Reader Confusion

One anonymous reader had these comments a few days ago:

Can you please explain how someone who appears to advocate Market tracking investing using stop losses can also advocates hedging “the simple hedge strategy”?

The 2 strategies seem to be completely opposite approaches to investing.

Can you please explain to me why you advocate both approaches, and the advantages of both?

When following major trends in the market, there will be prolonged periods of time where our Trend Tracking Indexes (TTIs) are in bearish territory and therefore keeping us out of the markets.

Case in point is the past 1-1/2 years. Our domestic TTI generated a sell signal effective as of 6/23/08. The markets subsequently crashed, recovered towards the end of 2008, dropped again 22% until making a low on March 9, 2009 and then rallied some 50% as measured by the S&P; 500.

Our domestic TTI did not cross above its long-term trend line until 6/3/09 when a new Buy signal was generated. That’s almost one year later after we headed to the sidelines.

Just because our TTI is in bear market territory does not mean there are no other investments opportunities. However, with the markets having shown the volatility they did, going outright long (against the major trend) or outright short had huge risk factors attached to it.

This is why I developed the SimpleHedge Strategy. It allows us, as described in the book, to enter the markets safely at a much earlier time to attempt to add profits before our regular buy signal occurs. This is exactly what happened, as the hedge strategy generated a buy late in December 08, when uncertainty reigned.

As it turned out, the hedge opportunity was profitable and allowed us the option to drop the short component of the hedge when the domestic Buy was generated. Some clients like the hedge so much, that they preferred staying with it.

However, let me be clear. In an outright bullish run, such as we’ve seen off the lows in March, a hedge will always lag in performance. Here again, as I discussed yesterday, a client’s risk tolerance would determine which path he should take.

The hedge concept is designed to fill the “lengthy gaps” inherent in trend tracking. I have found it to be a nice combination worthwhile considering by anybody but the most aggressive investor.

About Ulli Niemann

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