Bear Market Recovery and Replacing Stock Laggards

When the recovery begins after a bear market, try to identify lagging stocks. Replacing stock laggards is extremely important because there has likely been a paradigm shift in market "psychology." For one reason or another, you never sold when the sell signals were generated. You held your stocks throughout the bear market. When the market begins to recover, then, it would be to your advantage to screen for under-performers. Regardless of how wonderful a company is, the fundamental paradigm shift in market psychology that is common after a bear market can cause a stock to be ignored for an extremely long time. It is at times like this that we are often called upon to make uncomfortable decisions. For example, if we have a perfectly good stock that is going to be out of favor for three months, six months, or a year, do we hold on or do we switch while ours "takes a long nap?" The normal reaction to this question is "I'll hold on because I do not want to realize a loss." However, it's not as simple as that. Suppose the stock doesn't do much for a year, or even declines further, increasing your losses. The very best companies can have bad news, even after surviving a bear market. You could end up having to hold a stock for five years just to break even. The company may still be a great company, but its stock may not be particularly desirable in this market environment (after all, the market has just changed its psychology). Within the context of the new market psychology, another stock might be much more likely to recoup losses than the stock through which those losses occurred.

After a severe market decline, it takes time for the dust to settle and for indications to become apparent. Jumping prematurely one way or the other can be a very big mistake. With the passage of a few months, patterns begin to emerge. I think of it as analogous to a sea-storm. When the water is churning and being whipped by the wind, it is sometimes difficult to discern tides and currents. Once the storm subsides and the waters calm down, those tides and currents become more discernable. That is when it becomes possible to make use of those currents in plotting a course.

This is the time to watch sector recovery patterns. Each stock in your portfolio belongs to a sector or industry. Identify the sectors and industries represented by all your positions. For a comparative analysis, you can use sector ETFs or traditional sector mutual funds (we track a wide variety of ETFs, and Fidelity has a number of "Select" sector funds). Simply monitor the sectors and industries to which your stocks belong. Compare the charts of your stocks with those of their respective sectors. Look at the slope of the 50-day moving average for each position and sector. If the sectors to which your stocks belong are laggards relative to other sectors during the recovery after a bear market, then there has probably been a paradigm shift (assuming that your stocks were among the best performers before the bear market). Are any of your stocks moving sideways while their own sectors are rising? If so, those stocks are sell candidates. Is the angle of ascent of the 50-day moving average of any of your stock sectors less than that of the market's index? If so, the stocks you have in those lagging sectors will probably lag the market. Any stocks you have in lagging sectors are sell candidates, and they are especially so if the stocks are also lagging their own sector or industry.

For example, a paradigm shift in the psychology of the market may result in a change in perspective regarding value as opposed to growth. This can result in a lessening of buying demand for certain technology securities. Investors may become very cautious about buying stocks that have the relatively high PE-ratios so common with technology stocks. The exact nature of such a paradigm shift often does not become clear for a few months after the decline has taken place and it becomes evident where the strong areas are. We know of some traders who monitor an extensive list of ETFs (sectors, industries, investment styles, and indexes) and their strength rank relative to each other in order to keep on top of such paradigm shifts. However, they use a far more complex measurement of strength than the Relative Strength Index (RSI). They look for consistency in strength rather than a simple snapshot measurement based on 14 days. You could do something similar by taking three RSI measurements over three separate time periods and then combine the results. Then, you could rank the totals for all the stocks that you are monitoring.

Growth stocks often achieve a high PE-ratio relative to value stocks. The PE-ratio is the price of a share divided by the earnings per share, or the price investors are paying for each dollar of earnings generated by the company. Growth stocks may even continue to increase an already high PE-ratio over a period of several additional years. Thus, the fact that a growth stock has a PE-ratio of 50 does not mean it cannot go much higher. The PE-ratio goes up when the price of a share goes up. A stock with a PE-ratio of 50 could still double, resulting in a PE-ratio of 100.

When the PE-ratio of a stock keeps climbing, it may be because investors anticipate accelerated earnings far beyond present the level. That is, the PEG ratio may still be low even though the PE-ratio is high. However, other factors could also be in play. For example, it may be because investors think the price per sales or the price per sales growth rate is more important than earnings and these measurements far outstrip earnings or earnings growth. Alternatively, it may be because investors anticipate that a new product, service, or some technological breakthrough is going to change the way a stock is valued. That is, because investors may be looking at something other than present earnings, the price of a stock can go much higher than we might be able to justify on the basis of present earnings alone.

