Mentally Prepare for Tomorrow's Market

The market is finally in rally mode again. Thatmeans it's time for physician-investors to beginthinking about how to do things differentlythis time around to lock in the much-anticipatedprofits. Before going full throttle into a bull market,investors need to revisit the market's recent past andtake note of how many investors got burnt. Before thenext bull market begins to look invincible, investorsshould create protective devices.

Thebottom line:

Investors can protect themselves with sell rules.Nearly all investors now see the need for such rules afterbeing burned by the flawed brokerage house philosophyof buying a group of stocks and holding for the longterm. That strategy proved to be very dangerous, andmany securities will never regain their prior highs. Sell rules are imperative if you want to besuccessful in the stock market.

Market Direction

Initially, an investor should have general knowledgeof the overall market direction. Individual stockshave a very difficult time overcoming the generaldirection of the market. As you know, good, successfulcompanies lost a tremendous amount of marketvalue during the bear market.

Volume is a key indicator to watch. Optimally,investors want to see high volume on the days themarket goes up, which are known as accumulationdays. They also want to see lower volume on thedown days, which depicts a dry-up of sellers. At thebeginning of a turn in the market, there is typically alarge volume in whichever direction the market isgoing. In the past couple of months, investors haveseen extremely high volume in the positive direction,which is very productive for the market.

Market Leadership

Another indication is the strength of the leadership(ie, stocks that are leading the current trend). If leadersbegin to underperform as a result of weakness, the marketmay have nothing to fall back on. When the leadersof the last bull market collapsed, it was time to retreatand abandon ship—not hang on for the roller coasterride to the bottom. For example, when Intel went from$70 per share to $60 on heavy volume and broke its relevantsupport levels, it was time to get out. When Lucentbroke the critical levels on high volume, it was time toget out—not add on, as some brokers advised.

The market will weaken as leaders deteriorate.The key for investing in today's market is to search forthe new leaders of the new bull market. The old leaderswill not drive the new market. Investors shouldalso be aware of advances and declines in the marketindexes. There are various ways to measure strengthor weakness. Individual investors should be cautiouswhen stocks break below trend lines, moving averages,and support levels, especially when they breakabove normal average volume.

Realistic Possibilities

Just because the market has bounced off its lows onhigh volume doesn't necessarily mean we're entering araging bull market. In fact, the market will most likely benothing like the previous exponential bull market weexperienced. Instead, it might be very similar to the sidewaysmarket that began in 1966 and ended in 1982.That market ended where it began.

Keys to success:

Despite the likely nature of the upcoming market,there are opportunities for investors to make money. Infact, a lot of money can be made if the correct rules arein place. Between 1966 and 1982, there were gains of50% in the market. These same results can be achieved,but rules need to be in place to protect profits andinvestors must remain aware and mobile. Find the leaders and then apply sell rules.

Michael Doran is a private money manager affiliatedwith Sierra Capital Planning in northernCalifornia. He runs a fee-based business and ahedge fund for qualified investors. For more information,call 877-467-8657 or visit www.sierrainvestor.com. Christopher Nezbeth also contributedto this article.