April 7th, 2010

Fear of Heights

Due you suffer from acrophobia, the pathological fear of heights?

As investors, we make decisions on whether it’s the right time to buy stocks and, if it is, then selecting which stocks to buy. But the most difficult and anxiety provoking decision is deciding when to sell stocks, especially stocks with nice profits that were bought at the right time and price.

I’ll give you a personal example. ANR was the first chart during a discussion of the Stocks on the Move scan in “Stock Picking Now Feels Like Shooting Fish in a Barrel” of July 29, 2009. Fortunately, this is one time I followed my own recommendation and bought the stock; then priced at 30.69, ANR has since appreciated to 54.39, or 77%.

ANR is both high beta and price volatility so I frequently felt I should have sold since buying it in July. In January, for example, during the market’s swift 9% correction off the 1150 interim peak, ANR retreated a whopping 22.36% down to an earlier support level. But I held it while building cash and as a result, fortunately, have since been handsomely rewarded (click on image to enlarge):

When tempted to sell, I asked myself whether I would buy the stock at that level if I hadn’t already owned it. Knowing that it was a fairly reliable mover and that it had a long way to go in digging itself out of the Bear Market Crash hole I held on. Sometimes, the best way to avoid getting acrophobia is not looking where you’ve come from but looking up at where you have yet to climb. In ANR’s case, there’s the peak somewhere between 80-100, another double from current levels.

You can almost say the same thing about the market. Sure, we’ve come a long way from the bottom but there’s some climbing left in the recovery from the bottom:

Using conventional rules-of-thumb to measure the extent of the move is difficult because of the panic and over-reaction at the bottom. Traditionally, one would assume that the neckline was midway between the tip of the inverted head and the top. While the neckline can be fairly clearly positioned, the tip of the inverted head is more difficult to pinpoint. Was it 666 or did panic selling and over-reaction over take an actual bottom at around 750?

Our best guess can be nothing more than a range for the next consolidation level, a possible next peak somewhere between 1220 and 1310. There was congestion in this range in 2008 on the way down and odds are that there might be congestion as the market passes through the range again on the way up.

So don’t look down because you’ll get dizzy and want to quit. Continue looking up both for the market and for individual stocks. When we get to the next plateau there will be plenty of time to decide what to do next.

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  • DG

    As scary as it is to hold on, and even scarier to add to current positions on intraday dips, this is actually really good advice Joe.

    I'll presume of course, that you do keep a stop loss order set? How do you set yours – do you keep yours set at the closest price where there was a major/minor peak? In the case of the S&P, that would be 1150, right? And, in the case of ANR, that'd be around 52.53 or 47.14 – depending on how tight you want to set your stop loss.

  • Anonymous

    I am not sure how this post squares with your post from a few weeks ago. Then, you said that the market was in an uncertain state and could move rapidly in either direction. Now you say "only look up" and reconsider at the next plateau. I don't see anything in between these 2 posts that would explain the change.

  • Joe

    1) I'm not sure their contradictory and 2) the market continues to push higher against the odds.

    You "can't fight the tape" but you can be alert and cautious. I believe the market will continue moving higher in the short run but there likely will be another test sometime around the 1250 mark.

  • Jesse

    with over 90% of stocks now over there 50dma, don't you start to get worried/cautious or are you just searching for lagging stocks?

  • Joe

    I'm holding on to those stocks I already own and searching for lagging industry groups and stocks that haven't advance much in them.

    For example, I missed the boat completely on retail stocks so I now avoid them. I'm looking at the regional banks industry group now for some late bloomers.

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