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Tactical Stock Market Tips

September 22, 2008 – by Richard Band

Buy the dips and sell the rallies. I’m positive you’ve heard that one before.

By selling into temporary rallies and buying into the subsequent pullbacks, you can lower your cost basis and build a platform for stronger growth when the market recovers. Tactical stock market trading doesn’t make nearly as much sense after a new bull market takes off. (The pullbacks then are generally minor, and hard to gauge in advance.) But it’s the right formula for now. Buy some, sell some.

The Stock Market Is Up From a Deep Dive

Obviously, the HUGE market swings of the past week make it difficult to judge whether we’ve seen the bottom. Last Thursday’s dramatic intraday turnaround on Wall Street—down sharply for the first half of the session, then up even more sharply in the second half—brought a welcome change from the pattern of the past few weeks.

Since the beginning of September, the stock market has repeatedly had difficulty holding on to gains achieved in early-morning trading. For a while, it looked as if this depressing tendency would repeat on Thursday. By intraday, the Standard & Poor’s 500 was scraping a new low for the year.

But then CNBC reported that the Treasury is working on a plan to restructure the financial system along the lines of the Resolution Trust Co., a tool used in the early 1990s to sort out the Savings and Loan mess. Stocks soared, led by the battered financials, even though the government hasn’t yet released any details of the plan. But beware—the 400-point bounce we saw in the Dow represents nothing more than hope and speculation.

So we probably haven’t seen the final low for the blue chip indexes. If nothing else, Thursday’s rally suggests we’re much closer to the end of this bear market than the gloom-and-doomers insist (See also: "How to Profit From the Market Meltdown"—a free online conference hosted by Richard Band. Click here for immediate access.)

With a bit of luck, stocks could be tracing out the early stages in a sustainable uptrend by the election, which is why now you should take advantage of these bargain prices. The best stock market tip I can give you is to do some serious buying!

But Bargain-Hunters Beware…

Just because the valuations on many stocks on Wall Street look like bargains, their best days are long gone. You need to be selective about the stocks you’re adding to your portfolio. The new market leaders that will rise from the rubble will be driven by financially solid dividend-paying companies in undervalued sectors and with no exposure to the credit crisis (see “Steelmakers Still a Steal“).

If you want to protect yourself and profit from the changes we’ve witnessed in the market over the past several months, you must… reposition your assets now to make the big money.

What do I mean by this? Well, the first step is to peel off your losers. But don’t lose sight of the long-term picture. Sooner or later, the stock market will snap back, so you also want to do some selective buying. For instance, keep an eye on technology picks, like Hewlett-Packard (HPQ). This front-running tech company will probably rank with the strongest performers when the market turns around in earnest (see also, “There’s Safety in Technology Stocks!“).

Why? Because this company has continued to increase sales and earnings in this market, and will likely do so in 2009.

Another company that has managed to sustain its uptrend is Apple (AAPL). Although its earnings growth will probably slow in the fiscal year ahead, the success of the company’s iPhone has simply dazzled Wall Street. AAPL has maintained adequate cash flow throughout the duration of this market-madness, and I’m confident it will lead the pack when the turnaround arrives. This is a great company to buy on dips.

The Bottom Line

Now is the time to start curing your portfolio. Buy companies that are generating lots of cash—and sharing their cash with shareholders in the form of dividends.

A great stock market tip is to take advantage of the drop in oil prices to reposition yourself for a stronger economy in the months ahead. The energy sector won’t stay down forever. Consumer stocks will also benefit, especially as confidence returns to the market. Many of them even offer juicy dividends to boot.

The face of the banking and financial system has changed dramatically over the last several months. Make no mistake about it—the collapse of Lehman Brothers, the bailout of AIG and the acquisition of Merrill Lynch to name a few, have sent a major jolt through the world’s financial markets (see, “Profit as Lehman Folds & Merrill Disappears“). And now the U.S. government is stepping in to pick up the slack.

Don’t let this changing economic landscape frighten you. Au contraire—adapt to it accordingly. Be tactical. I guarantee there are tremendous profits to be made in the months ahead!

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