Investing--IBD: "Do You Have Skills To Survive Bear Market?"
investors.com
>>>Monday, November 20, 2000
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.
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Image: Ways To Protect Your Account
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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.<<< |
