In times like this, what should we to do with our stock holdings?

On April 4, 2012 this site told us that the market may go into a short term correction, though the long term uptrend is still intact.

In times like this, what should we to do with our stock holdings?

Answer: This is the time to sell stocks where the price action is not performing well, in other words the price action is showing weakness.

Some of the sell rules are:

a.       The price has gone 8% below buy price.

b.      The stock price has broken down on high volume.

c.       The stock price is forming a “wedge”. A “wedge” pattern is when the stock price goes down, then tries to rally up but the rally is anemic.

d.      If the stock price has had a long advance and then closes below 10-week moving average and stays there for 8 to 9 consecutive weeks.

Money from selling these stocks should be invested in the remaining stocks in your portfolio when there is a follow through rally in the market (indicating that the short term correction is over).

The thing to remember is that a short term correction can turn into a long term correction. The technique employed here to weed out weak stocks and not put that cash back into remaining stocks, till we get a follow through rally, will have the effect of getting us more and more into cash as the short term correction proceeds. In case the short term correction turns into a long term correction or a bear market, we will already be holding some cash and thus not get a big downside hit to our portfolio.