Over the past year or so, the sell-off in the market created many outstanding opportunities for long term entry price levels for many different stocks across many different industries. When we look back, it seemed so easy! The entire market was getting annihilated so as long as you had the wherewithal to buy, you probably did well. Greatly aided by a stimulus package with no limit and an intervention program that was really a manipulation program in its size and frequency, momentum took over and everything ran back up.
But now, things have changed. The market is not at 6500 on the DOW. The economy and the market are no longer in a panic driven free fall. So how are we able to find these good longer term entry points now? Easy, we must find good companies that are in distress but not life threatening distress. We have to learn to be smart, skilled, and confident enough to catch a falling knife. Fact is, in a bull market, especially in an aggressively bullish market like the one we have had, the only time we can find an attractive entry price is when the company runs into trouble and the stock sells off aggressively.The problem with that is that you now need to buy into this selling not sure if the selling continues right through ……just like catching a falling knife.
Recently, I have advised some of you to buy a few stocks that fit this bill. Schlumberger (SLB) when it sold off to just under $60 on purchasing Smith International (SII). Or Toyota Motors when it was down around $70 during its recall fiasco. Or like today when we recommended Transocean (RIG) while it dealt with the negative publicity from the oil spill. Or how we may even, at some point, recommend Goldman Sachs (GS) as it deals with the financial reform bill, its lawsuits and the ones to follow, and the downright hatred the public has for it. In all of these situations, we had to buy into the sell-off. The reason is that when the sell-off is over, the stock bounces back so fast, with so much momentum, it’s hard to get it.
There is a way of doing it…..catching that falling knife I mean! There is a combination of understanding the news and its effect on the stock, the stock’s technicals, and some good old instincts. Love to hear how some of you attempt “bottom fishing” and I am even thinking about teaching a special class on it!
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