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For Experienced Swimmers Only

November 4, 2009
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In my youth, I spent many summer days working as a lifeguard on the beautiful beaches of Southern California. Yes, I know it was a tough job, but hey, somebody had to do it. Of course, I jest, but one thing we didn’t jest about as lifeguards was the often treacherous conditions in the Pacific Ocean. Despite its beauty, the Pacific can be a very tough customer. Riptides and heavy surf can make getting in and out of the water a challenging proposition even for expert swimmers, and even then there were days when the water was just way too rough to allow anyone in.

To distinguish between calm conditions, difficult conditions and dangerous water conditions, the lifeguards had a color-coded flag system. The green flag meant it was safe to go in the water, and the red flag meant it was too dangerous to enter. But it was the yellow flag that really worried us, because that flag signaled that only experienced swimmers should venture out into the blue.

It was during yellow flag conditions that we had to do the most rescues, as many swimmers who thought they were experienced turned out to be no match for the mighty power of even modest Pacific surf. 

So, what does this have to do with the stock market? Well, everything. You see, my lifeguard experience is a perfect metaphor for the market, and right now we are experiencing yellow-flag conditions. 

Over the last couple of weeks, stocks have come way off their highs. Last week the major averages fell below their short-term, 50-day moving average. We can see this trend in the chart below of the S&P 500, which fell below its 50-day moving average (blue line) last week.

As a former lifeguard, and now as a lifeguard of sorts for investors trying to navigate choppy market surf, I’d say this market is for experienced swimmers only. If you have winning positions in your portfolio, they’ve most likely fallen sharply over the past two weeks. 

What you must do is make sure you don’t let a further pullback eat away at your gains. Set a stop loss on all of your invested positions, that way you can protect your gains. Hey, you can always go back into equities if this selling proves temporary, or in the language of lifeguards, as soon as the green flag returns to the beach.

Oh, and just to prove to you that I practice what I preach with respect to stop losses, subscribers to my Successful Investing advisory service recently banked double-digit percentage gains in two equity positions. These gains came as a result of having stop losses in place before the latest market dive. 

If you want to find out more about how you can profit no matter how difficult the market surf, then check out Successful Investing today.