By David Popper
In my next life, I want to be an analyst. When you are an analyst, you get paid for giving vague advice before a market event. The advice is vague enough so that absolutely no one can trade on it. It is also vague enough so that you may claim victory no matter which way the market turns. Analysts, however, become remarkably precise after the fact. They analyze what had already happened as if the market's direction was obvious before the event. In short, analysts are paid for adding to the confusion. If they were attorneys or physicians, their advice would often generate claims for malpractice - especially that analyst who gave QCOM a $1,000 pre-split price target.
Million of Americans turn to market analysts for guidance. In March, the guidance was don't worry about the pull back, do not sell and instead buy the dips. Investors who followed that advice have paid the price. The wonderful "buying opportunities" have turned out to be fool's gold. In March, the NASDAQ fell on heavy volume several times. Selling on heavy volume indicates institutional selling, yet many analysts kept claiming that a "buying opportunity" might exist.
How does an investor know what advice is sound and what is not? The best course of action is not to listen to opinions, but to listen to the markets. Follow the charts of major averages (Dow, NASDAQ, S&P) and leading stocks (CSCO, EMC, SUNW and ORCL, etc.). When the averages and leading stocks show selling on higher volume over several days, then it is time to begin to back off margin and move into cash. When your stocks hit the predetermined sell points, it is time to sell. Those who followed this advice in March would still have most of their portfolio intact.
Unless you have the time to follow the markets hour by hour, do not try to guess bottom. Wait for a "follow-through day" to confirm a new market rally. In other words, wait for a market bottom to be defined by a bounce on heavy volume which lasts at least two to three days. If you are a position trader, as opposed to a day trader, do not back up the truck until the bottom is well defined.
In April and May, we have had several failed rallies. The telling sign was a lack of volume. Be willing to miss out on picking an ultimate bottom while waiting for the market itself to send out an all clear signal. You may miss the gains of a potential snap back, but when you do buy, you will have a much better sense of the real market bottom.
Think about it a moment. The last time the market hit a bottom was on October 18, 1999. If you waited for definite confirmation and did not trade until November 1, you would still have massive gains with a lot less risk. The bargain hunters who purchased in September and early October were annihilated. Many did not have the cash when the real rally started. Yes, you will miss the first bounce, but you will have a much more reliable entry point.
The bottom line is that the NASDAQ remains in a downtrend. This downtrend will continue until institutions begin buying. If the institutions begin to buy in earnest, the volume will surge along with the averages. If the rally has legs, money will initially flow to the leading stocks. The charts of the averages and leading stocks should demonstrate break outs on heavy volume. In other words, the market will tell you when it is time to enter. Until the market tells you, by showing successive days of gains on higher volume that it is safe to jump in, any entry point is high risk and more akin to gambling than trading.