Honing In On The Sell Strategy

With the market trends zigzagging, and our domestic Trend Tracking Index (TTI) having moved closer to its long-term trend line (+0.73%), a potential Sell signal has become a possibility again.

One reader had this question:

Would you please take a moment to elaborate on your sell strategy?

You will sell if the TTI falls below the 195 day MA. Will you sell even if the price of your mutual fund has fallen only by, say, 4%? Or will you wait till the price drops by 7% though the TTI has fallen below the 195 day MA?

Your posting on Trend clarification is great. But if you could elaborate on your sell strategy, it will benefit people like me.

My apologies if the question is unclear.

As I mentioned in my weekly StatSheet, 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.

At the end of the last domestic Buy cycle (1/18/08), all of our positions had been sold before the TTI pierced its trend line to the downside. Right now it appears, with the current buy cycle not even being a month old, that the reverse might happen.

Please remember that this in not an exact science. The goal is to be out of the market before major portfolio damage due to a possible bear scenario occurs.

If in fact we head further south, and the Trend line gets violated to the downside, I will sell or neutralize my domestic holdings. What that means is that I have basically two options:

1. Sell all domestic mutual fund/ETF holdings outright, or

2. Sell all domestic ETF holdings, but hold the mutual funds and add an equal amount of short positions to offset the potential drop. In other words, I would be market neutral at that point.

The first choice is pretty clear, so why would I consider the second one? The main reason is that we have only held the mutual funds for a month and are still subject to the 90-day short-term redemption fees. While the fees have become relatively modest ($49.95 at my custodian), some mutual fund companies may not like the short-term sale and could ban me from further trading.

This is an option that was available a few years ago, and I may very well consider it. The short S&P; 500 (SH) ETF lends itself to such a transaction. If subsequently the markets go one way or the other, I can then later on remove the hedge and become net long or short again.

If you find yourself in a similar situation in regards to your mutual fund holdings, you may want to consider this kind of approach.

About Ulli Niemann

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