Look, the market's bouncing! Is the crisis over?
Not hardly. But you probably knew that.
While it's possible that last Friday's lows will stand as "the bottom," I suspect we'll be down in that neighborhood again before too long. No matter what the world's governments do to take pressure off the banks -- and as of this writing it looks like they are making real progress, finally -- we're in for a tough recession.
And that means more selling.
Institutions will continue to reduce leverage, and individual investors, particularly those nearing retirement, will take advantage of any rise in prices to lighten up on stocks. That means, as I said last week, that we're likely to see a series of false starts before the market gets a sustained recovery going in earnest.
In other words, this rally is probably a "false start." (I say probably, but what I really mean is "definitely, unless something really weird happens." Of course, right now, really weird is the new normal, so the usual caveats apply.)
So what do we do in the meantime?
Stick with rule No. 1
With luck, we won't see anything like last week's sustained eye-popping drops for a long time -- but it's entirely possible that we'll rally for a bit and go right back down very quickly. But no matter what, rule No. 1 still applies: Don't panic.
That rule has a number of corollaries:
- Have a plan and stick to it. Whether your plan is "Buy 500 shares of Apple (Nasdaq: AAPL ) if it dips under $100 again" or "move 10% of my portfolio gradually into bonds over the next month," stick with it. If developments lead you to rethink your plan, rethink it -- don't make any rash decisions out of fear.
- Remember that you have time. Sudden upward leaps in stocks like Google (Nasdaq: GOOG ) that are well-regarded but have been wildly oversold can cause panic, too -- nobody wants to miss the boat! But hold on a minute. Many successful traders will tell you, "Never do anything in the first half hour after the market opens," because that's when too many people make too many decisions based on emotion, and prices in that period can be all over the map. If your plan is "Buy Mosaic (NYSE: MOS ) under $40" because you've done the analysis and decided that that's what you're willing to pay, don't rush to buy it at $46 just because it's going up sharply. It could come back down -- and if it doesn't, there are plenty of other opportunities out there. Don't get too invested, emotionally speaking, in just one opportunity.
- Plan your selling, too. I don't think any long-term investors should bail out of stocks altogether at this point -- it's too late for that -- but selling stocks like Abercrombie & Fitch (NYSE: ANF ) that may be facing rough times to buy stocks like McDonald's (NYSE: MCD ) that seem better-positioned is usually a good move. Or, you may have decided to lower your portfolio's overall risk by selling some stocks and moving into a bond index fund or other lower-volatility investment. But again, no matter what, sell when and because your reasoned judgment says it's the right thing to do, not out of emotion.
- Don't obsess over the news. That's my job! Seriously, overexposure to attention-grabbing headlines and melodramatic TV talking heads will only feed your tendency to respond emotionally with impulsive trades. And that's bad. Unless you're a skilled, veteran trader who is prepared to make trading a full-time job, leave the quick trades on volatile issues like Validus Holdings (NYSE: VR ) or Liberty Media Capital (Nasdaq: LCAPA ) to others.
All of that said, there are tremendous opportunities out there -- if you're prepared to hold through the current storm with an eye to substantial gains a few years from now. If you're looking for strong ideas to buy today, take a look at the stocks that Fool co-founders David and Tom Gardner are recommending to members of their Motley Fool Stock Advisor service right now. Full access is free for 30 days.