What to Do When the Dow Hits 12,000

You already know about the huge opportunities in the stock market right now. If you had the courage to invest near the lows, you took advantage of the big run-up we've seen over the past couple of weeks.

And even if you didn't buy any new shares, just holding on to your existing positions -- rather than selling into the panic and guaranteeing yourself a big loss -- marks a major victory. Congratulations!

The next step
Yet, as some start to hear the all-clear signal, others will talk about the way bear markets work. Specifically, despite gaining nearly 1,500 Dow points from the October closing lows, the stock market isn't close to convincing many technical traders that the bear market is over. Take a look, for example, at how far below 200-day moving averages many stocks are -- even after the rebound.

Stock

% Rebound From 10/27 Dow Lows

% Below 200-Day Moving Average

Accenture (NYSE: ACN  )

20%

(9.6%)

Teva Pharmaceutical (Nasdaq: TEVA  )

13.4%

(5.5%)

Weatherford International (NYSE: WFT  )

47.6%

(50.9%)

Infosys (Nasdaq: INFY  )

22.7%

(22.1%)

ConocoPhillips (NYSE: COP  )

23.4%

(28.5%)

Transocean (NYSE: RIG  )

32.2%

(35.5%)

3M (NYSE: MMM  )

8.7%

(9.7%)

Sources: Yahoo! Finance, Stockcharts.com.

As you can see, many of these stocks would have to rise a lot further just to get back to their moving averages -- let alone hit new highs. The Dow would have to claw back to between 11,500 and 12,000 -- another 20%-25% higher than where we are today -- before these traders would see confirmation that the markets had broken their long-term downward trend from last year's highs.

Keep your cool
But just as we told you to stay calm when these same folks were making such dire predictions, you'll also need to keep your wits about you if the market has a melt-up for a while. Here's some specific advice on how to prepare for an even bigger comeback for stocks:

  • Don't get caught up in the greed. You've heard a lot about how smart investors get greedy when the rest of the world is paralyzed by fear. However, if the Dow rebounds to 12,000, there'll be a whole lot of greed among mainstream investors -- and you'll want to start looking for reasons to be fearful.
  • Get your risk tolerance fixed. When stocks have already crashed, selling stocks to cut your risk carries a hefty price: You have to take huge losses. After the rebound, however, you'll be able to fetch a much higher price for many of your formerly crushed stocks. Prepare now to know what you'll do when the time comes, and you may never have to go through the same uncertainty you did during this panic.
  • How much is enough? Many folks who were close to retiring before the market dropped found that they had invested aggressively in the hopes of having an even nicer standard of living during retirement. Now, they've had to scurry to adjust their plans -- and many will have to work longer than they'd originally intended. If a rebound to Dow 12,000 gives you enough of a nest egg to support your basic needs along with a few perks here and there, think about taking your risk level down a notch to ensure you won't have any back-to-work surprises during your retirement. Even if that means one or two fewer dinners out or trips to the golf course, the peace of mind is well worth the small cost.

A look back
Plenty of over-optimistic investors have gotten trapped by bounces during past bear markets. Unlike the 1987 crash, in which the markets staged an orderly advance back to new highs within a couple of years, most bear markets involve fits and starts of up and down movements that mask the overall direction of the market.

For instance, during 2000 and 2001, there were several significant rebounds that proved to be only temporary in nature. Things were even more volatile during the 1970s, when during the recovery from the lows of 1974 and 1975, the market grew increasingly choppy in its movements -- until it finally broke out to new highs in the early 1980s.

To get through the panic, the best course of action for many investors was to stay put. Once the Dow recovers to 12,000, however, all options will be back on the table -- including the choice to get out of stocks without selling at a fire-sale bottom. Take a look at your portfolio now and be ready to act when the time comes.

To learn more about investing in interesting times, read about:

For more than 15 years, Motley Fool co-founders David and Tom Gardner have helped people learn to invest better. Now, their Motley Fool Stock Advisor newsletter is digging through the rubble to find the best stocks for a recovering market. See what they've found free with a 30-day trial.

