A correction experience 6/2013

Expecting a 10% correction, I placed buy orders on certain stocks from my watch list with 5% to 10% discount from the current prices. As of 6/2013, the market only corrected itself by +/- 6%. Overall, I bought 8 stocks (with LCC bought twice) and all the purchase orders were executed on 6/24/13 in my largest taxable account. Because the market did not correct by the expected 10%, I had not executed more buy orders.

This demonstrates how to take advantage of a correction even though it has not been predicted 100% correct. This method works most of the time but not all of the time—as the market could decline further. On the very rough average, we have two dips (good opportunity to buy stocks) and two temporary yearly highs (good opportunity to sell stocks) each year.

After 1 month (7/24/13), the average return was 11% and the annualized return would be 131%.

The stocks bought and their performances

Stocks	Return	Annualized Return
ALK	21%	253%
BTU	7%	82%
CF	1%	18%
CRUS	16%	191%
LCC	18%	217%
MOS	-4%	-54%
OMX	12%	148%
LCC	16%	194%
Avg.	11%	131%
SPY	7%	89%
Beat SPY	47%	47%

As of today (7/24/13) I may start to sell more soon (LCC sold already) and place buy orders expecting another correction as the market has been too high. For tax efficiency, I usually do not sell if I do not have short-term losses to offset the gains in taxable accounts.

The average return (11%) for these 8 stocks is annualized to 131% while SPY’s YTD (16%) annualized to 29%. It is used to demonstrate how fast the return gain. The 131% is over-blown but it is used for comparing the market (i.e. SPY’s 29%). It will not be sustainable and should be smaller if we include the days of the cash not invested.

Beating the SPY for 47% indicates the good quality of the stocks in the watch list.

Conclusion

In order to take advantage of the dips, prepare by:

·         Accumulate cash before the dip. However, if the market keeps on rising, you may lose the extra gains for selling too early. We bet the market is at a temporary peak.

·         Preparing and updating a watch list for stocks to buy. If you do not have time to maintain such a list, buy ETFs such as SPY or any market ETFs that are commission-free from your broker.

If you do not have time to prepare such a list, try my list described in my book Best Stocks 2014 or later version. Be prepared to evaluate the stocks again.

(http://ebtonypow.blogspot.com/2013/11/reserved_5358.htm)

·         Timing is everything. It is harder to detect corrections than market plunges especially in light of the current excessive printing of money.

As of 2/5/14, I did sold some stocks taking advantage of the low-tax rate in long-term appreciation for 2014 and bought some stocks during this correction. Will update the performance. 

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