Five Investment Strategies For a Down Market

I’m sure you’ve heard the phrase “corrections are healthy” more than once over the past few weeks. And like most investors, you’re probably wondering how losing a third of your portfolio can be healthy. But just because you lost money doesn’t mean that investment opportunities have dried up. In fact, there are more opportunities today than in the past year. You just have to use smart investment techniques to find them.

Here are five tips you can use today to help you find great, undervalued stock opportunities:

1. Look for stocks hitting their 200-day moving average. Think of this moving average as a line in the sand. If the stock is above this trendline, it is in an uptrend. If below, it’s in a downtrend. Look for a stock that has a history of using its 200-day as support. If you find one, wait for the stock to bounce off its 200-day and then buy. Microsoft (MSFT) is a stock that recently did just that.

2. Look for oversold situations in the weekly charts. I like a weekly chart because it tends to move more smoothly than its daily counterpart. Finding an oversold weekly chart gives you the chance to buy into a stock that has already seen a lot of selling and is ripe for a turnaround. The oscillators I use are the 9-unit RSI and the 9,3-unit Slow Stochastic. Stocks showing an oversold weekly chart include Intel (INTC), Google (GOOG), and Silver Wheaton (SLW).

3. Use value analysis when reviewing companies. This is the same strategy investment great Warren Buffet uses. Value analysis allows you to invest in cheap stocks that make good money and are unfairly hit by a market slump. The best time to find solid, cheap companies is just after a big market drop. Good fundamental criteria to consider include P/E ratios below 12, price to book and PEG below 1.5, operating margins of at least 20 percent, return on equity above 15 percent, and growing profits and revenues. An excellent source for this type of search is the Yahoo! Finance Stock Screener.

4. Look for income-producing companies. There’s no denying that when the market falls, the best performers are solid, dividend-paying companies. The best of these typically have cash flow of at least 10 percent of t! heir market cap, pay out less than 30 percent of their earnings as dividends, and have a track record of paying consistent dividends for at least five years. Dividend stocks do well because they’re perceived as less risky than the average investment. These are companies that are mature and will stick around for years.

When you find these companies after a big drop, the yield they pay will be greater and should help buffer any potential drop your portfolio may experience in the future.

5. Manage your losers. Setting stop losses is one of the most important things you can do as an investor. Keeping your losses as small as possible will directly impact how much money you take home at the end of the day, month, or year. I’m not going to rattle off some pre-determined stop loss for you to religiously use. Stop losses differ depending on your strategy.

In Andy’s INCOME newsletter, we’ll sell half a stock position if it loses 10 percent. We do this because we still want to give the stock a chance to recoup its losses. But if the second half is down 25 percent, we’ll sell it. This strategy keeps our overall loss below 18 percent.

Technical traders may want to use a moving average or trendline as a stop-loss point.

Utilizing all of these strategies the next time you decide to buy a stock accomplishes a few things. First, you buy cheap so you’re less likely to lose as much money during the next market correction. Second, you’ll choose investments that help buffer any potential drop in your portfolio. Third, you’ll know when to sell if the trade isn’t going your way.

Disclosure: Author has no position in the above-mentioned securities