Focus on your Holdings During Tough Times

The distribution days are beginning to increase. The DJI (DOW) below shows three distribution days recently while other indexes are showing a lot more than three. Also the indexes have been moving sideways for 2-3 weeks now. Although odds favor a correction after a fantastic run up we just don’t know (nobody knows). We have to keep our gun powder dry and ease off on the buying until the market shows its hand. At this juncture it could quite easily move into a corrective down phase or conversely after some sideways movement break out to the upside again from its recent consolidation. As I said nobody can possibly know for sure but I would like to assume a downside move just so I can talk about how to handle the stocks you own in a down turn.


Graphs courtesy of www.bigcharts.com a great site for all your charting needs.

Compare the charts of DOW and CMG during the period when the DOW corrected approximately 8-9% (mid Jan to mid Feb). As I have said in the past when the main indexes start correcting down it is time to stop buying and concentrate on each of your individual holdings.

As you examine CMG which can be considered a leading stock with great earnings notice how it resists the corrective action of the DOW index. In fact each time it fell which was approximately 5% from its peak, then it quickly recovered its posture. In fact a number of times it fell only to recover quickly while the DJI continued falling. Another point worth noting was that even during the DOW’s correction CMG did not exhibit any high volume sell offs. The down days were in fact on much lower volume, certainly no panic. Now look at when the DOW stopped falling and in fact showed a little strength, CMG blasted to the upside on much increased volume. Clearly this stock was exhibiting no real sell off and was quick to show continued accumulation as the high volume up days kicked in. While the Dow was trading below its 50 day moving average CMG hadn’t even crossed the 50 day moving average. Once the Dow correction had ended CMG was quick to resume its uptrend and quickly gained about 40% from that point.

Now of course when your stock is in the thick of a down turn and you are a holding a lot of stock in a company the temptation is to take your profits and run. However the big profits are made by those that can hang in there. If the stock holding is keeping you awake at night then by all means lock in some of those profits, why not sell 50% of your holding. By locking in that profit you are essentially lowering your cost basis. If the stock starts moving up again you can always restart the buying of CMG.

Of course this is an example of what to do with a winner during a down phase of the stock market. Remember the Dow could have continued on down and CMG could also have plummeted. In this situation as the stock falls through the 50 day moving average and the sell volume picks up then most definitely you should sell. Even great stocks can simply become not worth their price if they are bought up to the skies. If in doubt sell some now and the rest as you become sure.