10 Lessons Learned May 31, 2006

Barry Ritholtz (yes, the guy at The Big Picture), offers up some good advice with his 10 lessons learned in the recent selloff. You would do well to read them and learn from them. Here’s the quick list, but you’ll want to read the whole thing:

1. ‘Cheap Stocks’ Can Always Get Cheaper
2. Macro Issues Matter
3. Oversold Markets Can Become More Oversold
4. Support & Resistance Don’t Always Hold
5. Investors Have Short Memories
6. A Major Shift Is a Subtle Process
7. Stop Losses Are Lifesavers
8. Money Management Is Crucial
9. When Your Timing Is Off, Step Away
10. Smart People Do Dumb Things

Watch the Volume May 31, 2006

Good advice from Tim Truebenbach today — keep an eye on the volume, and wait until we see evidence that the big boys are buying again:

Many stocks are taking high-volume hits to break below key areas of support. Subsequent rallies, or bounces are coming on diminishing volume. We know that prices move up and down all of the time. Stocks do not go straight up or straight down, but the important factor to always consider among price movement is volume. When volume is heavy and above-average it is probably an indication that institutions are selling shares. Another important point to consider is that institutions do not trade like individual investors. Individuals sell 1,000 shares or so and are done immediately. Institutions may sell a thousand, five-thousand or more shares a day for months. So, when we start to see them selling it is a good idea not to bother with the stock until we start to see them buying.

The 52 Weak Low May 21, 2006

Barry over at The Big Picture offers some very simple, but very solid, trading advice:

…there is never a reason to buy a stock making a 52 week low. Never.

OK, so you can better understand both the point of my statement, as well as the philosophical underpinnings of this, here’s the thinking (and I’ll use small words so even the emailer can get it): Any stock making 52 weak lows will ALWAYS be technically weak, and there undergoing a (possibly massive) institutional distribution. EVERYONE.

When will the hedge funds, pension plans, mutual funds and foundations be done selling? How the hell can you tell? I sure can’t.

Barry’s right. Listen to him. Buy strong stocks – not weak ones.

Words of Wisdom May 7, 2006

From “The New Market Wizards” by Jack D. Schwager, the second in the author’s Market Wizards series. The interview is with William Eckhardt, a designer of trading systems:

What advice do you have for dealing with the emotional pitfalls inherent in trading?

Some people are good at not expending emotional energy on situations over which they have no control. (I am not one of them.) An old trader once told me: “Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there.”

In particular, you should spend no time at all thinking about those roseate scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response should be.