A Distribution Day

Friday the stock market sent us a reminder that it doesn’t just go up. The Dow lost 125 points just over 1% on heavy volume and the other major indexes lost similar amounts, this can definitely be called a distribution day as trading was heavy. The sell off was triggered by the news that the SEC is accusing Goldman Sachs of fraud which caused the stock to fall over 23 points or 12%. From a monetary point of view Goldman can afford this and it would not have too big an impact on results going forward however the bigger issue would be their tarnished reputation.

The stock market sold off quite broadly with the financial sector being the focus. Of course the stock market has been looking for an excuse to trade down since it has gone up so much and so fast, the stock quotes looked quite scary during the day. As the indexes climb that wall of worry stock holders become more and more nervous. We know a correction is due but we never know when as the indexes become stretched way above their moving averages. See the graph below of the Dow courtesy of http://www.bigcharts.com/.

What we don’t know and what nobody knows is whether we at the start of a big sell off or is this going to be just a small correction in a very good market. This may continue a few days or it may bounce straight back. The investor must watch the nature of the bounce back to determine if the uptrend will continue. If the Dow moves back up on very light volume and then takes another big tumble on heavy volume then it is time to step aside for a while not initiating any new company positions since the trend may be changing. However if we see no more distribution days and the market resumes its march up then we can continue taking new stock positions. Don’t let the “doom and gloomers” tell you this is the end and don’t let the optimists tell you it’s a buying opportunity, nobody can know.

For the time being do not buy a position in any new companies and manage the companies you own until the picture clears. If the stocks you own continue up then by all means continue to add to those positions. Look at your holdings and decide if it is time to tighten up on your stop losses. Tightening up on your stop losses will allow you to lock in some profits however be aware that if you tighten up too much then you run the risk of being stopped out of your position in what could easily be a minor correction. One strategy is to use two split stop losses on one company at different points to sell some at one point and more later. I would suggest you watch your positions closely and if they break the first level of support then sell a portion of the holding. If they break a second level of support on volume then sell even more. If your stock breaks a couple of levels of support on volume and falls below the 50 day moving average then sell out of that position completely. (I talk about support in my early blogs).

Remember at this stage watch your individual positions for possible sales. You do not need to take your cue from the major indexes to sell, you should treat each of your stock holdings individually. Trading is not what you wish to do the preference is to hold your positions but only if they behave well. On line traders had a field day today as they played this stock market in both directions, we do not do that.

No new companies are mentioned today until we get more visibility. By the way it has been suggested that the stocks I mention are stock tips, stock picks or hot stocks. This is definitely not the case since they are simply stocks that break out on volume. Using a well defined money management strategy you can make a lot of money even if half the stocks mentioned go down. In fact you only need a couple of good winners as you invest more and more into those few stocks and take very small losses on the ones that fall. When I mention a stock it is to go on your watch list for possible consideration and review by you. Personally I may never buy that stock myself.