Fool contributor Dan Caplinger thinks it'll be a while before we reach Dow 12,000 again. He doesn't own shares of the companies mentioned in this article. 3M and Accenture are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy works no matter where the Dow goes.


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  • Report this Comment On November 05, 2008, at 8:19 PM, 181736065 wrote:

    ""To get through the panic, the best course of action for many investors was to stay put. Once the Dow recovers to 12,000, however, all options will be back on the table..."

    Ha ha! I guess hope springs eternal.

    Stay put over the last year, and watch your savings decline by 40%. Sad. Irresponsible, advice.

  • Report this Comment On November 05, 2008, at 9:00 PM, dlbuffy wrote:

    Could this piece be more badly timed?....or have left out more necessary information?

    There is nothing in this piece about how the economy actually works or has an impact on stocks...just fluff about it rebounding and hope eternal that 12,000 is just around the corner.

    We just had a terrible jobs report...our exports are dropping...corporate infrastructure spending is down (again)...and just about everyone is waiting for a terrible X-mas sales season.

    This is the hard stuff...this is the stuff that will take TIME to work through. The economy will not turn around on a dime with any one stimulus package...lending will most likely NEVER return to where it was...banking will become more regulated and global....

    ...ALL of this will take time. More time that some people have to wait for 12,000 again.

    Furthermore....12,000 had half of Fooldom saying overpriced...14,000 had most of Fooldom yelling OVERPRICED...there is no way that an economy with tighter credit...tighter lending practices...will reach the easy days of high valuations in next three to four years.

  • Report this Comment On November 05, 2008, at 9:23 PM, greenlake1 wrote:

    Your looking at 5-10 years for the economy to turn around, period! It took us 20 some years to get into this mess and the next 10 years are not going to look like anything we've seen before. The consumer is dead broke, over extended and doesn't have one penny in savings. We're going to 10%-12% unemployment because of so called free trade that has cost us dearly! Who ever thought we could compete with workers making $1.00 an hour without losing jobs and lowering our wages, standard of living. Free trade is the brain child of corperate greed that will bring us to our knees if we don't stop it and protect our industrial base! No country has ever survived and defended it self without a strong industrail base, period!!! Good Luck!!!

    Dan Bergstrom

    Seattle, Wa...

  • Report this Comment On November 05, 2008, at 11:32 PM, lcalc7 wrote:

    DOW 12,000? Don't get lost in pipe dreams. The DOW is more likely to see 6,000 than 12,000 in 2009. Keep your cash on the sidelines if your not a trader. If your a trend trader go with best in class stocks or Ultra ETF's.

  • Report this Comment On November 06, 2008, at 2:16 AM, amicidelbosco wrote:

    "It's the GLOBAL ECONOMY STUPID"! We are undergoing fundamental shifts in the means of production, costs of production and earnings of production. Much of our industrial base is undergoing restructuring if not elimination ( i.e automotive industry). Our standard of living and means of living are in the midst of a downward equilibrium curve while the future powers such as China are moving upwards. The key is to pin point where the East and West twain meets on the the economic equilibrium curve. As we have to get used to the idea of leaner life style and less spending with less earning power businesses will have to accept lower earnings. The DOW will see 5,000 to 6,500 for several years. Afterwards a slow increase once stability within the Global Economy is established. You've got to see the Wizard for a DOW of 12,000. By, By ALICE!

  • Report this Comment On November 06, 2008, at 3:27 AM, GoNuke wrote:

    The crash we just witnessed was the house of cards the Republican free traders allowed to happen. Both housing and stock values were bid up using outrageous levels of leverage.

    Levels that the world agreed were not acceptable; hence the capital adequacy ratios of the Bank of International Settlements that all OECD countries have agreed to. It appears that Canada was the only country to abide by the rules. The complex derivatives are not really that complex. They are; however, blatant evidence that the financial world found ways to circumvent the regulations that were supposed to be protecting us. They found major flaws in the bond rating agencies risk models and exploited them.

    We have just lived through a great period of deleveraging -replacing bank debt with sovereign debt. That means one way or another Americans are going to have to pay for the folly of the neocons. Taxes will go up -they have to.

