Page 1057 - How to Make Money in Stocks Trilogy

44 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

Even back then, I knew the stock market was “cyclical,” but I didn’t
understand what impact those cycles have on my portfolio. I didn’t know:

• How to tell when the market trend is changing?
• What action to take when that change occurs?
Most folks don’t. And that’s not surprising since we’re constantly told that
(a) you can’t time the market, and (b) “buy and hold” is the “safe” approach.
Those market myths have cost a lot of people a lot of money.
But now you see how the market actually works. “Buy and hold” investors
may make money in a strong market uptrend, but they’ll likely give it all
back (and then some!) when a sharp downturn hits.
By using the buying and selling checklists in this book, you can unstrap
yourself from that market roller coaster. Sticking to basic rules will help you
generate solid profits when the market is up and lock in the bulk of those
gains when the trend changes.

2. Know Where You’re at in the Market Cycle

We all know a “bull market” is when the market is moving higher, and a
“bear market” means it’s trending down.
But it’s important to understand that even within a bull market, you will
have what we call “interim corrections.” The major indexes will take a rest
and pull back for a few weeks or a couple of months, then resume their
climb. The depth of these interim corrections varies, but the Nasdaq or S&P
500 might pull back somewhere around 10% to 15%. That’s a fairly mild
decline—not enough to change the underlying bull market uptrend.
As a general rule, a decline of under 20% indicates an interim correction.
A drop of 20% or more constitutes a bear market.
The following figure shows an example of how that works.