Let me give you an example. Storage stocks seem to be holding up rather well here. I think that sector may be worth defending. But that might mean I toss out a software stock that I'm more worried about or eliminate an Internet stock because I don't know when it will reverse. I would defend, only, say, QLogic (QLGC - Get Report) or Brocade (BRCD), but not both.
If you rank stocks on a scale of one (buy) to four (sell), as I do at the end of every week for Action Alerts PLUS, you know that when you come face-to-face with the enemy -- an onslaught of selling -- you are ready to buy on the way down the ones you can truly defend -- the No. 1 stocks -- and you will wait on the twos until they are lower.
The nonessentials -- the ones that have no catalysts and that you are using just for exposure because you thought you liked the market -- they get the heave-ho immediately.
My wife, the former Trading Goddess, used to call this "circling the wagons" around your best names. The few first times you do it, you will curse yourself because you will be slaughtering stocks you might have had on for some time.But you must go through this process a multitude of times before you realize how right it is and before it can become second nature. You will end up with great costs bases on the stocks you really like, and you will have enough capital left to make a difference.
|1.||Pigs Get Slaughtered||2.||It's OK to Pay the Taxes|
|3.||Don't Buy All at Once||4.||Buy Damaged Stocks|
|5.||Diversify to Control Risk||6.||Do Your Homework|
|7.||Don't Panic||8.||Buy Best-of-Breed|
|9.||Defend Some Stocks|
|Check back for more of Cramer's Rules|