Miss Some Of The Current Market Rally? There Is Hope

Includes: DIA, QQQ, SPY
by: Paul Johnson

If bull markets "climb a wall a fear," as the saying goes, the current rally that has taken the Dow to highs not seen since 2007 has had more than its share. In the process, some traders have been very reluctant to put a lot of money into stocks.

There was, of course, the "fiscal cliff" which loomed over the market at the start of 2013. But more recently, traders have begun to talk about the end of the Fed's program of quantitative easing, which has fueled most of the market's gains since 2009 - even as the U.S. economy picks up steam.

Despite these concerns and others, the S&P 500 has managed a gain of over 15% so far this year - despite a pullback over the last couple of days. Given these impressive gains, it's no wonder that even hardcore non-believers have been dragged kicking to the realization that just maybe the market could end up leaving them even further behind.

If you are one of those who have been waiting on the sidelines but are now ready to consider putting more money into stocks, here are a few thoughts on what you might consider doing:

1) First, don't wallow in the past or beat yourself up. This only leads to further frustration and taking trading chances that could backfire on you. Relax, and "trade to trade well" as the saying goes.

2) Don't try to "get back at the market," or come up with a rationale as to why the market's gains were somehow ill-begotten. Go with it. Remember, as with your spouse, arguing with the market is an argument you will never win. Thinking of shorting the market or high-flying stocks? Think again. Never short a bull market.

3) Ease into stocks incrementally rather than jumping into the market headlong. Making big bets that go sour early on will frustrate you even further, and you will not only find yourself trying to catch up but falling further and further behind.

4) Stick to buying leading stocks. By "leading stocks," I mean primarily stocks that have a track record for strong earnings and earnings growth.

5) Buy leading stocks in the top ten or so sectors. Studies have shown that during any market rally, the biggest moves come from stocks in the strongest sectors. Right now, media stocks lead the pack, and I like AMC Networks (NASDAQ:AMCX), Sinclair Broadcast Group (NASDAQ:SBGI), Starz (NASDAQ:STRZA) and others. Biotech stocks continue to be strong, too, and I believe stocks like Biogen Idec (NASDAQ:BIIB), Celgene (NASDAQ:CELG), Gilead Sciences (NASDAQ:GILD) and others still have good potential.

6) Buy leading stocks at the right times-- namely when they are setting up in explosive chart patterns. I tend to concentrate on stocks that are setting up to either break out or that have pulled back a bit and may be ripe for reversal trades. Why? Because the chart patterns they form give strong visual cues just prior to making big moves. "Buy right and sit tight" as Jesse Livermore would say.

7) Monitor the price action of leading stocks on a daily basis. As the leaders go, so goes the market. You want to see a pattern of mostly higher volume on a stock's up days and receding volume on down days.

8) Monitor the action of the major market indexes daily, including the Nasdaq (NASDAQ:QQQ), the S&P 500 (NYSEARCA:SPY), the Dow (NYSEARCA:DIA) and maybe even the Small Cap 600. Again, you ideally want to see higher volume up days and very few higher volume down days.

9) Realize that even if your initial gains are smaller than you would like, the market will eventually pull back a few times a year - even during extended bull markets like the one we are in now. These pullbacks of 1% to 10% or more offer great opportunities to snap up shares of leading stocks when their prices become more attractive.

10) Trading the market is just as much about selling at the right times as buying at the right times. Nothing allows a trader to catch up with the market more quickly than raising cash when the market is showing signs of being overbought or when the big institutional investors are selling. The very essence of swing trading is staying in sync with the overall market, and if you follow steps #7 and #8, that's exactly what you will be doing.

11) Finally, always look ahead to upcoming economic reports, breaking news stories, or any foreign or domestic issues that could affect your holdings. I stay glued to MarketWatch, MSN Money and CNBC before, during and after the market day. You do this not to predict what the market will do next, but to create your own dynamic daily narrative as to what may be moving the market at any given time.

So, what are your thoughts? Let me hear from you.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BIIB, AMCX, SBGI, CELG, GILD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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