Chuck LeBeau is director of analytics at SmartStops.net Much like the movie character Austin Powers, the stock market lost its mojo in 2008 when systemic market risk erased trillions of dollars of capital and gave investors no place to hide. There was no protection against a whirlpool bear market that was dragging everything down at the same time. Diversification and rebalancing tactics proved to be about as effective as rearranging the deck chairs on the Titanic. Investors no longer focused on profit opportunities, but instead were scrambling for ways to control losses and preserve what little capital they had left. Shrinking 401(k) plans became "201(k)" plans, and many investors indefinitely postponed their plans to retire. Depleted college funds will leave June graduates shopping for financial aid. For months, the stock market has been likened to a graveyard -- no one can get out and no one wants in. It's evident that buy and hold investing died last year and was buried in that graveyard. Even Warren Buffett struggled. Over the last few weeks the market has come back to life, and investors are wondering if perhaps the mojo is back. Google ( GOOG) has gone from $250 to over $365. Since March, Apple ( AAPL) has climbed from less than $83 to more than $116. Even more noteworthy perhaps, many lesser-known stocks have made spectacular recoveries. Since February, household products company Blythe ( BTH) has skyrocketed from $13.64 to a recent close at $35.27, a rise of more than 250% in only 10 weeks. Oriental Financial Group ( OFG) has leaped from 91 cents in March to a recent close at $5.58. It would be fair to say that going up 600% in six weeks takes some serious mojo. Even usually stodgy bank stocks are starting to impress. Bank of America ( BAC) went up 35% in one day last week.
But investors must remain cautious. In spite of some old timers who remember their classic Dow Theory and call attention to the recent 20% plus rally in the Dow Jones Industrial Average, the bear market may not be over yet. Opportunities appear to abound but volatility remains high and risk needs to be tightly controlled. What if this is only a rally in a bear market? Loss limiting trailing stops need to be maintained and position sizes should be kept smaller than normal until the market proves itself. Rapid expansions and contractions in volatility make risk control difficult, and it's hard to know exactly where to set the stops. In times like this, services like those offered by SmartStops.net can be helpful in monitoring portfolios and alerting investors when a stock may be getting into trouble. In the meantime it looks like the mojo is back. Let's see if we can hold on to it for a while longer.