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Nasdaq Sell-Off Signals Death Of Rally
BY JONAH KERI
INVESTOR'S BUSINESS DAILY
Another sell-off in higher volume pounded the final nail in the dying rally's coffin Tuesday.
The Nasdaq gapped down at the open, then kept falling. Though it pulled off its intraday low, it still ended down 0.8%. The higher-volume decline marked the Nasdaq's third distribution day in the last seven sessions.
As noted in the Market Pulse, that makes four to five distribution days for the index in the last four weeks. That equals the threshold for a market red flag, defined as three to five higher-volume sell-offs in the span of a few weeks. Add in the frequency and intensity of the three recent drops and it's clear the market has gone into correction mode.
What will happen next? No one can say for sure. Some corrections last a few weeks. Others progress into full-blown bear markets, lasting several months, even years.
No matter how far the downturn goes, the market has spoken: It's time to raise cash. As noted several times in the last few days, this is a time for caution. By now you should be well off margin, as a leveraged portfolio can get creamed in a bad market. If you own any stocks down 7% or more from their buy point, sell now.
Now take a hard look at your other stocks. Ask yourself: Are they showing clear sell signals? Dropping in the heaviest volume since the breakout? Slicing through the 50-day moving average in brisk trade? If so, it's time to trim or close those positions too.
IBD's studies of bull and bear markets over the last 50 years show that three out of every four stocks follow the general market's lead. If you bought a stock a while back and are sitting on a huge gain, you can consider holding and waiting out the correction. Otherwise, there's no good reason to be anywhere but in cash.
The market has already ravaged micro-cap high-fliers such as NovAtel, (NGPS) and on Tuesday, Phazar. (ANTP) The carnage has now spread to leading stocks that had up to now withstood the market's blows.
Online travel deal provider Travelzoo (TZOO) dived 14%, slicing its 50-day. Though volume came in only about average, it picked up as the day wore on. In a healthy market, you can forgive a sharp decline in normal volume. Investors should take a closer look when the market's in bad shape.
Apple Computer (AAPL) fell 6% on triple normal trade. The firm has benefited from huge sales of its iPod digital music player. But the stock fell hard after CEO Steve Jobs spoke at the MacWorld trade show in San Francisco.
Analysts struggled to pinpoint any bad news, as iPod sales beat holiday views and the new iPod Shuffle is priced as expected. But in a bad market, stocks can drop for seemingly no reason. Often bad news doesn't show up until months later, given the market always looks ahead. With Apple and other leaders heading into the teeth of earnings season, be on guard for more volatility. eighr note: Take heed of the above.
At this time, Cash is king.
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