If You Can’t Resist The Lure Of Bottom Fishing This Market, At Least Follow These Five Rules

When it comes to investing and the markets, there will always be one that got away.

That is, the security that was rock-bottom cheap, but you couldn’t see it if it swallowed your head whole. For example, a single bitcoin BTCUSD, >+4.02%  in 2010 cost a few pennies, but now that same bitcoin will set you back $2,000.

Read: Bitcoin is trying to find a bottom after a weekend selloff

And how about MarketWatch’s Ryan Vlastelica, who could have made a bundle on Netflix NFLX, >+2.69%  if he’d ignored his dad and invested back in 2007. But hey, that’s got nothing on Ronald Wayne, who infamously sold his Apple AAPL, >-0.05%  shares in 1976 for $800 and gave up billions in the process.

So is there a trick to not missing the deal of a lifetime? Irrelevant Investor blogger Michael Batnick seems to think so, and he’s offered up several tips on catching a bottom, and even a place to look.

The first stop: retailers. And he likes the “Death by Amazon” Index from Bespoke as a reference. That index of 54 retail names, including Macy’s M, >+1.26% is down 20% this year.

But Macy’s offers up the first lesson for bottom fishers: It’s probably best not to try to catch one at all, so know what you’re getting into. The embattled retailer, for example, has rallied three times — 30% each — on its way to that 70% decline, as seen in the chart Batnick points out:

Irrelevant Investor

But if you must, then at least heed Rule #2: Don’t rush in after a massive down day. “The stock market is not perfectly efficient, but when a $15 billion company falls by double-digits in a single day, it’s usually for a good reason,” wrote Batnick.

That’s why you quickly move on to Rule #3: Wait for a higher low, which you will see near every actual bottom.

Here’s another rule for bottom fishers: If you want to know where the bottom is roughly, wait for the exchange-traded fund to crater. For example, he notes that Proshares has recently filed for double and triple-levered ETFs — such ETFs are considered highly speculative and carry bigger risk — for retail stocks.

“New ETFs are the new magazine indicators,” says Batnick.

Rule #5 is an oldie and a goodie: Put in a stop loss. “Pick a dollar amount, or percentage amount that you’re willing to lose, and stick to it.” You can find more information on stop-loss orders here at Investopedia.

Batnick has plenty more rules to go over in his blog post. Check it out here.

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Source : http://www.marketwatch.com/story/if-you-cant-resist-the-lure-of-bottom-fishing-this-market-at-least-follow-these-five-rules-2017-07-17