If you have been paying any attention to the markets for the last month or so then you don't need an update on how things have been going. The S&P has continued it's decline and as of this writing has fallen over 10% from highs. While many investors will look to move to safety until the dust settles, there are some that look at this as a discount and want to find good stocks to add to their portfolios at lower price.
You know the term "never catch a falling knife?" Well, all good investors want to be sure that they are adding stocks that are simply falling because the market is falling, not that are in some kind of trouble. So, how do you add falling stocks to your portfolio without catching the "falling knife?"
Relative Strength: Some investors will only add falling stocks if they are showing relative strength to their individual sectors. This is a fancy way of saying that they want to buy the stocks that are falling the least in their sector versus buying the stocks that are leading the sector lower. One current example of this would be in the financial sector. If you were to look at all the names in the
Long term support: This is a technical approach where one will use a chart to identify areas where a stock was stable in the past. Since many names are still in a long term uptrend, you could look on a higher time period chart (like the weekly) for support areas. Sticking with the financial sector we could look at Goldman Sachs
Wait for the selling to stop: Now this may sound like an obvious one but one tip is to simply wait for the selling to stop and for other investors to come and try to buy the dip first. This will take some discipline though. Imagine a long downtrending stock like Alibaba (NASASQ: BABA). Over the last month the selling has stopped and it could be that the bulls will try and buy this discount. If so, one could wait for the first sign of strength and then join in though that is easier said than done.
While buying a stock that is falling is always harder than buying a rising stock, with the markets showing their signs of volatility, it's a skill that many will have to learn to like.