Planning for contingencies
But it is the ferocity of the decline that is most startling. In two days, the plummet of the averages and individual stocks had the aerodynamics of an anvil. Warning shots over the bow occurred, for me, when former leaders such as American Healthways/AMHC and Websense/WBSN failed to follow as written their specific scripts. I sold other positions throughout the week, selling down to Google/GOOG and Apple/AAPL -- and I probably should have lightened the Apple/AAPL holdings.
Why did I sell? When the market enjoys upside momentum, it is okay to buy and hold breakouts, including those stocks extended from support (whether static or dynamic), but when the market turns down -- especially when that decline is as ferocious as occurred last week -- then it is folly to believe that most stocks will not turn down as well. Each stock must find its level of support. Yes, there will be leaders that will act initially as a safe haven from the storm, and rise; therefore, acting as a sop for investors' money. (Think Google/GOOG.) But should the decline continue, or worse, pick up pace... So I deem it critical to plan for all contingencies, to determine in advance (via scenario planning) whether the positions I hold could decline, and how deep if so. If the answer is below my acquisition cost (e.g., WBSN or AMHC) then I sell. I always could repurchase later, if still desired.
It is not easy to hold shares in any stock, no matter how bullish its future, if your profits wither away during a market decline. For example, an investor might be "okay" with holding GOOG to the low of its presumed base, or ~$250. What happens, however, if it should break down beneath that price level, and the market at that specific moment apears set to continue its plummet? What do you do then? Only time will tell whether such a decline occurs for either the market or GOOG. But having planned for all contingencies, you will know what to do and how to act when faced with its reality.
During a general market decline (and this one must continue lower before it qualifies as anything but a passing summer squall), the task I set myself is to find the market's new leadership. This requires more than finding isolated leaders such as Google/GOOG, but to find groups and sectors that out-perform on both a relative and absolute basis, akin to the leadership of the home-builders the past several years. (Has this group finally hit its high watermark...?) From sector and group leadership comes market leaders.
And having broached the topic of Google/GOOG...
1) It is rare to have a market leader as powerful as Google/GOOG that lacks concommitant group or sector leadership, but then Google/GOOG is sui generis, a "singular opportunity"
2) That GOOG upticked in the manner it did during Friday's sell-off augurs positively. This short term base ($300 - $265), however, is a mere 3 weeks in duration; I would prefer it continue to trade sideways -- the bigger the base, the bigger the subsequent move. Of course, the market doesn't listen to me!