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Should Investors Finally Breathe a Sigh of Relief?

By: Maximilian Sparrowson

Well, last week, many stocks that have more or less flatlined suddenly developed a pulse. An actual pulse! And now the questions I'm getting follow along this line of reasoning: has the market finally bottomed or is this one of those elated, yet false recoveries of a terminally ill patient?

For months now, I've been looking at quality companies getting hammered by the economic downturn, short sellers, analyst downgrades, rising competition, crude oil prices, the falling dollar, what have you. And then, relatively suddenly and still quite unexpectedly, a few of my favorite picks sprang back to life. And not only have my favorite stocks been resuscitated, but even stocks in the dog pound for poor risk management, such as Canada's Bank of Montreal and CIBC, have left their 52-week lows behind by about 20%.

As for technology stocks, both as a consumer and investor, I know Rogers has been struggling terribly dealing with new entrants to the wireless and cable industries. And does anyone even remember Nortel? Well, both stocks have picked up the pace, with Nortel soaring almost 28% from its 52-week low.

For fans of investment trivia, Nortel had its best trading session just three days after the Federal Reserve prevented Bear Stearns' meltdown. And speaking of the devil (pun totally intended), after the Fed's infamous weekend bailout, which saw Bear Stearns drop from $30.00 on Friday to just about two bucks on Monday -- well, the stock has doubled since then.

Here is a lesson for every investor: generally speaking, emotional investing is a bad idea. There are actual studies out there demonstrating that people are often more upset by the mere fact that they are losing money than by how much money they have actually lost. So, emotions be darned! (I can't actually use more colorful language here.) When blood flows on the Street, it's time to be ruthless. It's all about buying low/selling high, isn't it?

Well, I would actually say that in the title of this article if I did not have reservations about whether all the blood has actually flowed and every head has actually rolled. That's because I'm still not convinced it is all over.

Why? We still don't know how many more millions or billions of dollars will have to be written off before the subprime mess completes its catharsis. The investing public still does not know how large the bill will be to see us through all the bubbles bursting. And, for that matter, the Fed is not exactly sure whether its policies will soften or harden the latest cycle swing.

So, what's up with the last few rallies in the equity markets? I'd say it is simply a psychological effect of being overloaded with pessimism, and being fed up with it, disregarding risk management and getting far too comfortable far too early. My advice to PROFIT CONFIDENTIAL readers at this point would be to take a long and hard look at their own risk management and to establish new risk boundaries. Remember, a few rallies do not a recovery make!

Article Source: http://www.gcyarticles.com

Should Investors Finally Breathe a Sigh of Relief?
— by Inya Ivkovic, MA
Stock Market Investing Advice- Profit Confidential
Canadian Investment Advice
Stock Investment Advice - Profit Confidential

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