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08-Jul-08
Just say no to bottom-fishing
I’ve been doing some thinking about all this talk of bottoms and how people are beginning to stalk which stocks they’re going to buy, and something occurred to me. I want to state that I myself was in that group, but I may reconsider over-weighting my portfolio with longs right now and here are my reasons why.
Below is a chart of the Dow during the first half of 07′. The market had been cruising for some time up to that point and it had a normal, albeit scary correction (they’re all scary) but found support just above it’s 200dma. The 200 day moving average is instrumental in determining the safety of going long on market pullbacks. As long as the Dow is above the 200dma, your risk/reward of stocks snapping back quickly are greatly increased. When you’re bottom-fishing, having that trade be in-the-money as fast as possible is paramount to being able to stay calm and focused so other opportunities won’t pass you by.
So the highlighted area on the chart is where one could have accumulated some shares and basically waited out a few bumps in the road on the way to higher ground. The investor who bought while everyone else was panicing and unloading their stock, collected a nice paycheck for staying focused and calm.
Lets fast forward to todays’ markets and you’ll see we’re in a totally different scenario for bottom-fishing than last year. Buying the bottoms have been trickier and the snap back isn’t as swift. One almost has to have a little luck involved in guessing the exact day and be nimble enough to get out before the next correction occurs. That’s not even taking into consideration having the nerve to be able to withstand the churning dips and whipsaws that are going on in this chart. Lets be clear in understanding that I’m not saying that a bottom won’t be put in, and that people won’t make money on the long side. I’m saying that it might be safer to sit out the eventual up move, save yourself some mental anguish, and look for shorts once the market looks toppy. As long as we remain below the 200dma, the long-term trend will remain down and shorting will be the more profitable trade.
Tagged Stocks: CALM
Posted at 10:09 in External Blog | Permalink | Comments () | Top
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