Clarification Of The Sell Strategy

In regards to Monday’s post “Honing In On The Sell Strategy” one reader had this to say:

In Friday’s newsletter stat sheet, you said “My sell rules are as follows: I will liquidate any of my holdings if they drop by more than 7% from their highs since I bought them, or if the TTI breaks below the neutral zone, which is a point of -1.50% below its long-term tend line — whichever occurs first.”

In Monday’s elaboration, you say “I will liquidate my domestic holdings if the sell stop gets triggered or the TTI breaks below its long-term trend line, whichever occurs first.” Which is it? Am I missing something?

Thanks for your good work.

Yes, the reader is correct; I said both. When posting the sell rules in the StatSheet after the Domestic Buy signal was generated on 5/15/08, my intention was to give the market some room to breathe to the downside, in case a sell off had materialized right after our purchase. This would have avoided an immediate whip-saw signal.

While this whip-saw did not happen, here we are less than a month later staring a new Sell signal in the face. While domestic buy cycles usually last from several months to 1-1/2 years, this one may not. From my vantage point, this is either an indication that a major trend reversal may be forthcoming or that the past upswing was merely a bear market rally.

Again, as I said on Monday, this is not an exact science, and we’re simply trying to stay out of the way of an oncoming bear market train.

Given that, I will use the latter and issue a sell signal for domestic equity funds, if the domestic Trend Tracking Index (TTI) breaks its trend line to the downside and stays there for a couple of days. Remember, markets go down a lot faster than they go up, so use the solution to get out that best fits your risk tolerance.

Wednesday Market Update:

All major indexes retreated sharply as the markets were unable to absorb news of higher oil prices and interest rates as well as questionable economic news. I took the opportunity early in the day to unload some of our more volatile positions in technology, emerging and Latin American markets.

To no surprise, our domestic Trend Tracking Index (TTI) dropped as well and has now pierced its long-term trend line to the downside by -0.40%. Barring any super rebound rally on Thursday, I will initiate some short positions to neutralize our long mutual fund holdings as discussed in Monday’s post.

If the TTI stays below its long-term trend line for another day or two, that will constitute an official “Sell” signal for the domestic arena, and I will make the announcement on this blog.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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