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.

A good place to find relative-strength data is the newspaper Investor’s Business Daily, which focuses intently on that indicator. For more information online, go to: https://www.investors.com.

Beware the Old Leaders

Many small investors followed a winning formula in the last five years through last spring: They loaded up on big tech stocks whenever they stumbled, and waited for the eventual rebound to new highs.

That strategy has failed terribly since spring. Many big-name tech firms, including Dell Computer (DELL), Apple Computer (AAPL) and Intel Corp. (INTC), have seen their stocks pummeled after warning of revenue or earnings problems.

“Bottom-fishing in the old leadership could net you some dead fish,” said technical market analyst John Bollinger in Manhattan Beach.

Instead, experts say, whenever the market rebounds, investors must focus on the new leaders--because in each new bull run, a different crop of stocks usually leads the way.

“You’re likely in the next turn to see names you’ve never heard of before” leading the market, said hedge-fund manager Greg Kuhn.

Identify Strong Sectors

To find the new leaders in a market turn, start by identifying the leading stock sectors.

Since spring, while tech stocks have faded, investors who have looked elsewhere have found hot stocks: Medical, tobacco, restaurants, insurance and other financial stocks all have come on strong.

A good place to identify the leading sectors, as well as the top stocks within those groups, is at EquityTrader.com (https://www.equitytrader.com), a site founded by Bollinger.

On the home page, click on “Children” in the upper right-hand corner. That brings up a list of the 13 broad industry sectors (Bollinger considers sectors to be the “children” of the overall market).

Currently, finance is the top sector, followed by health. Clicking on finance on the site brings up a list of 14 finance-related industries, such as insurers, investment banking firms and banks. Click on an industry and a list of the top-performing stocks pops up.

The sectors, industries and stocks are ranked by a dozen criteria that include relative strength, volume patterns and earnings-growth momentum.

Within “full-line” insurance, according to EquityTrader.com, some top-performing stocks now include Lincoln National (LNC), Horace Mann Educators (HMN) and CNA Financial (CNA). Among life insurers, AmerUs Group (AMH), Nationwide Financial Services (NFS) and Mony Group (MNY) top the list.

In the health sector, health-care providers now rank at the top. DaVita (DVA), Apria Healthcare Group (AHG) and Pediatrix Medical Group (PDX) are the stock leaders, according to EquityTrader.com.

However, some market watchers caution individuals against jumping immediately into leading stocks, especially if their prices are streaking higher.

Medical stocks are worrying some analysts today. Separate from their fundamentals, the stocks have climbed in part because they’re viewed as a safe haven in a turbulent market, and in part because the companies are expected to benefit if George W. Bush becomes president.

Medical stocks could be due for at least a short-term correction, some experts warn.

Study the New-Highs List

Another way to find potential winners is to study the list of stocks hitting new 52-week highs.

The logic is simple: A stock must really have something going for it if it notches a new high during or shortly after a severe market downturn. In other words, institutional investors must be anxious to own these stocks because they think they have the best prospects.

“You want to buy the strongest stocks, the ones that are within 5% of their 52-week highs, because it’s those stocks that the big money will want to show in its portfolio,” said Harvey Baraban, who teaches online trading at Golden Gate University and runs a for-profit series of trading seminars.

To find stocks making new highs, go to CBSMarketwatch.com (https://www.cbsmarketwatch.com). On the left column, about two-thirds of the way down the home page, click on Market Data & Tools, then Stock Research. There, you’ll find separate lists of stocks making 52-week highs and lows on the New York Stock Exchange, Nasdaq and Amex.

For example, 79 stocks hit new highs Friday. Twelve medical stocks reached new highs, including Merck (MRK), Cigna (CI), Oxford Health Plans (OXHP) and Humana (HUM). Among food and beverage companies, Pepsico (PEP), Hershey Foods (HSY), and Ralston Purina (RAL) reached new peaks.

There’s no guarantee these stocks will continue to surge, of course. But investors who are looking for shares with momentum can at least start looking among these names.

Cut Your Losses Quickly

Regardless of the amount of research you do before buying a stock, some of your picks will falter. Especially in a troubled market, it’s best to cut losses while they’re small rather than risk the possibility of a larger loss that could devastate a portfolio, experts say.

If a stock slides by 5% to 7% from your initial purchase price, many experts say, you should sell. This does not apply to long-held stocks in which you have built up sizable gains. It’s normal, of course, for stocks to partially correct after an extended run.

Still, “The rule that you shouldn’t let your losses run is vital,” technical analyst Anderson said, and it applies to long-term investors as much as to traders.

Walter Hamilton can be reached at walter.hamilton@latimes.com.