When to Exit or Re-Enter the Markets - 1
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When to Exit or
Re-Enter the Markets
When to Exit the Markets or Get Back In
Opinions abound about when you should quit investing in the stock market. Equally,
there are just as many opinions and theories for when you should start investing or
going back into the markets. Using concrete signals is a simple yet powerful tool that
removes the emotion factor of “should I invest now or should I cash out”.
There are arguments for never exiting the markets, although the recent recession and
losses, however, temporary, of substantial dollars in almost everyone’s retirement or
regular investment account, makes this a hard argument to support.
Exit
Enter
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On the other hand, making an “exit” decision is possible if it is based on reliable,
measurable criteria.
There are different techniques to establish a signal for when to stop trading,
whether it be mutual funds, stocks or ETFs within which you place your hard
earned cash.
In his book, Smarter Investing in Any Economy, Michael Carr speaks of an equity curve
as giving just such an “Exit” or a “Return” signal. Carr applies the equity curve to
particular investment strategies that are based on universes of ticker symbols. This
same technique can be used to give an overall signal without being tied to any one
investment strategy or group of ticker symbols.
Basically an equity curve is created by using a moving average chart with both
the fast and slow parameters set to the same period. In his book, Carr uses and
equity curve of either 30 or 50 weeks which corresponds to 150 or 250 trading
days; so the chart settings would be 150:150 or 250:250. In my experience,
during volatile markets a setting of 100:100 works much better and would have
prevented almost all losses during the recent recession and when the market has
bounced around since the recovery began.
The equity curve is read by looking at the price line of the investment strategy. When
the price line crosses down through the relatively smooth equity curve line it is a signal
to exit or stop using that particular investment strategy. Conversely when the price line
of the strategy goes up through the equity curve and while it remains above the curve
line, one should be investing with the particular strategy.
An overall market signal can be created by using the S&P 500 or a similar major index.
My experience using the S&P 500 index with a setting of 100:100 for the equity curve
helped me preserve my cash during the recession and whenever the market has
dropped substantially.
Settings lower than 100 may react more quickly to market volatility while settings like
250 are slower to react. Low settings can result in frequent trading, while higher
settings may involve less frequent trades depending upon other buy/sell rules.
Personally my experience indicates large losses still occurred when the equity curve
used a 250 setting but settings in the range of 100 resulted in safety while still allowing
for substantial profits when the equity curve signaled to be in the markets.
Some software programs allow you to create equity curve signals or have them built in
and allow you to adjust the settings to meet your goals of frequent or less frequent
trading, aggressive or conservative investing. Using these concrete signals is a simple
yet powerful tool that removes the emotion factor of “should I invest now or should I
cash out”.
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When to Get Back into the Markets
Getting back into the market after you have moved all or most of your portfolio to cash
requires both a plan and patience. Being impatient can put your portfolio at risk. It is
safer to jump with a positive signal than to just jump not knowing what the outcome will
be.
After you have moved out of the markets you typically will have to deal with two worries:
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Am I getting in back in too early or too late?
Should I invest all my cash immediately or space it out?
The answer to the first situation is to trust the method of investing you have been using.
If you are using an investment software program to analyze and provide buy/sell signals
and it has been successful for you in the past, then wait for new buy signals. Of course
you will continue to watch the news to see what the Wall Street gurus and politicians are
doing because they have an immense influence on the market’s direction.
How much to invest should also be based on buy signals. If you sold six positions most
likely you will be going back in with six new positions. But unless your program or
methodology gives you six unique buy signals on the same day you will most likely just
buy as the signals come, and this could take weeks or even months before you are
again fully invested. Will you miss opportunities by waiting for your signals, perhaps,
but by sticking with your methods you will also reduce risk and be more likely to garner
strong gains. Because different groups, like asset, sector or foreign groups of ticker
symbols react differently to market forces it is most likely that new buy signals will be
spread out over time; but this is a good thing as it helps keep you diversified and
reduces risk.
In other words, if your investment methods have been making you money, previously
told you to exit completely or partially from the markets, then the safest course is to
continue your analysis at the same frequency (weekly for example) and move back in
as your methodology suggests. Changing methods of analysis at this point can put you
in the position of using unproven methods or results to make your investment decisions.
Of course if you are using a software program that allows for back testing then it may be
safe to switch techniques at this point.
Personally I find that it takes me a few months to get back to being fully invested.
Yes, it is frustrating at times, but I just keep reminding myself it is safer to jump
with a positive signal than to just jump not knowing what the outcome will be.
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Keys to Maximizing Profits
Buying is often considered the hard part of investing, but selling and knowing when and
why to sell can be far more difficult. The key to selling and making profits is to be
unemotional when making your decisions, to have rules or parameters that when met
“require’ you to sell.
