Heading South

The markets continued to stumble yesterday as downward momentum accelerated. Much has been written about a potential market top and one of the more interesting observations and references was made by Mish at Global Economic Trends in a post titled “Multi-year Stock Market Top could Be In.”

With yesterday’s action, several sell stops were triggered, and the affected holdings will be liquidated today. The position of the Trend Tracking Indexes (TTIs) relative to their long-term trend lines is as follows:

Domestic TTI: +7.14%
International TTI: +11.18%
Hedge TTI: +0.54%

Over the past month, continued reader feedback regarding sell stops was a topic of great interest. A few days ago, reader Bob had this to say:

Market is getting a bit testy right now. I noticed that my holding in Russell 2000 ETF is down 5.69% from its high today.

My question is do you recommend using 7% or 10% stop for this type of holding since its Beta is 1.19 compared to S&P; 500 per Morningstar?

Another though I had was to use a stop of 8.5% (7% x 1.19) to account for its increased volatility. In fact I am considering doing this for all of my holdings. It is easy to do & follow with spreadsheet I have set up. I would probably round all exit calculations to the nearest 0.5% (as I did above) to make it easier to follow in the sell zone.

While that is a different way of applying the sell discipline, it does not really matter. My preference is to use the 7% rule for all domestic and international funds and 10% for the more volatile country and sector fund arenas.

You should use whatever approach you are most comfortable with. In the bigger scheme of things, using any type of sell stop discipline is better than using none at all.

Remaining exposed to the whims of the market place with no clear exit plan has proven to be disastrous in the past and may very well be the downfall for many investors again in the future.

About Ulli Niemann

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