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6 Ways to Survive Today's Rough Market


What should you do now?

If you're asking that question you certainly aren't alone. As forces from slowing corporate earnings growth to a still-unsettled presidential election roil the stock market, investors are suddenly confronting some tough new realities.

Should you dump your losing stocks to avoid further pain--or perhaps start nibbling at deeply depressed shares in the hope they'll rebound in coming weeks?

The correct answer, of course, will be clear only in hindsight. But the action in your portfolio, and the tone of the overall market, can provide important clues as to how to proceed.

What follows are six suggestions from market experts as to how individuals--particularly aggressive investors who are more trading-oriented than buy-and-hold oriented--should maneuver through today's dicey market.

Many suggest how investors should prepare for the next major up leg in the market, whenever that occurs. They offer clues on how small investors can spot a turn in the market and individual stocks. Remember: Bad markets don't last forever.

For now, however, many experts advise aggressive investors to simply hold off on their trading because the odds of losing money are so great.

"When it's easy to make money, they should be investing, and when it's tough they should get out, and right now it's real tough," said Gary Anderson, a technical analyst at Anderson & Loe in Eugene, Ore.

Learn How to Read the Market

The first key in any market, especially a troubled one, is to understand the signals coming from the market itself.

This involves a lot more than simply looking at the daily movement of the Dow Jones industrial average or the Nasdaq composite index. Rather, it means scouring the beneath-the-surface indicators favored by professionals.

Granted, the market sends mixed messages, and there is always wide disagreement on Wall Street about the direction of stocks.

Nevertheless, many pros keep a close eye on volume patterns and what's known as support levels on price charts.

Trading volume indicates the intensity of buying or selling. Typically, pros compare the daily volume of a stock or the broad market with the level of the previous trading day, and with the short-term trend.

It's positive if, on a day the market rises, volume is heavier than the day before. That suggests that more investors are anxious to own stocks and are buying despite rising prices.

Conversely, it's troubling if stocks fall on increasing volume because it suggests investors are tripping over themselves to leave the market even at reduced prices.

The latter pattern has been on display throughout Nasdaq's steep sell-off the last 10 weeks.

Of the 21 trading days in September, for example, Nasdaq fell 13 times. On seven of those days, volume rose from the previous session. Clearly, mutual funds and other big investors were dumping stocks.

Throughout October, Nasdaq volume was generally heavy on up days and lighter on down days. On four days--the 11th, 12th, 18th and 25th--Nasdaq fell on heavy volume of more than 2 billion shares.

There were mixed volume signals last week. Though Nasdaq dropped each day, daily trading activity was well below 2 billion shares. That could be an initial sign that sellers are wearing themselves out.

Nevertheless, volume picked up throughout the week--from 1.5 billion shares Nov. 6 to 1.6 billion on Nov. 7 and Nov. 8 to 1.8 billion shares Thursday. Volume receded to 1.7 billion shares Friday, when the Nasdaq composite index plunged 5.4%.

Disconcertingly, volume jumped back above 2 billion shares Monday as the Nasdaq slipped 2.1%.

In addition to volume, experts have been paying close attention to index support levels.

Quite simply, support is a point at which an index (or a stock) has ceased going down in the past. Each time the index drops to that level, it's supported by investors who, enticed by lower prices, jump in and buy, thus preventing it from falling lower.

A key support throughout Nasdaq's sell-off had been 3,000. In April and May, and again on several days last month, the index fell near 3,000, but rallied each time.

That changed Monday. Nasdaq plunged to as low as 2,859 in the morning, staged a brief recovery to back above 3,000, but sagged again in the final hour. Nasdaq ended the day at 2,966.72--a sorry performance that suggests it could be in for a greater decline in the next few days.

Pay Attention to Your Stocks

Just as they do with the market, investors should watch volume patterns and support levels of the individual stocks they own.

Another useful indicator is relative strength, which measures the performance of a stock against that of a broad market index, such as the Standard & Poor's 500. In other words, it compares a stock with the average performance of all other stocks.

Trading-oriented investors want to own stocks that are rising faster than their peers in an up market and falling more slowly in a down market. It's a red flag when a stock's relative strength begins to ebb.

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