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QUARTERLY INVESTMENT OUTLOOK AND FUND REVIEW

For Traders, Treacherous Market Means Choosing to Move Nimbly or to Stay Out

Experts do agree on one thing--small investors must monitor their portfolios more carefully than ever.

October 09, 2000|WALTER HAMILTON | TIMES STAFF WRITER

You want to be an active stock trader in this dicey market?

You may have to change your style--and radically, some trading pros say.

A better option, some say, is to do what many small investors have already done: Just give it up for a while.

An army of individual investors jumped into active online stock trading late last year, riding--and helping to fuel--the technology stock surge.

But with the crash in many tech stocks since spring, the trading style that played so well until then--the "momentum" game of buying tech issues high and selling them higher--obviously isn't working anymore.

Many traders who have bought into tech-stock rallies since March have found those rallies to be short-lived. Though Cisco Systems Inc. stock, for example, surged almost nonstop between October 1999 and March of this year, since then it has mostly just traded between $50 and $70 a share.

Trading those short-term rallies can make you money, of course, if you can time them right. But that is a difficult game, even for the pros.

"You have to be good right now to be trading stocks," said Harvey Baraban, who runs a for-profit series of trading seminars. "It's not what it was a year ago. March really changed everything."

Far worse for many small traders is that some of their favorite stocks of recent years haven't just traded in a narrow range but have plunged to multiyear lows.

Last week, for example, Microsoft Corp. tumbled below the $60 low it hit in May, hammering bottom-fishers of recent months who thought they were getting aboard a sustainable rally.

The problem with this market isn't that there aren't hot stocks. They just aren't in the sectors many online traders were used to playing.

Indeed, some pros suggest that individual traders forget about their favorite tech stocks and focus on shares in other sectors that have been hot in recent months, such as utilities, energy and aerospace.

"The message is, you can't play today's game by last year's rules," said John Murphy, a technical analyst who heads a Web site called Murphymorris.com. "One of the things that investors have to learn is that the rules do change in a market."

Other experts, however, say the worst mistake traders can make is to monkey with a strategy that worked for them--such as the momentum game in technology.

That can be akin to a baseball player or golfer tampering with a smooth swing.

All trading styles temporarily go out of favor, some pros argue, and investors should simply wait on the sidelines until the market comes back to favoring their style.

"The best thing you can do right now is nothing, and that's one of the hardest things to do, even for professionals," said Greg Kuhn, general partner at Thoroughbred Partners, a hedge fund in Easton, Pa. "Doing nothing has to be viewed as a trading decision."

If you're going to trade, experts say, at the very least you must monitor your portfolio more carefully than ever, and take steps to limit the risk of getting trapped in a plunging stock.

Time-honored risk-reducing steps such as trading smaller amounts of money, cutting losses quickly and using stop-loss or stop-limit orders are key, many pros say.

"If you have high volatility, you trade less volume. It's real simple," said Cynthia Kase, president of Kase & Co., an Albuquerque, N.M.-based trading consultant.

Some pros also suggest specifically planning to trade with much shorter time horizons.

In general, it has been tough going since spring for traders who seek to buy stocks making new highs and ride them to extended gains over several weeks or months.

By contrast, some traders who focus on periods of just a few days say they're doing OK. But trading in shorter periods requires greater concentration and portfolio-monitoring time than many amateurs can afford.

Plenty of small investors can't seem to give up the idea of playing tech stocks.

On the Murphymorris.com Web site, "that's all they want to talk about," Murphy said. "I say, 'Why are you even looking at [tech]?' "

But with the stocks down so sharply over the last month, some traders may be eager to place bets on a traditional fourth-quarter rally.

Murphy, however, advises amateur traders to look into other sectors where finding upward momentum hasn't been a problem in recent months.

Traders should first seek out strong industry sectors, Murphy said. When aerospace stocks in general are hot, for example, that suggests institutional money is focusing on the sector, which can give an uptrend longevity.

"You don't begin your search by looking for a good stock," he said. "You look for a good sector."

Mark Leibovit, editor of VRTrader.com, a technical-analysis Web site, recommends that traders pay close attention to stock volume patterns. He looks for heavy volume spikes that come at the tail end of a big rise or fall in a stock's price.

Say a stock has been falling for a while but rises one day on heavy volume. That often presages a further jump in subsequent days, Leibovit said.

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