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In a new market uptrend, getting positioned right is everything. Not chasing, not letting the average cost of well established positions creep up, is very important for the inevitable 1st pullback. With the NASDAQ punching through an 11 year high today, this would be a logical area for that pullback to occur. My best guess (and its only a guess) is that we get our first pullback, possibly next week or the week after…after all the market has been running since late December without taking a breather.
If you are moving a high percentage of your portfolio into the market now, that allocation is at a high risk. It is critical to only buy stocks at proper pivot points on the chart. If you are adding to positions, be careful and keep a close eye on your average cost. Those who are plowing in or initiating several positions today are more vulnerable. You may be better off waiting and adding to core positions if you are seeing support during the pullback.
Getting the first market pullback right, in a new uptrend, becomes critical when looking at possible compounded gains at the end of a market move. That’s why it’s so important to resist chasing and the temptation to add a lot more exposure while we are extended this far in the move.
President, MarketSmith Incorporated
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Scott, Very helpful, timely post again. Thanks and Best Regards, Greg Lawson
Scott- what's your position on taking profits at this point? Are you back to looking for 20-25% from breakout or still feel taking them quicker is best couse of action
How much weight should one put on lagging RS lines in evaluating and entering an otherwise valid-looking volue-driven base breakout, 3-weeks tight breakout, or 50-dma support move? Several recent and current breakouts and support moves have RS lines that are lagging the price moves and breakouts to NHs [e.g., BWLD, CLR, LAD, MELI, RAX, SAVE, SWI, TSCO, ISRG, MA, SIMO] though the volume is there and the pivots cleared..
TDG's RS line on its 1/23 breakout move clearly lagged its price move, though after the 1st and 2nd pullbacks afterwards and volume move on 1/31 above the left-side peak pivot of 102.83, the RS line led. Is this the way to play it?
Or should one place less value on a RS line at the breakout and concentrate rather on the volume behind the breakout move?
Been passing on these breakouts as a result of lagging RS lines.
Any guidance you could provide would be appreciated.
Scott, Withey above asked an excellent question. Model book stocks show that leading RS lines to new highs at breakouts is a high percent required ingredient. Also, worth noting, the last 10 weeks, the 85-85 index chart , shows a declining RS line. Other successful rallys eg Sept. 2010 and March 2009, showed that index with a rising RS line, almost from the start of the rally, if not before. Ofcourse, that doesn't mean that it won't change course in the near future and make can slim investing less stressful.
Scott...excellent timing of this note. I just made a note this morning about figuring out when I add to my existing 30% exposure in the market with the 4 stocks purchased in Jan after reading this weekend's IBD article on managing average cost and not trashing your returns when a correction happens due to overly aggressive position adds. Great advice on being patient for the proper support with the core stocks once the correction happens.
Scott, Are we beyond the usefulness of comparing the 1929 DOW and 2000 NASDAQ post-bubble periods? It would seem so, but while the DOW took until 1945 to reach above the intermediate peak of 1937, it did create the resistance you mentioned in the current 11 year NASDAQ high. It ran for ~5 months, but then there was another 2 year period of correction until 1949. Just a thought. Also still watching the potential 1987 precedent. Looking for good entry points nonetheless!
@Steve17: I’m still taking profits quicker than normal. But as more stocks are able to sustain runs and if the market can continue to avoid volatility, I’ll give my positions a little more room.
@Withey: Just because the RS line isn’t at a new high, doesn’t mean its “lagging.” Many of the stocks you mentioned have great, up-trending RS lines. An RS line at a new high is great to have, but it isn’t a deal breaker if it isn’t there. Use volume as your primary validation for breakouts. RS line is important, but I consider it secondary to volume.
@fairwaymike: Great question. While the 1929 comp doesn’t overlay as well at this point, its still useful because it tells thus that after a devastating market crash, it takes a very long time to fully recover and develop into a “normal” market environment. It tells us to continue to being cautious and be prepared for volatility.
Hi Scott, one rule I am having trouble defining for myself is: after a stock has shown a profit, at what profit point do I refuse to let it drop into the loss column? After reading the 2 chapters on selling in your father's book again, I found that he says 15-20% is the point where a stock should never drop into a loss (I believe the exact words were closer to "when a stock shows a 15% gain is when you start looking at where to sell for a profit").
Given your recent posts re:adjusting market exposure based on overall market environment, I imagine that your answer would include "depends", but is there a point, like 6% or 8% profit, after which you would not consider a pullback to 8% below the pivot a "normal" pullback in the course of a breakout?
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