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Averaging Down: A Recipe for Disaster


A day like today reminds me why we do not buy a stock because it is a "good value." Investors have received advice since last Friday to begin buying as stocks fall back off their highs. That, by definition, is averaging down: a recipe for disaster. We all know stocks trend. What is the current trend?
 
Buying the dips is not a sound approach. Sometimes that dip never stops going down. And what about recent opinions that the market is oversold? Well, I guess we’re even more oversold right now and what about tomorrow and next week? A successful investor always starts with a strong defense. The stock market is treacherous and cunning. It would love to clean us all out.

Consulting stock charts reveals the markets have not been acting well for the last five months. I do not buy into downtrends nor do I hold very many stocks in a market like this. I am small now and will probably be forced to stay that way for awhile. There are times to be in the market and there are times NOT to be in the market. It doesn't hurt us to watch a few innings from the bleachers.
 
We need to be very careful going forward because the market is hypersensitive to the news of the day. Also, we are in the third year of a recovery after the 2008 market. Late in market cycles is when investors get chopped up and give back profits. Further, this market may be a going through a topping process, and I think it’s worth paying attention to the numerous indicators we’re seeing and potential implications. For more detail, refer to my MarketSmith Community blog posting on May 18.