I know that it’s been a scary couple of months. The floor fell out of stocks at the beginning of August, and the S&P 500 index went from modest gains to double-digit losses in 2011. Not surprisingly, investors are still anxious about putting their cash back in stocks.

But that’s exactly what they should be doing. Let me explain…

There’s been a whole lot more to stock picking than just “picking stocks” lately. Instead, portfolio management has become one of the most important contributors to actually seeing meaningful growth in your account. That’s why, in the face of so much uncertainty, it pays to be tactical in this market.

That’s easier said than done…

In the pages of Penny Stock Fortunes, fundamental factors are the basis for the stock recommendations that my colleague, Greg Guenthner, and I put out. But as I told you last month, fundamental value just isn’t in synch with the market anymore. You see, despite the facts that corporate profits are at all-time highs, earnings are beating Wall Street’s estimates and stocks are already trading at crisis-level discounts, market participants continue to drive share prices lower. When fundamentals decouple from market prices, the world suddenly becomes a scary place for most investors.

So, to combat that, we’ve ramped up the technical analysis that we use in our short-term decision-making.

While fundamental factors (like profitability, book value and product lineups) are our basis for deciding whether or not to recommend a stock, technical factors (like supply and demand levels in the market itself) are dictating our entries and exits in positions.

Those factors are the reason we’ve been taking profits on so many highflying positions in recent months. A few examples include:

• The 205.8% gains that we closed on shares of KapStone Paper and Packaging Corp. (NYSE:KS) back in late June.
• The 113.2% gains we booked on Advance America (NYSE:AEA) last month.
• And the 13.3% we netted on shares of Boise Inc. (NYSE:BZ).

In all three of these cases, it wasn’t the fundamental reasons for owning the stock that changed. Instead, it was the technical weakness in the market that prompted our selling.

As the market continues to churn, we’re continually reassessing our open portfolio — and you should be doing the same thing. Now, though, it looks like a good time to buy.

That’s because stocks are still trading at a discount to their “real values”. On a relative basis, corporate fundamentals are currently priced the same way they were back in October 2008.

In other words, stocks are cheap.

At the same time, we’re finally seeing the technical cues that indicate bulls are coming back into the market. The bottom appears to be set in stocks (for more on why, check out this article), and until the S&P 500 falls below the 1,120 lows that got set in August, that’s not changing.

In other words, the market’s selling appears to be over.

That doesn’t mean that stocks are going straight up, or that we won’t get another correction in the future. Even so, the alignment of fundamental value and technical strength is noteworthy right now — and we’re taking action as a result.

As I type, Greg and I are putting together our analysis for two new names that we’re recommending to our members. We think they’re prime candidates to take advantage of the current scenario in stocks. (To get those names, click here.)

If you haven’t bought the market bottom, maybe you should…

Cheers,

Jonas Elmerraji
Penny Sleuth

Did You Buy the Market Bottom? was originally featured in the Penny Sleuth.

1. A double bottom with a shake out low.
2. A First Thrust Up

In order to give you a clue as to what these look like and what to be on the lookout for, below are a few examples in multiple time frames and frequencies. First up are the market lows of last week in a four-to-six day, one-minute time frequency.

The chart above is super historical! It’s the Great Depression lows. As you can see, the crash of 1929 was not the problem. It was the ensuing bear market that followed — that was where the real wealth destruction took place. Sound familiar? What you’ll really notice was that the market did not truly bottom until it formed a 1ST Thrust Up, then an eight-month Pullback Off Highs (POH)! Now let’s fast forward to the bear market of 2000…

The chart above is also historical. It’s a bear market we’ve all lived through — the Tech Bubble Bear Market of 2000- 2003. Look familiar? Again, you did not get your true lows until you got the First Thrust Up, then the Pullback Off Highs (POH). As you can see, this particular POH lasted four months. (Note: The crash of 1987 also showed this pattern.)

Now that you’ve seen a few key historical market bottoms and what the technicals look like, you’ll never have to listen to the talking heads on TV telling you what they think.

With this said, a retest of the lows by the market in the coming week will set up a boatload of issues on the longside and our final lows of the first leg down of this monster bear market. Then we get a reprieve of a decent time duration and a bear market rally.

Sincerely,
David Grandey
AllAboutTrends.net

March 16, 2009

How to Spot a Market Bottom was originally featured in the Penny Sleuth.