    The world economy is tanking. Demand is falling. I am not convinced the recession has been priced into the stock market yet. I am not prescient. The market may have fallen as far as it will go but it may not. I am holding cash in reserve awaiting 1Q 2009 earnings. They are likely to be disappointing. The market may fall further. I agree that it is going to go up and down for a while. A $70 billion stimulus programme where checks are just mailed to people will have no impact.

    Now is the time for the US to invest in itself by building assets not subsidizing consumers. It is time for a real new deal.

    All of you well versed in analyzing balance sheets should now become familiar with demographics. There are going to be big shifts that will affect the econometrics. The future will not be like the past. Don't plan for the past.

    Don't be like the old generals that are always fighting the previous war.

  • Report this Comment On November 06, 2008, at 6:36 AM, Ozcutty wrote:

    i've been worrying about this also. If the dow does its usual xmas and spring rally we could easily see 12000 again, regardless of the real economy, should i cash out at least some of my gains incase things plunge again?

  • Report this Comment On November 06, 2008, at 8:37 AM, BoTom wrote:

    So much blabla. Just take your money and put it under your pillow if you're too scared and lack the genes for value investing but stop repeating the same panic yip-yap in every comment to every article around here.

  • Report this Comment On November 06, 2008, at 11:46 AM, ricej1969 wrote:

    I agree with BoTom. You guys are helping fuel the fire. I just wish that I had more money to invest. My standard of living goes up each year and will continue to go up because I keep my expenses low, have plenty in savings, bought a resonable house according to my income/expenses last year. And STOP BLAMMING EVERYONE ELSE. America is very materialistic and greedy and is being spanked for it right now. This goes for the CEOs and down to "poor" Americans.

  • Report this Comment On November 06, 2008, at 3:16 PM, GoNuke wrote:

    Oh look

    October retail sales were worse than analysts expected and market fell today.

    Why were the analysts surprised?

    Why were investors surprised?

    If you have the stomach for it keep some cash around until next spring. The analysts haven't studied psychology. People are scared. They are going to heed bad news and discount good news. Analysts are not good econometricians. They are going to keep underestimating how scared people are and; thus, how much worse things are going to get from a market perspective.

    The real bottom may not be reached until next spring or summer.

  • Report this Comment On November 07, 2008, at 12:19 AM, gregoryb02 wrote:

    You cannot pick the market bottom or the market top, or the timing of either... you can only pick your stock. Choose wisely.

  • Report this Comment On November 07, 2008, at 8:45 AM, 32susan wrote:

    my worry is all the spending that WE all will have to pay for congress spending by obama will be spending our/my assets-- my children & grandchildren will get few if any assets/money--

    4 years as disaster-- hold your breath & pray

  • Report this Comment On November 07, 2008, at 11:51 AM, parkeld wrote:

    to avoid the many and costly pitfalls of market timing, choose an asset allocation and REBALANCE if your asset classes get out of whack. If you have a small portfolio, use no transaction fee mutual funds so that rebalancing is not so costly. Rebalancing a 75% stock, 25% bond portfolio beats owning stocks outright over the long term, with less volatility -- it forces some amount of selling high and buying low.

  • Report this Comment On November 07, 2008, at 12:00 PM, parkeld wrote:

    32susan, puh-lease. There are so many valid criticisms of politicians of all stripes that it is a waste of time to repeat the old saw that Dems will spend like crazy while Repubs will not. Bush/Paulson and Congress just spent over a trillion on a rescue package and we're looking at a fiscal 2009 deficit of $1 trillion or so before Obama makes any decisions. The Iraq war will cost several trillion if you include VA expenses and such. Both parties spend like crackheads with a stolen credit card -- they just spend on somewhat different things. Right now, both parties agree on higher spending -- it is a fiscal stimulus (government spending can stimulate the economy). If the government spent less now, it would detract from GDP and probably lead to higher unemployment. It's time to lobby your representative for the spending that you think is wisest...they're not going to cut the budget this year.

