Get Ready for the Next Leg Down

October's market swoon created plenty of opportunities for enterprising investors. But a lot of them were short-lived -- and if you didn't manage to pull the trigger and buy, you may be kicking yourself over the gains you've missed.

As stunning as it has been watching many stocks suffer huge losses in recent months, the rebounds have been equally quick and steep. Just look at how far some popular, beaten-down stocks bounced back from their lows last month:

Stock

Recent Price

% Above October Lows

Goodrich (NYSE: GR  )

36.56

29.6%

Chesapeake Energy (NYSE: CHK  )

21.97

83.2%

Mindray Medical (NYSE: MR  )

21.56

36.5%

Nucor (NYSE: NUE  )

40.51

54%

NYSE Euronext (NYSE: NYX  )

30.18

38.6%

Mirant (NYSE: MIR  )

17.52

46.1%

UnitedHealth Group (NYSE: UNH  )

23.73

63.5%

Source: Motley Fool CAPS, Yahoo Finance.

That's great news for those who fought their fear and found the courage to buy at those lows. But if you decided to wait until things got a little less uncertain before committing your capital to the stock market, the more important question is whether you should go ahead and buy now -- even at these somewhat higher prices.

It's all relative
First and foremost, it's essential to put the recent rebound into perspective. Yes, the major market averages all had double-digit percentage gains last week. Yes, those gains were especially impressive coming in the face of confirmation of a contracting economy and continuing lack of consumer confidence. And yes, plenty of folks seem to believe that we've hit bottom and that barring any more bad news, it's safe to get back in the investing water again.

But here's a look from the glass-half-empty camp:

  • Even with those big gains last week, the S&P has only gotten back to where it was just two weeks ago.
  • Over 2,000 stocks set new lows at some point last week, despite the run-up.
  • We're still down almost a third for 2008, and even more from last year's highs.

Halloween horrors may not be over
Perhaps the most compelling reason to remain pessimistic, however, is that so few of the big-picture economic problems that brought about the crash in the first place have gotten resolved. Around the world, governments have thrown billions at the problems plaguing the markets, yet many haven't even gotten implemented yet, let alone had enough time to show any concrete results.

Face it: The bad news isn't over. You're still going to see foreclosures well into the future. Housing prices may continue to stumble. Unemployment could rise precipitously.

In short, while the mood at the depth of the panic may have been unreasonably dour, it's way too early to get gleeful.

Good news for bargain shoppers
If you're not letting all this bad news affect your long-term investing temperament, however, you're on the right track. Just because some stocks have bounced back 20% or more from their lows doesn't mean they're suddenly overpriced.

Consider: If you're tempted to buy now, you must believe that the economy will recover and that everything will work out in the long run. The key, though, is whether you'll keep that confidence even if the market gives back all of those 10% gains tomorrow. In other words, this rebound may have cleared your head of irrational fear -- and put you in a position where you will be able to make targeted investments even if the market tanks further.

Stay disciplined
The way to get ready for the next leg down -- whether or not it ever comes -- is to start planning now which opportunities you'll want to take advantage of. Although it's possible you'll never again see the values you could have gotten last month, there's always a chance. By plotting out how you'll handle whatever contingencies end up happening, you can make sure you won't miss out on a second chance for the stocks you want at the price you've dreamed of.

For more on making the most of the current stock market opportunity, read about:

Fool co-founders Tom and David Gardner believe now is a once-in-a-lifetime opportunity for stock investors -- and they want you to profit from it. Their Motley Fool Stock Advisor newsletter has outperformed the broad market since it started in 2002. To learn what they think are your best bets to make money now, take a free look on us with a 30-day trial subscription.

Fool contributor Dan Caplinger thinks he's ready if the market falls again. He owns shares of Chesapeake Energy. NYSE Euronext and Mindray Medical are Motley Fool Rule Breakers recommendations. UnitedHealth Group is a Motley Fool Stock Advisor selection. Chesapeake Energy and UnitedHealth Group are Motley Fool Inside Value recommendations. The Fool owns shares of UnitedHealth Group and Mindray Medical. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps you covered.


Read/Post Comments (2) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2008, at 4:57 PM, goatsnuff wrote:

    Irrational buying often follows irrational selling. Good chance we'll see 8500 or less before we see 10,000 from this point. There is no really good news about profits out there. GM sales down 50% in Oct.says it all. As autos go so does the country.

  • Report this Comment On November 03, 2008, at 9:33 PM, disaster2008 wrote:

    Good advice. There is plenty of bad news to come plus hedge funds may be dumping more stocks. I predict the DOW will hit 7500 with the other indices proportionately lower, sometime between now and March 2009. Be patient. Look for high dividend stocks with stable earnings, good cash flow, low debt, and good ROA and ROE, because after that it will probably still be a roller coaster, so at least you will be getting paid to wait. I have researched a bunch of such stocks and have put in limit orders near their 52 week lows. I may not get them all, but if I get some, that will be great and I can also increase my positions at lower prices if the opportunity presents itself.

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