Pennsylvania Investment Observer

The Next Move Up

by Daniel J. Nestlerode

The NASDAQ and the other broad market averages are now officially in a correction or bear market, depending on the commentator. I prefer the notion of a correction, or temporary adjustment in stock prices, in an otherwise long-term rise in stock prices. I save the term bear market to describe the events from 1929 to 1933, when the average stock fell 90% and the period from 1968 through 1974 when the average stock fell 75%. By my standards we have had two bear markets in the past 100 years and many, many corrections. So, if we are in a correction, what should we do now?

The key to profiting from a correction is to wait until the overall stock market signals a decisive bottom and begins to climb again. Very few stocks will buck a down market and make money for investors. On the other hand, many stocks will go with the larger flow of the overall market and move higher in price, resulting in profits for investors. So the first part of benefiting from the correction is accurately determining the direction of the stock market.

Please note that your opinions and feelings are useless in helping you determine the bottom of the market. If you allow your emotions and feelings to rule your portfolio, you are in serious trouble. I prefer to study the market bottoms for the last twenty years, applying the lessons learned to the current correction. The point here is not to miss the beginning of a new rise in the stock market averages.

In the three market averages, the Dow Jones Industrials, the NASDAQ or the S&P 500 Stock Index, we can identify most market bottoms by looking for a particular bottoming and rallying pattern. After the stock market has made a new low, we cannot assume that the ensuing rally will be the beginning of the new bull market. After making a bottom, as the market did on Friday (April 14th), the market must rally and then follow through with a continuing rally. This continuing rally should produce an upward price change of one percent or more in the average or more with an increase in trading volume, usually within the fourth through seventh day following the low point in the average. This second day of rally on increased volume is the confirmation rally that determines a new direction in stock prices. About 20% of the time, this method of determining a new bull market will fail, for numerous reasons. However, it is usually easy to spot a failed turn in stock prices, as the decline will reestablish itself on increasing volume. Remember that this occurs only twenty percent of the time. Eighty percent of the time this rule correctly points out the turn in the market.

Once you have determined that the stock market has turned up, you now have to decide what to buy. Again, what you should buy depends on (1) the fundamentals of the company and (2) the trading pattern of the stock price of the company. Just like the market has a decided pattern indicating a bottom has been reached, individual stocks trace out patterns that can indicate that a move upwards in price is likely. But that is another story for another column. Stay tuned.

top of page | article archive

Home | About Nestlerode & Loy | Company News
Traditional Brokerage | Discount Brokerage | Investment Management
Investment Research |  Investment Articles

Privacy Policy

1-800-922-7492
Contact Nestlerode & Loy

©1997-2007 Nestlerode & Loy, Inc.