The market is in the most troubling of all possible situations.  We have a split decision by the experts; a pull back with a W chart pattern or an extension of the amazing bull run since March. I’m here to tell you, it doesn’t matter. Let’s put this market into perspective.

We had an expected and needed correction in ’07 into ’09 that was aggravated by the banking/credit/confidence crises. Without the collapse of the banking system the drop would have stopped in the mid to low 9000’s, maybe the high 8000’s and would have turned around after a reasonable period.

As soon as the market sensed that we were not falling into the banking abyss it ran right back to where it would have stopped without all the aggravating factors we had last fall; around 8700.

We are now where a real bull run should start, but we have just finished a 30% spurt in three months. We are out of psychological gas. The market is tired and afraid of having come too far too quickly. That is the cause of the drop in the volume in the markets and why many investors are betting on a pullback.

Whether we pull back now or later, or run up another 30% now or later, this market will still go over 10,000 and go to 15,000. In three to five years you will look back at this period and kick yourself in the butt for not doing the obvious.

We are down 6000 from our high on the DOW. If not for the problems last fall this would look like the biggest buying opportunity of our lifetimes.

This market period can still be the foundation for the biggest money grab in market history. Here’s how to make this work for you.

Go through the stocks in the S&P 500 and identify companies you are familiar with and whose products and history you feel comfortable with. It’s important you are comfortable with the company and how its stock behaves.

In other words, how did this stock do in the last run up from a correction? Or, how has this company behaved over the long term. Is it an obvious long term winner, three to five years, or a not sure? If it falls into the area of not sure, drop it from the list.

It would be nice if they were spread over four or five industries for diversification, but knowing the companies and being comfortable with them is more important right now. I’ll explain why in a minute.

Get your list together and study their price movement over the past six months. Eliminate, or delay buying those that have obviously run up too much. Look at how far they are from their 52 week high. Go with the biggest spread.

Start buying in ¼ positions those that look like they have some upside. In other words, if you normally buy $5000 positions, only buy $1250 positions.

What you’re doing is averaging into a market that will probably give you better prices in the future. Probably is the key word. This big pullback may not happen and you could be left at the station when the train pulls out.

Buy into the list when we have dips. Look at POT, Potash Corp. It dropped 20 points in one day recently and is a screaming buy. It was also a screaming buy at $115 two weeks ago. Using our plan you could go back in at $20 less per share now than a week ago and add another ¼ position.

Don’t worry if the turn around happens before you have all your cash in, cash is king. You’ll have other opportunities.

This market will serve up lots of bargains just like the POT buy in the next few months as it bounces and swerves it way out of the hole. You will make the real money planning on the market being crazy and not trying to guess if it will fall or rise. This approach allows you to plan on both.

The guts of this approach are the familiarity and confidence you have in your companies. They will give you the strength and discipline to ignore the really bad days that we definitely will have.

If you can watch your companies drop and know it doesn’t matter because you are certain it is temporary and they will make big money in the next few years, you picked the right stocks!

This is a new version of an old rule of investing. Be a Warren Buffet! Cheer when the market is terrible! Buy good companies that you know and buy into the dips in a down market.

It’s not perfect but it is the only way I know to make the market craziness work for you.

Source:  8500 Will Look Cheap