Bear Market rally

As the title suggests, I'm not buying into the notion that we have reached the bottom and it's all smooth sailing from here. I find myself firmly in the camp of the profit takers. What this represents to me is opportunity. If you've made some money here, it's a good time to take something off the table and/or reallocate your portfolio. The thing to remember here is that the fundamentals of the economy haven't changed. In some data, conditions, although not as bad as forecast, are still abysmal. Don't be sucked into the argument that we've turned the corner. Nothing goes either, up or down in a straight line and until now, it's been a free fall for most asset classes. The overall trend for the broader markets is still down.

This is indeed a rally, but a rally in a bear market. This is no different than a bull market sell off.

What I mean here is treat it the same way you would if the markets were doing well and then pulled back. You would add shares on the pull back in price right? The only difference here is that we are given a chance here to either, take some profits from our new investments or recoup some losses from our older, beaten down positions, then reallocate those funds in more profitable sectors.

All of this applies to other assets only. What do I mean by "other assets"?

Everything except gold, silver and anti-dollar investments such as TBT. These things should be accumulated over time because their overall trend is up and fundamentally, that trend is still in place.

I still see serious times ahead, this rally just puts me in a place where I can correct earlier mistakes, such as DOW, sell it off and either, wait to reallocate those funds, after the next leg down, or play the down move with a short position.

So what's the best sell technique here?

Set your stops.

This is the absolute perfect time to use this sell strategy. There are a couple ways to do this, but essentially I'll be letting the market take me out.

Let's look at the DOW trade. First let me repeat, I screwed up on this one. I bought into the old line about buying blue chips and I realise now that the old blue chips are just that, old. But my mistake wasn't in buying DOW, all investors pick losers every now and then. My mistake was in holding DOW as it continued down. The buy and hold mentality took control and I figured that over the long term it was a good acquisition. It may well be, given enough time, but is it the best acquisition?

That's where we let the market decide. I'll be entering a stop loss order. What that means is that it is a conditional order to sell if the price hits a certain price level. In this case I'll dump it if it hits $8.50. Current price is $8.96. That's about 5% down from here and it's a critical support level. This trade will automatically execute with or without me around.

The advantage here is that it removes emotion from the decision. If DOW holds the support level and continues higher the trade doesn't go off and I can participate in an ongoing rally. In that case I would cancel the stop loss order and issue a new one at a higher support level. Or I can issue a trailing stop order which is the same thing, but it works off of percentage drop rather than set price levels and the stop level ratchets up with the price on it's own. I prefer to be more active and use predetermined support levels. But either method works. Your own broker may have different procedures to accomplish these trades, so do your homework and consult with your broker to learn their methods and restrictions.

If, on the other hand, DOW breaks the support level, the trade is automatically entered and executed with no further action from me. I just wake up with a new account balance and no shares of Dow Chemical.



Good luck and Godspeed



JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor, which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post