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In Today's Market, Patience Is a Virtue

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Often, individuals become trapped when the market drops and find themselves in a vicious cycle of hope and despair when a prolonged downtrend sets in.

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While we have a lull in the action I thought it prudent to pen a little something for the passive or methodical investor observing today's tape. This is one of those very dangerous days where it may feel cool to run with the active traders. However, looking to play such extreme short-term bounces can oftentimes compound any damage you have already experienced and rather than looking to wade in, keeping an eye on the longer term and waiting until the action settles down may be much more prudent.

Stocks have come in quite a bit from previous highs and the S&P is clinging now to a small gain for the year. While the pressure has been intense there is nothing to say it can't get worse and respecting the damage that has been done, in my opinion, is a must. Often, individuals become trapped when the market drops and find themselves in a vicious cycle of hope and despair when a prolonged downtrend sets in. Rather than raising some cash they stick to the general mantra of buy and hold, hoping to ride out the damage. When stocks fall, they become frustrated for having not lightened the load sooner, however when a bounce sets in, the emotion is then replaced with optimism and hope that the worst is over and we can go on adding significant gains. Unfortunately, more often than not, another shoe drops and the previous frustrations set in once again. Not only does this erode significant financial capital, but it can take an incredible toll on your emotional capital as well.

A day like today, where there is green on the screen and many, including myself, attempting to play the short-term movements, the individual trader should be conscious of the fact that the risk reward for anything longer than a short term trade remains unfavorable.

Should you be sitting trapped in positions grasping onto hope, take today's bounce and lighten the load a bit. Step out of the fray and at least reduce some of the anxiety you are feeling. Should we continue lower you will be pleased to have sidestepped some of the action, however if we bounce further, you will participate with some of your capital still in the action. When the market calms and basic technical indicators such as the 50 day moving average is recaptured and financial stocks at least find a bottom, there will be plenty of time to participate.
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