Sell Stop:(PWRD)

Well, I got my answer in less than 24 hours - rules are no good if I break them.

Yesterday I averaged down into (PWRD) as it pulled back into buying range, and today that meant I lost even more money as the stock tanked and I took 7% loss on my entire position (I stopped out at $29.14). I think the group took a hit because of a cut on (SOHU) from buy to hold, but it really doesn't matter. The group had made a lot of progress and it's not surprising to see a pullback - nonetheless the fact that I bought the stock as it was moving against me simply added to my loss.

The tough part for me now is getting a handle on my emotions. Driving in this morning I had a feeling we might be in for a correction, simply because things had been too easy lately. Whenever I start feeling comfortable with my position in the market, it usually does something to remind me that investing is hard work. My portfolio was down 5% today - what a wake up call.

It's easy at this point to lose confidence. Part of me wants to go to cash and preserve what gains I have left. Fear steps in. What if the rally is over? What if I picked the wrong stocks? What if, just when I thought I was improving, I lose more money instead?

While I can't necessarily control what emotions I feel, I can refuse to act on them - and that's what I choose to do.

At some point I'll do a careful post-mortem on (PWRD) and try to see where (or if) I went wrong. Was the stock a laggard in the group? Were the low sponsorship, or the decreasing number of funds owning the stock obvious clues? I think it's sometimes easier to evaluate failed purchases after some time has passed and I'm less emotionally involved, so that's what I'll do. For now I'll focus on what's left of my portfolio.

My remaining positions, (SOL) and (SOHU), both met the qualification for a potentially big winner by gaining 20% in less than three weeks. This means that unless I'm going to take a loss, I should try to hold them at least eight weeks. The rule exists because these stocks can be hard to hold, suffering huge drops on volume that would normally shake most investors out. For better or worse, I've held both stocks through such drops. I will continue to hold them, simply because I don't see any new indication to sell them.

Yes, (SOHU) dropped 11% on huge volume today - but the stock has doubled in eight weeks. Today's action has to be taken in context. The big winners often have this kind of day - it helps to sort out the 'weak' holders of the stock, leaving the strong holders and allowing the stock to move on to new highs. Doesn't mean it's guaranteed to go up - but I have to do the best I can to evaluate the stock with a cool head. When I'm most tempted to sell may be the best time to hang on, and vice versa.

As for the overall market, I've heard many folks saying this rally won't work as it's run up 10% from the 'Bear Stearns bottom.' Yes, we picked up a distribution day today, but again I see no reason to panic. The market has been on a healthy uptrend and yesterday all of the major indices settled just below their 200 day moving average. This will certainly be a point of resistance, and I'm not at all suprised to see folks take some profits off the table here. I would not be surprised to see the market fall further tomorrow, in lower volume.

It is a concern that the S&P 500 did not hold the 1400 level, and that this index has now logged 4 distribution days in recent weeks. Still, I think we will test the 1440 level again at least a couple of times before we break through or start another leg down in the bear market. Regardless what I speculate about in the future, I don't see enough signals that I must go to cashe today.

Having said this, I'm also not going to further expose myself to the market right now. In a healthy bull market, I would potentially buy back into a stock like (PWRD) if it passed the buy point again after shaking me out. However, with my history of over-aggressive trading and my thoughts that this is a bear market rally rather than a bull market, I don't see any reason to put more money at risk.

Last year my big winner was (RIMM). I bought it the first day I traded, and it's still the best stock I ever owned. When other stocks didn't work out, I kept loading up and trying to find the next big winner. My coworker, who I'll talk more about in a future post, kept asking me why I was looking for another stock when I had a winner. I didn't get it then - but I do now. All stocks are bad, unless they go up. When I'm lucky enough to find one that's going up, there's no sense putting my capital at risk elsewhere. As much as possible, I should look to add on to the stock that has proven itself a winner.

That's what I'll try to do now. We'll see what tomorrow brings.

-Geoff