In a poor market like we are experiencing now, it is extremely important to have a clear investing or trading style. The easiest way to get in trouble is "style drift," when you allow a trade to turn into an investment or are panicked out of investments due to short-term movement.
To navigate a market such as this one requires a clear strategy and rigid discipline. If you employ the right tactics, this sort of action can produce great opportunities.
Let's take Micron Technology Inc. (MU) , which is Real Money's Stock of the Day. I don't have any strong bias about MU one way or the other. It is in the weak semiconductor sector, but it trades with a trailing price-to-earnings (P/E) multiple of just 3. It is estimated to have declining earnings per share in the next couple years, but a good argument can be made for it as a value play.
If you are positive about Micron over the longer term, the issue to contemplate is how to build a position. You want to manage risk but build a big enough position for it to matter if you are correct about a positive future.
The first step in a poor market is to look for support levels. Micron has held around the $34 level since the end of October, so that would be a logical stop-out level. Though still in the red at mid-morning Thursday, Micron stock is bouncing back after a weak open and hasn't tested support, which is a good sign. The action might merit a small preliminary position or addition with a view toward additional buys the longer it holds above recent lows
The key here is to set a stop and honor it if the stock breads that level. Forget valuation and fundamental arguments. The most important thing is controlling losses in a poor market. If you are stopped out but are still optimistic, then rebuy the stock as it develops again. In the meantime, keep the losses small while you stalk entry points.
There are many stocks in this market right now that look like Micron. Whether they are making sustainable lows or not I can't tell you, but if you want to buy make sure you do so in a manner to control your risk.
The indices have tried to bounce but are finding some heavy resistance. Buyers are uncertain and nervous, which is a good sign. Stay patient and disciplined.