Bear market rallies happen; it's part of the process.
That's the message that you should hold onto through the past two days' rip higher in the market.
I remember the first set of rips and dips in 2007, when the market turned mean. The first three months saw a series of rallies and sell-offs that were both good and bad.
Good, because these fits and starts gave the nimble traders the opportunity to operate in their natural environment. Increased volatility, short-term trends, and a market that is more in tune with the technicals. It's a haven for quick and recurring profits.
Bad, because the roller coaster ride of a market kept the longer-term investors guessing as to whether they should put some money to work or not. That question got harder to answer with each trip higher that ended the next move lower.
Investor behavior in a bear market hasn't changed in decades. Most are trained to try to nail the bottom and then hold on as the rally takes them for a long bull market ride. This isn't normally the case, as they will often buy "a" bottom and try to hold only to find out that the bottom they bought was wrong and they're losing more money.
In between those tops and bottoms, we all tend to decide that we want to buy or sell a stock. Inevitably, the mean market volatility leads to the following fun situation.
The market opens… you're thinking about selling shares of a stock at… let's say $50. You wait a few minutes, and suddenly, the stock goes from $49.50 to $47. You take a few more minutes to check the headlines for why the stock is down and bam, shares are now at $46.
"Forget about $50, I just want to get out," you exclaim as you hit the "sell" button. Of course, when you check the price of the stock the next day, it's trading at $51. If only you hadn't been swept into the throws of the mean market, you would have gotten your $50, saving you 8% of your profits.
Investors, here's the one simple strategy you can use to improve your portfolio in this bear market: Pick your price and use Good-Til-Canceled limit orders only. That's it – then you walk away knowing that you beat the market…
Allow the Volatility to Find Your Price
Beating mean market swings means having the ability to name your price and stick to it. In most cases, the market's whipsaw volatility will deliver your price, but you must be patient. Thirty years of trading experience has taught me to "set it and forget it."
About the Author
Chris Johnson is a quant - he's obsessed with building and perfecting mathematical models that allow him to predict, with startling accuracy, the direction of the markets, entire sectors, and individual securities. For the last year, he's been researching and building a new system that lets him move swiftly in and out of the hottest stocks in the market for life-changing gains - entirely on his own terms. The results of his newly-minted Night Trader system are nothing short of amazing.
Chris also contributes to Money Morning as the Quant Analysis Specialist.