After a follow-through day, stock and ETF investors face the question of how to invest back into stocks. And just as important is the question of how aggressively to be invested in the midst of a bear market.
The follow-through day essentially tells investors when to start buying quality stocks again, as they break out past buy points. IBD founder William O'Neil said he never seen a bull market that didn't begin with a follow-through.
How To Invest: Buying After A Follow-Through Day
But not every follow-through results in a sustained uptrend, which is why investors need to gauge their level of exposure in the days and weeks that come after this signal. You want to buy in sync with the market, so that you don't overcommit to an uptrend that may reverse on you.
On Oct. 21, 2022, the Nasdaq composite and S&P 500 staged follow-throughs, signifying the start of a potential uptrend, according to that day's The Big Picture column. But buying opportunities were mostly missing until later.
Remember, don't panic if you miss the first couple of breakouts. If a stock market rally is real and meaningful, then there will be plenty of time to buy stocks and make money over the coming weeks and potentially months.
With the stock market uptrend still in its potential early stages in October 2022, investors needed to be patient and disciplined when buying stocks.
Don't let FOMO — the fear of missing out — get the best of you. There will be ample opportunity to build exposure if the uptrend is for real, as top stocks gain strength and recover from the bear-market volatility.
And if the stock market starts to break down again, you can reduce exposure without losing too much capital.
Watch for sell signals in stocks coming out of bases. Specifically, sell any stock that falls 7% from your purchase price. Another way new breakouts fail is when a gain of more than 10% from the buy point disappears.
Stocks To Watch
One way to know how much to be in stocks is to track IBD's recommended market exposure levels. After a follow-through, that could be at 20%-40% — a level that invites just enough buying to get into a market upswing without risking much in case the follow-through flops.
If the stock market continues climbing, you might see the exposure level rise to 40%-60%. This can be a guide to buy a few more stocks, or add to earlier buys that are working out.
The maximum exposure level is 80%-100%. Don't expect such a heavy recommendation until the market is well into a confirmed uptrend.
This article was originally published Oct. 28, 2022, and has been updated.
