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Action Plan

One of the advantages of operating in an environment where indicators do not perform as well as they once did is that it invariably brings to mind one of the cardinal rules of investing: Avoid the urge to take the easy way out. Whether that means engaging in halfhearted superficial research instead of doing the requisite amount of due diligence and homework, taking on a seeming “lay-up” trade before exploring why it might not necessarily work out as planned this time around, getting out of a winning position in an actively traded security instead of shedding an illiquid loser, adding to losses—averaging down—rather than cutting them outright, or laying the blame on others for investment decisions that are, at the end of the day, all your own—all of these actions will invariably lead to poor investment performance. In fact, they can do potentially significant harm to your personal bottom line—the one you have today and the one you may have to depend on tomorrow.

Interestingly, while certain indicators have turned out to be less than reliable in recent years, one of the basic realities of the share-trading arena seems to have remained intact. That is, most shares go up when “the market” is moving higher, while the opposite holds true when it is heading lower. Simply put, it is better to be long than short when money is flowing into equities and indices are in an uptrend. While there are any number of available gauges to look at, one approach that, broadly speaking, provides a good guide with respect to whether shares are in a bull or a bear phase is to examine whether benchmarks such as the Russell 2000 or the S&P 500 are trading above their 50-day and 200-day moving averages, with the smaller average also above its longer-term counterpart. If that is the case, it will usually lead to more promising results and cause fewer headaches if you focus on potential buying opportunities rather than short-sale candidates. Of course, these are general tendencies, and if numerous signs clearly indicate that you have identified the next Enron-like disaster, it might be worth taking the risk of shorting the shares in spite of a broad-based advance.


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