Reader Q & A: Should I Hold Or Should I Fold?

Some readers like to listen to the financial gurus on CNBC and actually follow their advice. Here’s what Mark experienced:

I am a real fan of your investment letter and typically abide by it completely. However, I saw Meredith Whitney, the Oppenheimer guru, on CNBC this week forecasting a further “huge” decline in financials.

Wednesday, “SKF” started climbing rapidly and I thought that we were about to see another Friday 11/26/08. I bought into the ETF and since then it has declined 24%. Should I bail out Monday, or do you think that Whitney was right?

This is exactly the reason why I have stayed away from playing the short end of the market. Volatility is simply too high to make a reasonable assumption as to the short-term direction of the trend, whether in financials or any other segment.

While I believe that Whitney is right in her view (long-term) that financials are due to decline, the timing of it could be off as Mark just experienced. Nobody can look into the future, so blindly following an opinion voiced on national TV is a gamble at best.

If you look at a chart, you’ll see that SKF is above its long-term trend line, and therefore a buy. However, you need to have either deep pockets, nerves of steel or both to be simply holding this UltraShort ETF. That makes it suitable for only the most aggressive investors.

For the rest of us, if you do take a stab, you need to use a sell stop. UltraShort ETFs can move violently in either direction, so a larger exit point is required. Since I usually recommend a 10% stop for sectors, in the UltraShort arena, you may have to move that to 20%. Hopefully, you used “play money” or only a small allocation of your “serious money.”

I’d watch Monday’s market opening or the first couple of hours and, if the trend goes against you, get out. If there is a sharp drop in the market, monitor it closely and maybe Whitney’s forecast will turn out in your favor.

The key here is to always have a sell stop discipline in place. You may have to jump in and out several times taking small losses before the major trend finally supports your view. In the meantime, you need to make sure that you don’t get wiped out with one trade and then watch the market go your way.

Disclosure: At this time, we don’t have any positions in SKF.

About Ulli Niemann

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