After the market "crashed" in March/April of 2000, a recovery period began in which investors, whether right or wrong, were reticent to invest in some of the stocks that were very popular (and moving up very strongly) just before the crash. There developed a new emphasis on buying stocks that were under-valued. That did not necessarily mean "value investing" was a better choice than "growth investing." However, it did mean that a portion of the money flow began to be diverted to alternative areas in the market rather than returning to where it was before the crash. Some of the strongest stocks before the crash did get the share of money flow one would expect, but some others did not. When investor sentiment changed, investment capital began to be dispersed somewhat differently than before the crash.

The objective, then, is to determine which of your investments are likely to be left behind in the new market environment. Ask yourself whether replacing any stocks with other stocks might improve portfolio performance. Ignore "iffy" alternatives, where the prospects for a replacement stock are just as vague as the prospects for a current position. However, prudence does dictate that you at least consider opportunities that could improve performance in the new environment.

Of course you would not sell a stock if it is simply below your purchase price but recovering faster than the market as a whole. You might even conceivably decide that the best course is to hold all positions. However, tactically, it would be an error to stay in a bad situation just because of the pain you would incur (realizing a loss) by extricating yourself from a losing position. In reviewing the methodologies of the greatest investors of the last 100 years, I have become aware of one trait that is an almost universal characteristic. They had the necessary grit to close out a position even though they believed in it and even though it meant taking a substantial loss. In doing so, they set the stage for recovering the loss and then moving ahead. Some of these top investors have even said that it wasn't until they learned to do this that they changed from being losers to being winners as investors.

Risk Control Through Selling and Diversification

It is better to sell with a small loss than with a big one. Diversification is one of the means by which an investor can minimize a losing position's negative impact on a portfolio. The inconvenience of tracking a diversified portfolio is preferable to watching a non-diversified portfolio's value melt away. A comprehensive risk control strategy is based on individual position size relative to the whole portfolio, limiting the amount of decline permitted, and maintaining a ready supply of candidate replacement stocks that are more likely to rise than decline. The last of these is important because weak stocks are riskier than strong stocks, and it is natural for an investor to have internal resistance to selling a weak stock at a loss. The availability of alternative stocks likely to rise soon eases that resistance, and selling weak or declining stocks is an important part of a good risk control strategy. Monitoring a watch list for promising setups can provide investment alternatives and make it easier to reduce risk exposure by replacing weak stocks with strong stocks.

When the market is volatile, "loss control" is vital. Suppose, for example, that a portfolio incurs a loss of 15%. To break even, it would have to gain about 17.5%. Such a gain may not be that difficult. However, a loss of 50% requires a gain of 100% to break even. It is okay to allow a stock to drop 20% before selling if the stock represents only a small part of a portfolio. However, when position size is large (when the stock represents a relatively large part of a portfolio), losses must be kept under much tighter control. An investor cannot know in advance the extent of any stock decline. He does know for sure, however, that he must act before the loss becomes too great. At some point, he must sell even if he believes in the stock and thinks it may reverse at any moment. That is the part of risk control that takes discipline.

Let's assume you have a profit and that the stock is no longer advancing (it's going sideways). You have a "watch list" and you notice that there are several stocks that have attractive "setups." By definition, a "setup" gives a much higher probability that a stock will move in an anticipated direction. Now the question becomes, "should you sell and buy a stock that has a good setup or should you stay put?" Why sell? The stock may be topping out and preparing to decline, it may continue sideways for months, or it may be consolidating in preparation for another ascent to higher price levels. You do not really know what it will do next. If there is a pattern of increasing volume when the stock rises and decreasing volume when it declines, you may infer that when it breaks out of its trading range it is more likely to do so on the upside. However, in the absence of such clues, the gain you have achieved is at greater risk than when the stock was climbing. If you don't sell, you may lose part or all of your profit. Alternatively, the stock could remain in a trading range for 6 months. Either way, your prospects would seem to be improved by a switch out of the position to something that is more promising. Having your money in a stock that is going up is preferable to having it in a stock that is going sideways or down. If, after you sell the stock, you see it break through the upper boundary of its trading range, that event would be a "trigger event" calling for a repurchase of that stock. Under those conditions, risk would be much less, and the stock would have signaled its "intent" to go higher.

Assume that instead of a gain you have a loss of 15%. For a relatively large position, it is unwise to let a stock drop much more than this before taking action. You can still be pretty confident that you will be able to gain back the loss and more. However, if the stock slips further, damage can increase to an almost unrecoverable level (it's a process of stealthy or "creeping" decline in which things look fine; then, before you know it, the stock is down another point). Eventually, a small loss becomes a major loss. It is possible to recover from a major loss, but it is not easy. It is better, by far, to limit loss in the first place rather than to have to repair damages incurred by ignoring an obvious need to act. This is where a "watch list" can be a big help and enable you to get a significant boost in performance. Expert traders always have a "watch list." You can profit by following their example. Monitoring such a list will make you aware of stocks that are in a "setup" configuration that promises a price surge soon. Thus, money could be shifted from a stock that is stalling to one of these when an appropriate "trigger event" occurs.

