"Did you ever get the feeling that the world is a tuxedo and you're a pair of brown shoes?"— George Gobel, comedianThere's no point zigging when the whole world is zagging. Buying stocks during a correction or a bear market is simply fighting the tape — a fight you lose. Similarly, shorting stocks while the market is rising also can be a waste of time and money.
Sure, you could find the one stock that can buck the bear, or short a stock that falls amid a rising market. But the odds are stacked against you. Why would you want to make investing more difficult and less profitable than necessary
IBD research shows that one of the most important factors that determines a stock's success is the direction of the broad market. Bull markets don't lift all boats — but most.
So how best to use your time during a correction? Look for great stocks, those that you can buy when the market turns up and that stock breaks out.
Great stocks don't necessarily rise in a bear market — although some do. But many build bases while the broad market is getting shellacked.
When the correction ends, you'll see a lot of stocks that are badly damaged — and a few that have held their losses and show the signs of at least some institutional accumulation.
What kind of a stock will build a nice, tight base while the market is falling? The sort that's enjoying support from the big-money funds. They've identified the stock as a future winner, and they're taking advantage of the correction to get in at bargain prices.
Chipotle Mexican Grill (CMG) built a 10-week cup-with-handle in 2010. At the time, the S&P 500 was in a correction that would cost the index 17% at its worst.
Chipotle's correction only ran as deep as 18% — not bad, considering that market leaders can show losses of as much as 2-1/2 times that of the index without being considered excessive.
Chipotle broke out at 154.53 on Sept. 1 1, the same day that the broad averages scored a market follow-through. Not all winners break out on the follow-through, but those that break out early in the uptrend tend to often score the biggest gains. Chipotle's heralded a gain that would amount to 186%.
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- George Gobel