IN THE MARKETS, it’s often the case that where there’s smoke, there’s fire. So when I’m long a stock that abruptly craters, you can bet I’m one of the first ones running for the exit, no matter how encouraging the fundamental news might be. If a stock isn’t acting right, that’s all I need to know before kicking it to the curb. In my world, you sell first and ask questions later.
Why? Well, as longtime readers know it’s my belief that markets aren’t chaotic, but rather they move in trends that tend to persist over time. So while I can’t precisely predict the future, I can observe the present and make calculated guesses about how securities are likely to respond.
Weak stocks tend to stay weak, or at least weaker than stronger alternatives. After a sharp decline, XYZ might indeed enjoy a dead-cat bounce, but all too often that’s the signal the trade’s gravy has already been mopped up. In my experience, very rarely does an investment break 20% lower because it’s intent on marching right back to previous highs. (more…)