  • Report this Comment On November 07, 2008, at 8:32 PM, easymoney4us wrote:

    We can all try to time the matket under a new president elect.

    We will all be wrong. I have invested multiple times under the same situations and lost. I was always behind the 8 ball.

    This is the first time I have seen stock prices in my favor at these bottom line prices.... and have had the opportunity to react period!

    Trust me I have learned to be a bottom feader and here are three stocks I have found to be "Best Value" for anyone interested.

    Look at GE $18 ??? DDR at $ 9.00 and ...ERTS at $23.00

    Just these three household companys pay dividends in the 15-30% range on your investment.

    This is a time to buy and buy right NOW if you want to make money.

    If it goes down it will not be by much more.

    If you wait you will miss the upside and then you might as well send the next thread on why you sat on the sideline.

    Have you watched the market lately? It has been volitale for the past few weeks positive and negative yet has not gained much ground. (This is a signal to buy) and yet has not lost much in the past few weeks either.

    Just these three household companys pay dividends in the 15-30% range on your investment.Yes I am saying it again...

    These companys are worth more with Brick & Mortar alone!

    Am I stupid to invest ? Or am I stupid to sit and watch?

    I look forward to your response.

    By the way I am self employed "high school 1977 grad" and can only invest a few hundred if I am lucky per month.

    I have no interest in any companys and would like any information you guys can give me on other investments that fit my value.

    Thanks for your input.

    11/9/08

  • Report this Comment On November 09, 2008, at 6:27 PM, milpo wrote:

    The DOW will most certainly hit 12000. It will do it in 2020. That gives you about 12 years to position yourself. If getting in cheap and acquiring bargains is your game, don't get in until 2011 or 2012. Good things come to those that wait. Eventually.

  • Report this Comment On November 09, 2008, at 10:21 PM, pswms wrote:

    GE at $18, DDR at $9 and ERTS at $23.

    Maybe these are great buys.

    I think Lehman Brothers was at $16 when I bought.

    General Motors may have enough money to make it

    through the end of the year? For now, people with a

    few hundred dollars a month to invest, probably are

    wise to let the market correct and enter a well established

    uptrend before putting money there, if then.

    If the stocks you are talking about are valuable now, they will

    also be valuable at a few dollars more.

  • Report this Comment On November 10, 2008, at 1:49 PM, Ironbob wrote:

    I just hope more losers keep selling. I want to get rich on their fear.

  • Report this Comment On November 10, 2008, at 1:57 PM, Ironbob wrote:

    GoNuke, are you a retard or do you just play one on this forum?

  • Report this Comment On November 10, 2008, at 2:06 PM, Ironbob wrote:

    "I am not prescient."'

    "The real bottom may not be reached until next spring or summer."

    "The crash we just witnessed was the house of cards the Republican free traders allowed to happen."

    "The complex derivatives are not really that complex."

    "That means one way or another Americans are going to have to pay for the folly of the neocons."

    "The market may fall further."

    "The market may have fallen as far as it will go but it may not."

    "The future will not be like the past. Don't plan for the past."

    As I said previously. GoNuke, the only thing we know for sure is that you love to hear yourself talk. It's the only thing that can explain this long list of your own quotes that indicate you are a jackass.

  • Report this Comment On November 11, 2008, at 6:17 PM, richlyfl wrote:

    What to Do When the DOW hits 12,000?---

    Wake up! You're dreaming!

    Or----

    Worse yet---

    The DOW is at 12,000---

    But----

    The World dumps the US Dollar---

    And---

    100 US Dollars = One Remindi

    Subtitle: The little billionaire with the bow tie was right.

  • Report this Comment On November 17, 2008, at 10:35 PM, segesta wrote:

    On the other hand, I have a pile of breathless "we'll never see $3.00 gasoline again!" and "if we're lucky, oil will only be $175/barrel by Christmas 2008!" articles from just five months ago, from other Smart Financial Pundits.

    Yes, planning for a Dow of 12,000 may seem comical right now, but prognostication both ways is a dangerous game. Me? I'm maxing out my 401(k) for the first time. Getting greedy while others are panicking, and all that.

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