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| How Well Does Your Stock Bounce? |  
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May 4, 2010 - One of the benefits of watching a market crash, then rebound quickly, is to see how well some stocks survive the initial hit and then recover. There's nothing scientific about this. Merely observation. But it can tell you what other investors think about your stocks.
For example, if the stocks you owned were down (on a percentage basis) much more than the broad market indexes (use S&P 500 for your larger cap stocks, the Russell 2000 for small caps), then investors are selling your stocks at a higher rate than they are stocks in general. In other words, they think your stocks are weaker than most others and are dumping them first and faster than the rest of the market. On the flip side, when the market recovers (again, use those indexes as benchmarks), how well did your stocks do? If they moved up, on a percentage basis, higher than the indexes, that tells you investors like your stocks better than stocks in general and feel they will perform better in the future than average stocks. What you would like to see is that your stocks didn't go down as much as the market averages but rallied higher when a recovery happened. The worst case is when yours go down further than the averages and then don't bounce back at all. Investors sold them and didn't bother to come back and buy them again. They're considered losers, no matter what the economy does. A case in point: Citigroup (C). Citi was already in trouble when the government announced it would sell its billions of shares, putting pressure on the stock price. Then the market dumped and C went lower. When the rally happened on Monday with some follow through on Tuesday, C almost stayed where it was on Friday, moving up only marginally. Investors don't like C. Not just because the government is selling stock (with the average volume of 915 million shares a day, those shares can be easily digested, maybe already have been) but because the outlook doesn't seem that positive for the big bank, even with a profit reported last quarter. There was no bounce to C.
So what does that suggest? It should make you scrutinize your portfolio for stocks that bounce back well and those that stayed in the dog house when the rally occured. It should inspire you to do more research into your dogs, to determine if owning them still makes sense. That also pertains to your winners, the ones that beat the averages on the upside and the downside. Those are clearly stocks other investors like. If you're not overweighted in those stocks, and further research shows they're still good buys, adding to those positions should pay off big next time another tsunami hits Wall Street. Which it will. Owning strong stocks and keeping them for a long time still works. Seeing how your stocks perform under extremely adverse conditions, as well as very positive ones, can help you determine the quality of your portfolio and determine which stocks are worth keeping or letting go. Of course, the ultimate decision is based on further research, but the initial inspiration can come from how well your stocks bounce. - Ted Allrich |
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