 20%, and you need a 25% gain. A
33% loss means you need a 50% gain. In a bull market, that's
a tough task. In a bear market, your prospects are grim.
Learn how to spot the next market top. Even if your stocks
look fine, the market may be in trouble. If the market is falling
on heavy volume, the bears may soon come out of
hibernation.
Don't let small point drops lull you into a sense of false
security, either. Institutions that own millions of shares can't
dump stock all at once. They sell off gradually. Market
collapses often start slow, then quickly turn for the worse as
the big boys run for the exit.
Trying to guess market bottoms can be just as dangerous.
Plenty of pundits called a bottom on Oct. 18, when the
Nasdaq fell sharply, then reversed on one of the heaviest
volume days of the year. Two false rallies later, the index
found a new bottom, closing below 3000 for the first time in
more than a year.
Let the market tell you when it's bottomed out. Look for a
major index to show a big jump in higher volume, usually four
to seven days into an attempted rally.
Follow Your Sell Rules
Develop sell rules for individual stocks. Cutting losses is vital.
You also need to know when to take profits.
Don't get greedy with your gains. If your rising stock starts
running up faster than ever before, it may be headed for a
climax top. If it's marking new highs on light volume, it may
soon roll over. Lock in gains before you get burned.
Should you get out of the market entirely? Not necessarily.
Defensive issues like food, utilities and medical stocks have
held up well despite the market's jitters.
But take care. No stock is impervious to attack. Follow your
buy rules. Target companies with strong fundamentals. Grab
stocks that are busting out of well-formed bases. If your
stock flashes a sell sign, be ready to eject |
