I have mentioned several times the importance of broader market moves because roughly 75% of stocks move in same direction as the general market. The market was due for a bounce after it got drubbed 18% in a short amount of time, but I thought the 9% sprint off the bottom was baseless. It sucked a lot of people back in who are now solidly underwater again.
It pays to be able to spot real moves versus simply reflex ones in the broad market because your individual stocks are swayed by it so much. So how should you handle future bounces?
Newsflow Matters
The biggest clue that the 9% bounce was phony was that none of the economic data or international news improved to any meaningful extent, yet traders piled into stocks when they noticed that prices started to rise. The point gains on the indices were enormous, leading many to believe that the water was safe to wade into again. Every bad news item was treated as another chance for the Fed to enact QE3, even though the first two were suspect at best.
The second clue that the bounce was fleeting was that volume was low and it happened during the “dog days” of summer when many traders were vacationing in the Hamptons. This made it easier for high frequency traders to dominate the action even more so than they usually do. Studies have shown that high frequency traders have an upward bias, so when things start moving up, these folks pile on and create huge point gains.
So until the economic data and earnings picture improves, treat all bounces with skepticism and use them as an opportunity to lighten up your holdings rather than add to them. There will be plenty of time to get on board once things improve, but the important thing is not to get sucked into phony rallies and watch your capital dissipate. If you can avoid big losses now, you will be that much ahead of the game once the tide turns and can afford to be more offensive at that time.
Rallies Should Be Viewed Skeptically is an article from: 
