Torpedo stocks:

Last Tuesday’s torpedo like collapse of the potash related stocks was a wake up call to investors who may have forgotten that no fundamental or technical study works all the time.

So here is the bad news on torpedoes. There is no fundamental or technical defence against your stock being hit by a torpedo.

The good news is that you have choices on how to react to the torpedo. In other words, do you react and sell now, or do you not react and hold on to your position? The choice you make depends on the nature of the exogenous event.

If the exogenous event is deemed to be just the beginning of a series of unresolved issues such as in the Sino-Forest example, you should sell and don’t look back.

If the exogenous event is deemed to be a one event issue that can be resolved by management, such as the Shoppers Drug Mart Corp collapse of April 2010 you should just hold on to your original position. In most cases the stock in question will pause, build a base and resume the original advance.

The technical rule is that a stock will only react (or torpedo) once in response to a one-issue exogenous event.So in the case of the potash stocks – if you are long, just hold on to your original position.