Don't Let Fear & Frustration Guide Your Investing - Investors.com

Don't Let Fear & Frustration Guide Your Investing

Posted 07/07/2010 08:22 PM ET

Q&A with IBD Market Wrap host, Kate Stalter

IBD: In recent weeks, the current outlook in The Big Picture has gone from “market in correction” to "market in confirmed uptrend," then back to “market in correction.” And again on Wednesday, July 7, a new uptrend was confirmed. What’s going on?

Kate Stalter: That kind of see-saw action can certainly be frustrating. But it’s exactly how you know we’re in a volatile market, and it proves again why it’s so important to have some objective rules to guide you through all the changes.

Beware of Distribution Days Soon After Follow-Through Day

KS: In the last two issues of IBDextra!, we talked a lot about follow-through days. We mentioned how no new market uptrend since the 1880s has started without one. But we also noted that around 25% - 30% of follow-through days end up failing — that is, they don’t lead to a sustained uptrend, and the market falls back into a correction fairly quickly.

And as we said in May, if you see distribution days — that is, days of heavy selling — right after a follow-through day, watch out! That can spell trouble for the new rally.

That’s what happened in recent weeks. We saw distribution soon after the June 2 and June 15 follow-through days, sending the market back into a correction each time.

That's why it’s important to get back into the market gradually after a follow-through day. You have to be prepared to spot opportunity and act upon it, but also be ready to exit quickly, if the indexes turn negative again.

IBD: Since the market has been particularly volatile, when the current outlook changed to “market in confirmed uptrend” in June, some investors said they didn’t believe it. They said the market didn’t “feel” right.

KS: IBD founder Bill O’Neil always says relying on what you “believe” or “feel” about the market can be a dangerous strategy.

Don’t worry about what you feel or what you think the market "should" be doing. The market itself and the action of leading stocks will show you if the new rally is working or not. Trust the market since it tells you the facts. Opinions have no place in investing successfully.

As O’Neil points out in How to Make Money in Stocks, new uptrends tend to begin when everyone is the most discouraged, when everybody just feels beaten up by bad economic news and a prolonged bear market. If you let your feelings or fears get the best of you, you could end up missing out on some big gains.

2009 is a fantastic example of that. You still had lots of bad economic news, and many people didn’t “believe” the new uptrend. For months after the follow-through day that occurred in March, plenty of pundits were still debating whether the uptrend was for real. Meanwhile, Baidu (BIDU), Green Mountain Coffee Roasters (GMCR), Apple (AAPL), Priceline (PCLN) and other leaders were all trending higher! People who insisted on arguing with the market missed out on a lot of 2009's best winners.

3 Things To Do Right Now In New Uptrend

IBD: As we've noted, it's been a rollercoaster market, but as of the July 7 follow-through day, we're once again in a confirmed uptrend. What should investors do right now?

KS: As with any new uptrend, no one knows how long this one will last. So this is when you just need to put theory into practice, follow some sound rules, and make sure you keep your emotions at bay.

There are 3 basic things you want to do...

First, look for stocks that have good fundamentals and are starting to come out of sound chart patterns. Watching the Daily Stock Analysis video each day is a good way to find those kinds of stocks, while also improving your chart-reading skills at the same time.

Second, get back into the market gradually. For example, you can start with a position that's about 50% of your normal position in a stock. If the stock acts well and shows strength, add shares. If not, you can sell and avoid any serious damage.

Third, check the Market Pulse each day to see if distribution days start to mount. As we mentioned, distribution days early in a new uptrend can spell trouble.

If you do those three things, you'll be in good shape whether the new uptrend succeeds or fails. If it fails, you won't be too exposed and you can avoid any serious damage. If it succeeds and the new uptrend leads to some big gains, you'll be right there ready to share in those profits.

via investors.com

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