Investor's Corner: Leaders Change From One Bull To Another

Aside from some corrections, the market has provided plenty of opportunities for investors to make money in stocks.

But despite the solid gains many leading stocks are making today, investors need to be aware that even the biggest winners will drop sharply at some point.

Have your sell rules in place and be ready to apply them. Many of the big winners will suffer the worst declines. Also, don't expect the leaders of one bull market to lead the next one.

Studies show that the period of greatest market performance lasts on average only about a year and a half to two years. Some last for three years.

Only a small number will last for five to 10 years. We're in the last category.

To preserve your capital and your confidence, make sure you sell if a stock falls 7% to 8% below your cost. Don't let your gains evaporate.

As long as this bull market lasts, you should be able to find other stocks that emerge as leader and give your portfolio new blood.

"Even the best stocks eventually go down," writes IBD founder William O'Neil in his book "The Successful Investor."

"And when they do, they can hurt you as much as, or even more than, the mediocre ones, especially if you buy them too late, as so many investors did as the 1990s bull market finally fizzled."

O'Neil also mentions that true market leaders fall by an average 72% once they reach their peaks. After the dot-com bust, many went down more than 90%.

That's why sticking to your rules is so important. If the market goes into a correction or worse, a bear, those same leaders most likely will not be there when the new bull arrives.

Only one of every eight leaders will reprise their role as a leader in the next bull phase. As times change, so do the economic and competitive conditions.

JDS Uniphase (NasdaqGS: - ) went from a price of 2 in late 1993 to a record high of 1,227 in March 2000 (point 1).

But as the tide turned, so did the fate of this stock. JDS plunged as much as 99% (point 2) along with other Internet and technology-related stocks in bear market years that followed.

The stock never recovered. It made a climax run as it topped, its principal sell signal.