Rev Shark:
Sometimes Selling Is the Way to Soothe
10/12/2005 8:52 AM EDT
"How poor are they that have not patience. What wound did ever heal but by degrees?"
-- William Shakespeare "Othello, the Moor of Venice"
The best way to deal with a weak market environment like we have now is very simple in theory: You raise cash and wait. There isn't anything particularly profound about that advice. It is simple common sense. When the market is acting poorly it is best to move out of the way and then patiently wait for market conditions to improve.
Like most common sense advice, it is easier to apply in theory than in practice. Individuals tend to struggle with the idea of selling positions into weakness and raising cash, and when they do accomplish that, they then have a tendency to be impatient and jump back in too quickly.
Most investors are haunted by the feeling that the moment they sell a weak stock it will reverse course and trend straight back up to new highs. What keeps us in poor stocks is the illusion that the reasons we bought it are still intact, that nothing has changed, and now it just happens to be a better bargain. Our timing is sure to be completely wrong if we sell right now.
In some cases you will sell a weak stock at the wrong time but it is surprising how often it turns out to be the right thing to do. Even if the stock does find support, as soon as we sell it we often have already found a better place for our cash. Don't underestimate the emotional benefit of raising cash in a poor market. It can clear your thinking tremendously and lead to much better results in the longer run regardless of what happens to the stock you sold.
Once you have positioned yourself to deal with a poor market, the next issue to confront is patience. In a weak market there will be a constant barrage of bottom calling. Traditional Wall Street will tell you that you have to get in NOW! or you will miss the big rally. Funds, brokers and many commentators will constantly urge you to anticipate a turn in the market. They will inevitable be way too early. The truth is that most investors would do better if they were late to putting idle cash to work rather than early.
Patience is the key right now. This market is facing many problems both technical and fundamental. The charts are in very poor shape, the Fed is unfriendly and earnings have started off poorly with the Apple (AAPL:Nasdaq) report last night.
The good news is that it is pretty darn gloomy out there and becoming oversold, especially in the technology sector. The big cap tech stocks like MSFT and INTC have been falling steadily for months now and sooner or later they are going to find support. Investor sentiment polls are showing substantial erosion in confidence but we still could use much more.
If you are short term-orientated I suspect we are close to a temporary relief bounce like we had last Friday, but if your time frame is longer than that, don't be in a rush to jump into this market. Much work needs to be done before this market will be more hospitable.
We have a weak start because of the Apple report. Overseas markets were mostly down, crude oil is up again and there is little love to found.
Position: No positions in stocks mentioned
Gary B. Smith:
