To be clear, we are not in a market correction or even an official pullback as I write this on Tuesday. It just feels like it.
The guidance in last Friday’s VectorVest Views said it all. In Canada, “There are very few positive signs of hope in this Bear-dominated market.” In the US Views, from Dr. DiLiddo himself, “I don’t like this market… there were too many vicious selloffs in the face of relatively good earnings reports. We haven’t seen the end of it yet.”
In Canada our VectorVest Composite, VVC/CA can’t seem to make up its mind. It gets stuck around $22.00 going up, but it hasn’t wanted to give us a proper summer correction and break below support around $21.55. As a result, the market and my retirement portfolio has been virtually treading water since June 6.
So, what exactly is an investor to do? Well, my strategy right now is to tighten up on defense until the market decides which way it wants to go. It could break to the upside at any time, and I could miss out on some opportunities, but I’ll wait for VectorVest guidance to give us the green light before adding any new positions. I’m prepared to miss out on some early gains to avoid the risk of giving back too much and ruin what has been a good year so far. Gains take time and losses happen quickly when the market breaks to down side. I believe downside risk outweighs upside potential as Dr. DiLiddo likes to say.
It’s times like these when you really need a trading plan, and of course, you need to follow it. If you find yourself asking the question, “I wonder if I should sell this stock now?” or “I wonder if it’s too late to sell this stock now?”, then you don’t have a trading plan. You might consider incorporating in your plan the following guidance for playing good defense. It has been culled over the years from Dr. DiLiddo’s essays and presentations by senior instructors.
Seven Rules for Traders to Survive and Thrive in Falling Market
- Play good defense. Good defense wins championships more often than good offense in just about any sport. The same is true in investing. When the market is losing steam and looks like it needs wants to take a break, hope for the best but prepare for the worst.
- Don’t fight the trend. If the market is nearing overbought levels or is just acting tired, start playing defense early and often. How do you know when the market is tired? Well, one sign is how few Buy-rated stocks there are. Would you believe on Tuesday we had as few as 126 Buys at the low point before closing with 149? That’s seriously tired. The BSR or Buy/Sell Ratio is down to 0.24. Hard to pick winners with so few rising stocks.
- Regularly evaluate your stocks for signs of weakening fundamentals. Are Value, VST or EPS starting to fall? If they are, and price is also falling, it’s time to play defense.
- Worry most about stocks that are losing momentum as shown by the RT indicator. When RT is trending lower, hitting lower highs, and especially if it falls below 1.0, consider selling if market conditions continue to worsen.
- Never allow a Winner to turn into a Loser. Embrace the trader’s mindset that it’s okay to sell ‘too soon’ when the market is bearish or nearing a resistance top.
- Sell on any hint of negative news. Facebook had a ton of it even before its earnings collapse last week just as one example. This includes bearish industry trends, disappointing earnings or forward-looking guidance, whispers of company corruption, forced senior personnel changes, or defensive policy changes such as freezing or lowering dividend payments.
- Change your mindset. Start to view taking profits while your stock is still doing well in a difficult market as a way to raise cash in order to take advantage of better prices when the market regains its strength.
As the market begins to pull back, fast, clear and accurate information without ‘information overload’ is vital to your portfolio’s survival. VectorVest was created to give you just that. It’s our solution. The BSR is our “canary in the coalmine” but it’s only one part of how VectorVest allows you to evaluate both the market and your investments very quickly. It delivers what we need to SURVIVE AND THRIVE IN A MARKET PULLBACK.