Perfect Time to Define Your Strategy

On the first rally day after the market's historic one-week decline beginning Sept. 17, I made the case that there would be further upside because there was an absence of sellers. At the time, the market had not bounced enough to spark selling from profit-taking. And it didn't spark selling from those who wanted to cut losses, because most people were still too deep in the hole.

That is no longer the case. Anyone who bought when the market reopened the week of Sept. 17, and held until last night's close, has enough profits to take some gains. Also, anyone who bought for patriotic reasons or a trade and was initially wrong is near enough to break-even now to cut and run.

My earlier argument was that there were a limited number of sellers that would hit the market. That's no longer the case. In addition, when going through the S&P 500 this morning, I found that any stocks that looked OK technically are now in overbought territory, and any stocks that are oversold are breaking down.

Again, the key is to define whether you bought stocks for a trade or an investment since the Sept. 11 attacks. If you bought a stock because it is a market leader and you like valuation levels, management and products, you are probably an investor and should not focus on the day-to-day and week-to-week fluctuations from current levels. (Remember that for investment purposes, judge stocks based upon where they are, not where they were.)

If you bought stocks because they were down too much and were deeply oversold, then you probably did so as a trade. As stocks rebound and/or become overbought, then they should be sold as momentum wanes -- whether they went up or not. I'm guessing that momentum is going to wane as many stocks and the indices approach resistance levels (where many bought and are down and looking to sell when anywhere near break-even) and become overbought.

Don't make trades into investments or investments into trades.

From an investment standpoint, I believe the lower level of inflation, interest rates and valuations relative to interest rates makes a compelling case to buy, especially given the climatic technical nature of the decline after the Sept. 11 attacks. From an investing standpoint, we are again entering the bottoming process, where timing the perfect entry point should be impossible and not relevant over time.

From a trading standpoint, I believe many stocks and the indices are nearing resistance and becoming overbought, and therefore should be sold as the market works higher from here. This comes with the caveat that you should sell with the intention of buying back in at better prices. Define your strategy, time horizon and risk tolerance.

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