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Trading Lesson: Find Quality Stocks in Up Trend, Buy into the Bad News

11/02/2018 3:27 pm EST


Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

Dating back to the 1920s and earlier, the seasonal pattern in stocks for the month of October has been bearish. In fact, being long stocks during the month of October has been a scary proposition for many traders, writes Jake Bernstein. He's presenting at TradersExpo Las Vegas.

Some traders lighten their long portfolios early in the month in anticipation of what has been an uncanny tendency for stocks to move sharply lower in late October. Typically the late October decline has been followed by strong November rallies and the so-called “Santa Claus rally” which typifies a strong rally into year end.

Although the statistics for this pattern are well documented, available for study, not open to debate or interpretation, the fact remains that many traders and investors believe that “this year will be different.” In most cases they miss significant opportunities to profit and vow not to make the same mistake next year.

Although I am firmly in the camp of statistical advocates who favor a strong year-end rally this year, the negatives that will be trotted out or which have already been trotted out in opposition to the potential year-end rally. Why no year-end rally:

  • continued uncertainty about trade tariffs
  • an overheating economy
  • steadily rising interest rates
  • escalating international conflict
  • rising oil prices
  • excessive optimism
  • the need for a correction after a sustained bull market
  • high employment signaling inflation
  • an erratic president
  • and continued political turmoil in Washington.

And so here we are looking at the same situation we have looked at for decades being faced with the same decision-making process. That process is to be long, to be short or to be out. I’m a numbers guy; the numbers mean a great deal to me because they don’t lie.

My strategy: I will find quality stocks that are in up trends and within my level of risk tolerance I will buy into bad news. It’s that easy and it’s that complex.

‘Tis the season(al) to be bullish.

Best of trading!

Jake Bernstein

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