Removing your emotions from the decision making process isn’t always easy; it can be
like switching from always buying Chevy’s to all of sudden buying a Ford – not easy!
But if you follow set selling rules you will maximize your profits and minimize any
investment losses.
The key to unemotional selling is to have rules or parameters that when met
“require’ you to sell your investment. Such rules include (but are not limited to):
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Decline – if the stock goes down a certain percent or a certain dollar amount.
Percentage drops from a high point after you made the purchase are called
“trailing” or “high” stops.
Rank – if the ETF is part of a group and after owning it a while it is no longer
ranked at the top by your means of analysis but is now below a certain level.
Charts – if you look at different charts for your mutual fund and the signal based
on your chart of choice is a sell signal.
Market Exit Signal – if you have a chart or calculation that analyzes the strength
of the markets and this “Benchmark” gives an exit the market signal.
Rebalance – you automatically sell at certain times of the year or after a certain
number of months so you then buy the most current best performers.
How to set your sell rules is the challenge. Author William O’Neil generally
recommends selling if a symbol drops 7 – 8%. Some software programs can back test
your group of stocks (or ETFS or funds) to find what is the best trailing stop to use for
the particular group strategy when a ticker symbol starts to decline.
The same goes for where a symbol ranks in your group. One author suggests that an
investment position should be kept as long as it’s in the top 10% of the group. Again,
some software programs can evaluate where the rank cutoff should be based upon the
particular group.
Intensive training over many months is often required to fully comprehend the mean of
different charts. There are many software programs both for sale and free on the
internet that provide dozens of charts. The two questions are: a) how do you set the
chart parameters or should you just stick with what the providers give you? and b) which
charts should you use?
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There are definite arguments for using and not using a Market Exit Signal or to
rebalance your portfolio at specific times. The answer relates more to your
philosophical attitude towards your particular trading goals and methods
Your Market Exit Signal Choices
When the market is in a downward spiral how can you preserve your money or even
continue to make money? A declining market is the greatest challenge and test for all
investors and there are certain, yes key actions that you can take when the market
heads downward.
With the market in a sustained decline, you can:
Cash
Out
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Invest
LongTerm
Analyze
ShortTerm
Cash Out
Invest for the long-term
Analyze and invest based on short-term signals
Cash Out requires reading a few signals that have a tendency to predict the best time
to exit the markets. Perhaps one of the strongest exit signals is the equity curve of the
S&P 500 with a setting of 100. As mentioned, this signal is generated when the price
line of the S&P 500 cuts thru the moving average of the S&P, which in this case would
be set to 100 days.
Other cash out signals could be when the equity curve of a group strategy gives the
signal or when both the moving average and the full stochastic chart are all in sell
mode. Another technical analysis signal would be if the ticker symbols of the group are
all ranked below a benchmark like the S&P500.
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Investing for the long-term means you are willing to ride a market drop because of the
overall future strength of your holdings. With the market in decline, it can be a good
time to buy such positions, whether they are individual stocks, ETFs or mutual funds,
which have a strong history of paying high dividends. Besides future growth capability,
these holdings will produce income in the form of dividends which can be automatically
reinvested so your investment continues to grow and is ready to surge when the
markets again go up.
Short-term signals can be generated using technical analysis. This may mean
switching to a different set of strategies for your investment groups. Analyzing relative
strength with an Alpha period of 10 continual trading days or even 30 will be more
responsive to market changes than if you are analyzing based on trading periods of 60
or 90 continual trading days.
The most difficult aspect you have, that I have, when these signals to exit the market
are given, is to actually follow through. Human nature is generally optimistic and we
don’t want to admit that maybe what we own isn’t going to make us money, or perhaps
more money. So we don’t want to sell. This is our biggest human flaw; we need to sell
and lock in our profits when the sell, and especially the “get out”, exit signals are
generated.
Handling Turbulent Markets
Turbulent markets require thinking and planning so you are ready to roll and you can
take swift action. The answer is not to be an ostrich and run and hide but to prepare
and if necessary take decisive action.
The economy can be hammered by political events and posturing or by sudden financial
news. These causes of market turbulence, where one day the market moves like a yo yo requires a solid game plan.
Three keys to handling your investments turbulent markets include:
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Safeguarding your investments.
Ready to buy new positions when the markets decide the roller coaster ride is
over and it’s time to climb the mountain again.
Searching or hunting for current investment stars despite the turbulence.
Safeguarding your investments means you need to sell. You may not want to sell
everything, but you may want to sell a chunk of your holdings and move into something
safe like a bond or treasury ETFs, bond mutual funds or rock solid stocks that pay high
dividends. A safeguard action like this will preserve your capital and if you choose
carefully you can still beat inflation with high earnings.
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Standing ready to buy means that you are going to keep a chunk of your money in
cash or at least readily available in a bond or treasury ETF. This way when your
investment software program starts screaming BUY, you are ready to invest and ride
the next wave up.
