Be Proactive
Wednesday, July 5th, 2006
By George Leong, B.Comm. for Profit Confidential
Okay, it is not technically a bear market yet but investors are trading in this market as if it was a bear market. Selling capitulation has clearly settled in, as nearly all sectors and asset classes are being shown the exits.
Recently, blue chip stocks continued to face selling as investors dumped so called ‘widow stocks’ and drove the DOW to an intraday low of 10,890.24 before rebounding back above 11,000 at the close. The last time the DOW fell below 11,000 was on March 10.
What I have noticed during the market action of the last month is the inability of stocks to hold after rallies. We have been seeing some holding and rebounding over the last few weeks, but it has been followed by further declines. Recently, the DOW fell 199 points after recording up days in five of the previous seven sessions.
It is clear to me that market apprehension; specifically the fear of higher interest rates and the possibility of an economic slowdown is playing on the minds of investors.
Technically, the near-term picture is bearish, but given the selling, stocks are again oversold so we should be seeing some near-term buying support. But whether it will be sustainable is another matter.
As an investor, you must be proactive in this market. There are some factors to consider when trading. First, make sure you make stop losses placed on your positions in order to protect the downside.
You can also use buy put options on stocks or indices as a hedge against weakness. If your portfolio is comprised of 50% technology, you would buy an index put on the NASDAQ in an amount to cover the size of your portfolio at risk.
You may also look at shorting opportunities on rallies as the market is trading as a bear. This means rallies are not sustainable, so selling short into rallies may make sense in certain situations. Just make sure you are experienced in short selling and understand the extreme risk of short selling.
Lastly, look for opportunities to acquire shares that may have been sold off without any reason except the overall market weakness.
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Tags: bear market, dow jones, interest rates
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