Another tool of use in controlling risk is diversification. Many people like to limit their portfolios to as few as 5 stocks. They just want to keep things simple. However, increasing diversification will reduce the significance of any future downturn in any single stock. For example, if a stock represents 40% of your portfolio and it drops 30%, your portfolio will lose 12% of its value. Though this might be a manageable loss, you could not tolerate many repeats. On the other hand, if the stock is only one of 15 equally weighted stocks (and therefore represents little more than 6% of your portfolio), the same drop will cost the portfolio less than 2%. Thus, you have more "wiggle room" when dealing with a declining stock. Of course, the "stops" described here are based on the assumption that there is an even distribution of assets among your different portfolio positions. If this is not the case, the amount of decline that can be tolerated for a stock will be determined by the amount of assets that are concentrated in that particular stock.

Also, even top portfolio managers who usually let stocks drop 10% to 20% will sometimes "pull the plug" after only a 7% loss or less. They do this at times when stock behavior patterns can be defined sharply enough that breakdowns are very evident. An investor can tolerate twice as many 7% losses as 15% losses. What does this mean? It means that when the market becomes very expensive and stocks are more likely to break down, professional managers will tend to tighten their stops. That is, they will tend to sell more quickly because waiting for a stock to recover from a major sell-off becomes increasingly risky under these conditions. Stocks can work their way down slowly (but sometimes quickly) 50% or more and then stay there for several years. If this happens, the opportunity loss, to say nothing of the drop in value, can be staggering. In short, investment style, time horizon (short-term traders vs. long-term investors), market conditions, portfolio weighting considerations, and the volatility of the particular stocks that are in the portfolio all can have a bearing on the amount of loss that can be tolerated.

The important point is the need for some discipline in maintaining damage control. The value of your portfolio must be protected when stocks are in decline. Letting money become relatively dormant for six months is not good stewardship either. The market has many opportunities for growth. It is far better to abandon non-performing positions to take advantage of such opportunities when they occur, than to leave assets in a state of dormancy or heightened risk. Increasing volatility also suggests the need for more diversification. Spreading assets among more positions enables you to weather greater declines in individual stocks with less damage to your portfolio.

The Best Stock Trading Site

The best stock trading sites typically have a forum or community where usable techniques are shared. There, in these forums, you'll find leaders, mentors and experienced traders who are willing to share their experience with you. This is where you can establish relationships with real people who are interested in the same, or similar aspects of trading as you.

These sites are educational, and offer reviews of affordable courses that are relevant to where you're up to in your journey as a stock trader. You can leverage that community and ask them what courses they've attended, purchased or are currently doing. Gaining feedback on theses educational sources will be instrumental in your own, very personalized, trader education program.

The Best stock trading sites review not just programs, but software, books, tools and seminars, famous traders, current market events and some can keep you abreast of changes in the trading rules. Think of these sites as an active learning forum. They engage people just like you to bring together ideas, experiences, and solutions for people who are either starting out as traders, or are well established and need to take the next steps.

Studying graphs, trends, economic policies and conditions is what most authors for these sites do. That's their profession and some of the better writers have been analyzing markets for many years. The most important aspect to finding the best stock trading site for you is to ensure that the writers for the site are speaking your language. Make sure that the way they write is in a syntax and language you can understand. Many fall into the trap of "technical jargon" and tend to appeal to sophisticated or professional traders only. Find the one which talks to you. I personally recommend a free newsletter from an Australian publisher called "Morning Money".

Some newsletters and sites will charge you for their content simply because of their specialist expertise. Most of these will offer a free sample to try and get you hooked. If you find one that you feel is worth investing in, in addition to an online course,simply ensure you can pay by the month and cancel anytime if you start to feel it's not the right content for you. Remember, these subscriptions are in addition to an ongoing structured education in trading.

Many of the best stock trading sites are generalist in nature. The best sites probably won't provide "hot tips". Some will recommend certain stocks based on significant research and forecasting calculations, as presented by an expert author. Always remember that all recommendations from outside sources need to be assessed against your own goals, strategies, your risk profile and understanding of the trade itself. If you think what a newsletter or site is recommending is a good buy, always do your own research and ensure you run it past your mentor, then check it against what you've learned from your online course. No one can protect you from your own decisions.