Hunting for investment winners can be tricky, but with the right software program you
can find and keep some cash, perhaps 20 – 25% of your portfolio, invested in growing
ETFs, stocks or funds.
Profiting in Turbulent Times
Profiting in a turbulent, up and down, market can be a real challenge. The key is a
steady, unemotional course based upon good signals. It isn’t necessary to go to the
sidelines and simply wait out bouncing markets.
When markets are bouncing up and down rather than moving steadily upwards with
occasional dips this can be scaring but still be very profitable if you follow a few key
principals – and even these principals have a few options.
Check Emotions
Keep Time Frame
Turbulent
Investing
Increase Analysis
Watch Exit Signals
First, remember it is critical to keep your emotions in check. Don’t succumb to selling
or buying that is not based on hard facts. And the facts should relate specifically to your
investment strategies and to particular ticker symbols.
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Second, keep your time frame for managing your portfolio. If you examine your
portfolio weekly don’t succumb to daily decisions because this won’t fit either your
existing strategies or your time frame. In other words you can set yourself up for failure
and losing money by switching horses’ mid-stream
Third, be willing to spend a little more time. Perhaps you should look at a few charts to
see if they confirm holding or buying particular positions. I like looking at moving
average and full stochastic charts.
Fourth, take a more frequent look at the Market Exit Signal that can tell you when to
stop trading and put your money in a safe position.
Broker stops vs. Strategy stops
How do you protect your investments with stops? This is a good question. Should you
sell your mutual funds, ETFs or stocks only when a strategy says so, even if it is a
strategy updated weekly or monthly? Or should you set stops with your broker following
the same stop rules as in your strategy, but letting them activate whenever necessary?
I usually set the stops with my online broker and if they execute mid-week on my
weekly strategies, I simply wait until the weekend to get the signal of what action
to take from my investment analysis software. This way I am protected from
major losses. This doesn’t work well, however if you set stops that are really tight,
like one or two percent, because a fund, ETF or stock can rebound that amount
when the markets are topsy turvey.
Let me give you an example: let’s say that my investment program recommended
buying EWD and VALU. The ETF, EWD (ishares Sweden) has a stop of 4% and the
stock, VALU (Value Line) also had a stop of 4%. With these somewhat tight stops set
with an online broker the positions easily stopped out and were sold with the recent
market gyrations. Both tickers began a recovery within about 10days and were climbing
steeply in the few weeks afterwards. If the stops had been set to 6% they would have
still been sold because the recent market drop was so extreme.
However the loss would have been minimal because the stops were used mid-week.
In other situations where the markets do not have extreme movements on an almost
daily or every other day basis, stops can move you out of a position one day and then
the same position recovers and soars ahead in the following days. Again, the solution
depends upon the stop percentage.
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In any case, as a “weekly” trader, if my stops with the broker close me out of a position
mid-week I wait until the end of the week for my software to tell me what to do next. I
don’t try and second guess what the program will recommend.
The hard part of this process is remaining positive. When you are stopped out, it means
you took a loss or cut short possible future gains, but the positive point of view is that
any loss was minimized. The even more important factor to keep in mind is that if your
strategy of buy-sell rules with stops is based on a thorough back test analysis and the
history of this strategy has produced excellent returns, strong gains, then yes, a few
losses should be expected, but the long term outlook is for further gains and more
money in the bank or portfolio.
I said I usually set stops with my online broker, but I don’t set them for every position. If
I knowingly have purchased a stock or fund for the long term, I won’t set the stops with
the brokerage, but will follow the recommendations of my investment software if it says
to sell, even if I have only owned the position a short time. In these situations my buysell rules have settings designed to hold a position a long time except in extreme
situations where the market or the position is taking a dive.
Dynamic Investor Pro is your proven investment software program that provides
reliable investment decisions in moments. Michael J. Carr, CMT, author of “Smarter
Investing in Any Economy”, is a user and advocate of the program.
It is the only program available that focuses on relative strength momentum. It features
analysis by alpha plus more than 30 methods for recommending stocks, ETFs and
mutual funds along with a variety of charts. An Exit Signal tells users when to get out of
the market to preserve their cash! The program works with each person’s individual
style of investment and includes an exclusive one button Decision Maker with ability to
analyze data and charts, plus the program allows users to create and optimize strategies
for any group of symbols. Sell signals based on a variety of criteria are generated to
preserve gains and limit losses.
The program is widely used by both individuals and professional financial planners and
advisors. It can be used as provided or customized to fit any users goals whether
they be conservative or aggressive, long term investors or short-term. Although it
is not intended for use by intra-day traders, investors can reap rewards with as little
as 30 minutes a week or day. It comes with a 30-day no quibble guarantee!
When to Exit or Re-Enter the Markets, copyright by Raymond Dominick, Investment Solutions.