How to Select Winning Stocks in a Down Market

There is an old and true saying, "When the markets go down 75% of stocks go down.". This is the old saying is the glass half full or half empty. I see this statement to mean that 25% of all stocks will rise in down markets.

I never recommend going short on a stock. In a down market I recommend going to cash, buying puts, or if you must invest, buy stocks that will not cave in to the markets pressure. Easier said then done, but I will attempt it here.

Since the stock market is much like the ocean, it goes up and down. Sometimes the waves are strong and suck you under. To stay afloat you need a life preserver. The life preserver I use in the ocean of stocks is Sectors. There is always one sector that seems to move higher when everyone else is being sucked under. Currently (06/30/08) the hot sectors are Energy and Petroleum. The markets are down 14% for the year and these sectors are producing stocks that have gained 400% and more over the last few months.

To identify the hot sectors (you should be hearing about them in the news consistently) you can always look in the financial papers or online website also. Once you have located the hot sectors, look at all the stocks in those sector. Some will be leaders and some will be laggards. The leaders will be the biggest names in that industry/sector. If you look at their charts you will see a pattern of the stock moving consistently higher over the last 6 months or more. These usually make great long term investments during a down market.

Now if you are looking for some great short term profits over a weeks time or a month, here is what you do. Look in the same sectors but look at the laggards (usually the stocks in the $2 to $5 range). Look at their chart and find the ones that look like they have reached a bottom. You don't want to see a chart where the price is getting lower each day. You want to look for one that hit its low point and is either moving sideways or been rising the last week or so. Put these on a watch list. Watch these stocks for one that gains 10% or more in one day on BIG volume. This would make a great short term play.

The reason this works is all in the mentality of the investors. When a sector takes off, it's the leaders in that sector who gain the most. They lead the way. As more and more investors get in on the bandwagon, this sector and the leaders rise in price. Soon more people want to invest in this popular sector. When they look at the prices of the leaders they see three digit numbers. "That's too expensive" they think, but they don't want to be left out either so they buy the laggards. Now all these companies with horrible earnings start to take off. You want to jump in right when they take off. So keep an eye out for the 10% jump.

Here is a warning, like the housing bubble, like the tech bubble, the energy and petroleum sectors will someday pop too and it is the laggards that drop the most first. This is why I recommend them as short term investments only.

- By W. Henry Boyett

About The Author

W Henry Boyett retired from his job three years ago and now trade stocks and options for a living. He shares his picks and knowledge with others so that they too can retire sooner, by trading stocks and options.

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