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Breaking Up With Stocks Is Hard To Do


Don't fall into the trap of buying a stock back the first time it shows signs of life.

Write the word "Discipline" down on a Post-It note and immediately paste it to your trading screen. When volatility and confusion are whip-sawing traders like a piñata at a kid's birthday party your discipline has to be maintained.

Yesterday's rally off a triple bottom first established nearly a year ago was impressive and perhaps we can use that as a base to build from, but recognize you don't have the wind at your back.

Retailers like Men's Wearhouse (MW) rarely miss earnings by 60% when everything is A-OK. There is no question that it's going to be harder to make money on the long side over a sustained period until conditions improve. I didn't say it's going to be impossible, just harder.

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Perhaps the first way we can improve performance is to not give back hard-earned profits with bad trading technique. We all have favorite stocks that have made huge returns over the last few years. Names like Foster Wheeler (FWLT), Precision Castparts (PCP), Google (GOOG) etc. Maybe you were stopped out recently as profits withered away or you sold because you thought the fundamental prospects were deteriorating. Don't fall into the trap of buying it back the first time it shows signs of life.

It's like breaking up with your significant other. Perhaps you didn't want to be with them anymore but you would go into a jealous rage if you were to see them with someone else. You were able to withstand weeks of pain as the market pummeled your stock but now that you aren't involved you can't handle seeing it dance with others.

Let it go. Don't let your emotions rule your trading. Take it off your screen and move on. If you don't, you will proceed on a never-ending love-hate relationship as this stock continues to take your money as you buy and sell your way into the poor house.

Wait at least two weeks before you step back into the name. Most times you will be buying back in with more clarity and certainly less emotion.

The biggest change this year over last is that suddenly dividends matter. This is very reminiscent of 2002 and with the whiff of recession in the air it makes sense that investors would gravitate to the safety of dividends. My firm is constantly back-testing the factors in its models and suddenly dividend payout has become one of the more significant.

Drugs and utilities have been outstanding performers, which are partially explained by the high yields. Even more staggering are the international telephone stocks like Telefonica SA (TEF) and Tele Norte Leste Participacoes S.A. (TNE), the latter of which is up over 20% since Merrill Lynch upgraded it just a couple of days ago. Again, dividends were a factor. Even after a 20% move TNE has a yield of nearly 4%.

Most of these are too extended for purchase right now but put them on your trading screen, where your "ex" used to be.
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No positions in stocks mentioned.
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