What Goes Up Usually Goes Down Even Faster
Thursday, February 1st, 2007
By Mitchell Clark, B.Comm. for Profit Confidential
And… in the continuing story of amazing China stocks, the entire equity market in that country has fallen significantly.
Yes. It just happened. What goes up usually goes down even faster. The Shanghai Composite Index represents China’s largest companies, and it just pulled back 5% in one day. This index has been booming, so a correction had been expected.
In China, where government officials frequently opine about the economy and stock market, a lot of people have been openly worrying about the high valuation of stocks. No one wants a big bubble that will eventually explode.
It is said that a lot of individual investors are now participating in the Chinese stock market. With increasing wealth, consumers there want an apartment or a house, a car, and a speculative equity portfolio. Sound familiar?
It will be interesting to see how things develop. Regardless of what happens to stock prices, economic growth in China will still be substantial.
This reminds me of LJ International (NASDAQ/JADE). This jewelry company just broke through the $7.50 per share level and is looking very strong at this time.
Just one month ago, the stock was trading around $4.50 per share. I’ve been writing about this company since July of last year, and it continues to amaze me, both in its ability to execute its business plan and to create wealth on the stock market.
If you bought this stock, watch out. Think about what’s happening in China’s broader market. Stock prices don’t go up forever. This is why it’s so important to maintain strong risk management tactics when speculating in stocks. Institutional investors do it, so why shouldn’t you?
When you have a winning position in your portfolio, it pays to maintain a moving stop limit from the stock’s current price. Say 20% as an example. LJ International just hit $7.54 per share. If it falls back 20%, this would mean $6 per share is a new price floor for cashing out.
In this particular case, it probably would be better to employ a 10% moving stop limit. At its current price, if the stock was to pull back to say, $6.80 per share, this would be a strong signal to take some profits.
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Tags: china, chinese economy, chinese stocks, stock market
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Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.
