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Be a Market Cynic


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The famous anecdote about Diogenes is that he would carry a lantern around Athens in the daytime, oblivious to those who were mocking him; if asked what he was doing, his reply would be that he was in search of an honest man…something that he apparently never found. Yet that didn’t keep him from looking. When market conditions deteriorate it can be tempting for some to get discouraged and lose focus, or, worse yet, to give up trying to even find stocks that might be the next leaders. Then, with each and every rally, we are forever hearing that “the bottom is in” and that we are fools not to recognize what a bargain the old leaders are at current prices. However, it is imperative that we tune out Wall Street’s drivel and continue on with our search for those ‘honest“ stocks, even if they are few and far between.

Bear in mind that, 400 point advances notwithstanding, this is not the time to be buying. First of all, even taking the action of late into consideration, we are still in a downtrend. Bear markets are notorious for the kind of sharp advance that we were witness to on Tuesday (Over at bigwavetrading.com, Joshua Hayes has noted that the best nine sessions in NASDAQ history came between the dates of 5/30/00 and 5/8/02; also, the DJIA had rallied over 400 points only four times before Tuesday: they all occurred from 3/16/00 to 7/29/02). So don’t be fooled. Since three out of four stocks follow the market’s lead, knowing the market’s direction is paramount: and that direction is still southward. Those who have chosen to buy into that kind of weakness, though poorer, will probably still be no wiser, since they thought that they could outwit the market in the first place. And if a beaten-down former leader looks like a bargain here, consider this: once they peak, former leaders fall by an average of 72%, and, of those, half never return to their former highs. Those aren’t the kind of odds a wise trader would want any part of. (I had hoped to come up with a good joke about being cynical of the “Dogs of the Dow” but, alas, nothing doing.)

By keeping an up-to-date watch-list of stocks with outstanding fundamentals that are displaying resiliency and by protecting our capital by staying cash heavy, we will be in good shape when the market finally does turn around. As Investor’s Business Daily likes to point out, 90% of the stocks that go on to be big winners form their bases during markets just like this one.

So stay on the look out for those “honest” stocks, the ones with the big earnings that are in exciting and innovative industries, stocks that are young and have been holding up well. Those are your potential new leaders. Be patient, though. Wait for the general market trend to shift. If at some point you notice that certain indicators are signaling a bottom might be close, wait for the market to confirm it. Again, from IBD: “Buy stocks only after at least one of the indexes has staged a follow-through day. That’s when the market confirms a fresh rally by surging about 1.7% or more, with an increase in volume over the session before.

“A follow-through is merely the first step in seeing the market re-establish its strength. Next, you want to see multiple up days occur in brisk trade, confirming the follow-through. If conditions are fertile, top-rated stocks should start breaking out of bases.”

Again, await confirmation. This is because the market has suffered a distribution day within the first three sessions of a follow-through 15 times since 1982, including the most recent follow-through of February 13th. On 14 of those 15 occasions, the rally has gone on to fail. So don’t try to get a head start and buy at the first sign of strength just because you are afraid you might “miss out” on gains. That is Wall Street’s most prized lie. And when it comes to what the Wall Street machine says, it pays to be a cynic.

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P.S. Be sure to watch the video of Jim Rogers below.

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