Staying Out of the Way

I have a couple short positions on, but mostly I'm just staying out of the way and letting this market correct. Breadth has been steadily declining all day, and the small-caps are really being hit hard. The IWM small-cap index is down about 2.3% while the DJIA is only down around 0.84%. There is a bit disconnect there, and the market is much worse than the indices indicate.

At a juncture like this, the dilemma always is whether you stay with your longs or dump them and look to buy back later. The fear is that the market will bounce back and you will be left behind when all those great stocks you were holding suddenly recover. The reality is that once the market starts to crack, stocks act weak longer than you would like. It is the inverse of what we have seen in the market over the last couple months, when many stocks keep going up much further than many thought was reasonable.

I'm always inclined to sell my weak stocks rather than hold on or even average in as they decline. I'd much rather pay up when a stock is acting better rather than buy weakness in hopes of the reverse. It is a matter of style, and big fund managers typically have no choice but to average down into their favorites. Small investors can be much more flexible, and in most cases there isn't any great benefit to sticking with a poor-acting stock. You might as well just wait and try to jump back in when the action is better.

It is ugly out there today, and I'm not inclined to do any long-side buying at all. We are starting to bounce a bit as I write, but the bears have had a taste of success lately, and the bulls are nervous, so I don't think we'll have much lasting upside progress in the near term.

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Know What You Own: In Thursday's trading, the most active stocks include Bank of America (BAC - commentary - Trade Now), the Financial Bear 3X (FAZ - commentary - Trade Now), Citigroup (C - commentary - Trade Now), the Financial Bull 3X (FAS - commentary - Trade Now), the S&P Depositary Receipts (SPY - commentary - Trade Now), PowerShares QQQ (QQQQ - commentary - Trade Now), and the Financial Select SPDR (XLF - commentary - Trade Now).

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.