One of the most important selling rules applies not to individual stocks, but to the market as a whole. You may be right about your stocks, but if you're wrong in your assessment of the general market, your stocks will suffer. During a market decline, even good stocks have a hard time swimming against the market's current. Typically, three out of four stocks go down in a declining market.
The market always begins a downturn with a series of distribution days in which selling predominates. Over the course of a few weeks, at least one of the major market indexes (the Dow Jones Industrial Average, Standard & Poor's 500 Index or the Nasdaq Composite Index) closes lower or stalls several times on higher trading volume than the prior day. This is another example of churning, and every major market downturn has begun with one such episode.
Read an excerpt from our CAN SLIMTM course on market tops & bottoms.
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Also during weakening markets, the leading stocks (those that have led the market's uptrend) typically start to falter.
When the market enters a confirmed downturn after four or five days of clear distribution in a market index, you're better off selling some of your stocks and raising some cash. Get off margin (that's when you borrow from your broker to buy stocks) at once. Sell your worst performing stocks first. Of course, you'll need to keep watching the major market averages to identify the market's next turn. You may see the market rally for a few days, only to falter. Learn to recognize a valid market upturn so you aren't misled. Always regard the 8% Sell Rule (selling any stock that falls 8%
below your purchase price) as your safety net, particularly in market declines. Track signs of weakness in both your stocks as well as the general market.