Finding the best stock trading site is a personal journey. What's good for one person isn't necessarily good for another. No matter what site you choose, if you find it's of value to you beyond all the others you've seen, then that's probably the best one for you. Whilst the sites are interesting and most provide excellent content, none will replace the need for studying a structured, reputable course. Many sites will provide you with excellent resources, and excellent learning opportunities also. You'll gain significant value in joining a community and sharing your experiences. The more you learn, the more you have to apply in your trades, and the more successful you'll be.

If you've watched your retirement savings take a dive, your job "security" go out the window, and your way of life look as though it's threatened, then it's time you took some action.
Many of us are facing the same problems and struggling to make ends meet month after month.
The best investment you can make is in yourself. Only you can change this, and there's plenty of help to get you there. Learning how to trade shares is a sure fire way to generate a consistent income, no matter what the market conditions are.

Should a Corporation Be Able to Claw Back Executive Compensation If the Stock Crashes Due to Market

Due to the political rhetoric of class warfare it seems as if the public doesn't want executives to earn big bonuses and high salaries. Many in Washington DC, especially the politicians that are socialist leaning want to curb these excess bonuses and payments to the boards of directors, and executive management. Still, most of those in the corporate world and investment world believe that it should be up to the shareholders to decide. Okay so let's talk about this shall we?

It is amazing when shareholders are asked to vote, they will often approve big bonuses, huge stock options, and higher salaries for executives that increase the stock price in any given quarter or year. The shareholders could be said to be greedy, but they own the company, and who is to debate that? They own the company, and they should decide how much the corporate executives are paid, not politicians in Washington DC, or the 99% who are occupying the park who don't actually own any stock in the company. You see my point?

Another interesting issue of contention is that often when the market is in full swing, in a bull market, many of these corporations make hand-over-fist in quarterly profits, and the stock price rises dramatically, even though the executives running the company had very little to do with it. During these periods the executives also get bonuses, often bonuses they do not deserve.

Incidentally, it is common for minority shareholders to file class-action lawsuits requesting to claw back the bonuses from executives after the market falls, the profits collapse, or the economy tanks. Should a Corporation be able to claw back executive compensation if the stock market crashes? It doesn't seem realistically fair to do so, but then again it isn't really fair to overpay and get huge bonuses to executives that had nothing to do with the increase of stock price during a bull market either.

Now then, whose fault is all this anyway? It seems to me that it's everyone's fault, but more so it is a snapshot of our society looking for short-term gain over long term value, profitability, and growth. Executives should not be rewarded for something they didn't do, nor penalized for something that isn't their fault. Nevertheless, they should see the road signs ahead, the writing on the wall, and position the company in a safer realm prior to the downturns, just as they should to make hay on the upswing.

Make Money With Dry Bulk Shipping Stocks

The Baltic Exchange's main Sea Freight Index, has recently been on the rise again. The Index in general, gauges the cost of commodities such as iron ore, coal, cement, fertilizer and grains, etc. Ships within the Sea Freight Index, are usually broken down into four different freight capacity sizes, Handysize, Supramax, Panamax and Capesize. With the Handysize having the smallest capacity freight size, and the Capesize having the largest.

Since the start of the economic crisis, the Dry Bulk Shipping Industry has been hard hit on all fronts. With the drop in worldwide demand for dry bulk goods, together with a glut of over-ordered ships from when times were better, the Dry Bulk Shipping Industry has been left out to sea without a paddle. Previous to the crisis, dry bulk freight rates were at all time highs, sharply dropping off when the crisis started, and hitting rock bottom about 12 months ago.

The value of these shipping companies has therefore plummeted to lows of where if their ships were sold for scrap, they would actually command a higher value than their present day stock valuations. Most of these companies stock valuations, are now floating around the 20% mark from where they were before the crisis started. Previous $16.00 dollar stocks can now be picked up for around $3.00 dollars each or less, making them considerably cheap in today's market.

However, now may be the right time to start thinking about investing in these beaten down shipping stocks, as the tide seems to be on the change once again. After several years of sluggish demand for dry bulk goods, demand from countries such as, China, India, Brazil and Vietnam, seems to be on the move once again. Considered future world economic growth leaders, this small group of countries may be just what the Dry Bulk Shipping Industry needs.

As demand for dry bulk goods rises again, the previous glut of unemployed ships will once again find active employment. This will in turn start to drive up dry bulk shipping freight rates, and help these loss making companies become profitable again. Once this happens, many shipping stocks that previously paid out dividends, and were forced to either cut them, or stop paying them out all together, will begin to reinstate them.

These sunken shipping stocks will become buoyant once again, as more and more investors become attracted to them. This in turn, will push up their stock values to near pre-crisis levels, making investing in Dry Shipping Stocks today, an excellent way of riding out the crisis, and shipping in a tidy little profit.