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How to Manage Investment Advice

Mark Manning

When it comes to financial commentary and investing advice, sites like RealMoney can serve as a catalyst for new ideas and solid market commentary. However, investors still need to have their own set discipline for managing money in their own accounts. Then they will be able to use our commentary as a guide but ultimately make their own independent decisions.

Let's discuss investing advice, what to do with it and individual responsibility for a bit, then take a look at what this market is up to.

How to Read the Pros

I have been amused by the columns that I've been reading on RealMoney where Jim Cramer has been talking about the criticism that he has been receiving about his calls on the market and stocks. Then there was a very good column by Helene Meisler where she talked about her readers being annoyed with her because her timing for a rally was off by a few days.

Jim made a good point about the difference between professionals and amateurs and how the thought process is often completely different when it comes to buying and selling stocks. This analysis is very accurate, because we know from studies that the average investor buys stocks when they are being pumped by the financial media and sells them when the same stocks often hit their lows.

The reason for this is psychological, and it falls back upon our greed/fear response. Investors do not want to miss out on a hot stock when all of their friends are making a ton of money. So as they continue to hear about how a certain stock continues to rocket upward, they often make their buying decision right at the top. Then, when the market corrects and those stocks start spiraling downward, they often sell right at the bottom.

That is why Jim made the point that buying when things feel like they are absolutely at their worst often turns out to be a brilliant decision. As I said, non-professional investors have to view advice like his as advice alone. And as stated above, they must take responsibility for their actions.

Unfortunately, with that comes responsibility for the decisions that you make, and many investors do not want to take the time to do their own research and make their own decisions. They know that if they do, they will have to take responsibility for any mistakes that they make, and they will not be able to blame someone else.

The one thing that investors need to keep in mind is that professional money managers are usually right only 60%-70% of the time. The reason they make a lot of money is that they are quick to cut losing positions where their analysis is wrong, and they hold on to the strongest stocks in their portfolio that are performing as expected. Finally, they take money off the table when the stocks get too extended and when the amateurs are buying hand over fist; this is known as feeding stock to the public.

This reminds me of the story of the two archers. When an amateur archer drawls his bow back, shoots the arrow and misses the target, he immediately starts looking for something or someone to blame for the reason of his miss. He blames the bow maker, the arrow or the wind, but never himself. On the other hand is the master, and when he misses his target, he doesn't blame anyone but looks within himself.

Troubling Volume During Rally

OK, that's enough about that, let's take a look at the market. It seemed that everyone was quite ecstatic and excited over Tuesday, Nov. 13's sharp move up in the indices . That was especially true for many investors who felt trapped in their long positions as the market dropped.

However, the problem with the rebound was that volume was about 5% lower across the board, and much of the buying was fueled by aggressive short -covering. The important thing to watch is how the indices act as they approach key resistance levels.

If you look at the Nov. 13 chart of the Dow Jones Industrials (DJI - Cramer's Take - Stockpickr), major resistance lies between 13,500 and 13,700. As the Dow continues to move up to those areas on decreasing volume , it is likely that we will see at least another test of this week's lows.

Source: TC2000

The S&P 500 (SPY - Cramer's Take - Stockpickr) is quickly approaching the resistance levels between 1500 and 1525. It is certainly possible that we shoot right through these levels and break to new all-time highs. However, that is highly unlikely, and I still feel that an intermediate-term top is in place, and we will need to do some more downside testing and consolidating before moving much higher.

Source: TC2000

The Nasdaq (IXIC - Cramer's Take - Stockpickr) dropped slightly below the 2650 level that I said was a likely area of support before the selloff began. The technology area has been one of the strongest areas of the market, but there is also been a lot of technical damage as well. At this point, we could see a bounce up to the 2700-to-2750 level.

Source: TC2000

We have seen a lot of "V"-shaped rebounds in the past, but these types of rebounds are technically very weak, and they often result in more downside action. The important thing for investors to watch is the action of the volume as the indices move up. If it continues to remain lackluster, it may be better to remain cautious.

This column was originally published on RealMoney. For more information about subscribing to RealMoney, please click here.