When the market is "on fire" a lot of interesting things happen. We are sure you have heard the old adage "a rising tide lifts all boats" and it is one of those "truisms". When the market is on fire just about everyone does well. But when the market gets nasty the rebounds are very often left to the "survival of the fittest". At that point the adage that you don't hear is that "when the tide goes out, only the best boats float".
We have seen this pattern before after major market crashes. Money comes back to the strongest and the fittest first. If you turn on CNBC you will start hearing pundits tell you that you have to be more selective about who you buy. Well the point is that if you are a trader, you have to take what the market gives you.
What is important is being in the right stocks at the right time. So we know that after a major pull back the "generals" lead the way back up. So as traders, these are the guys you want to be in so that you capitalize on the big rebounds. Does that mean you should never buy a hot new outfit or an old high flyer? No it doesn't. But it does mean that you cannot buy them until the overall market is so happy it will let a high flyer, fly high.
It is the overall market "tone" or attitude that will "tell" you where to place your trades, it is important to try your best to get the "feel". For instance when the market is giddy and everyone is flying, sure you buy the high flyers. But when there is good reason for the market to get nasty, or even cautious, it's time to take your money and move over to established companies or even old value plays.
Have you noticed that when we get a pull back on the NASDAQ, every one is talking about "the cyclicals"? Well sure enough they often gain a few points at the time. There is no reason you shouldn't take profits out of a high flying stock and park it in "value" when the market gets nasty. Likewise, when the market is on fire and no one cares about value, you "have to" buy some high flyers to get the short quick pops.
When investors get rocked and lose money, it will take a while before they want to buy speculative stocks again. But there will be a time when they will again and that will be the time to move back into the "periphery" stocks. Like everything else in life, the market is all about timing. When the time is right, you can venture into "junk" stocks, when the market isn't right, you have to rotate back into the stable.
When the overall market is in rally mode, the leaders are often companies that have no earnings, but the "outlook" for growth is huge. When the market gets rocked, the idea of future growth isn't nearly as important as earnings now. It is often wise to make notes of who stands on top after significant events. If we see the XYZ company up 5 the day after a crash, chances are the next time the market gets rattled XYZ will be a good place to look for the first rebound! You need to take notes and refer to them often.
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Larry Potter is a recognized authority on the subject of trading and has been publishing his newsletter since January of 1998. For a 2-week trial to Stocks2Watch® and a 8-part FREE report on Technical Analysis in easy to understand language, click here urlcutter.com/StockWatchers
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