Sell Stops For All Positions All Of The Time

In response to a recent post, reader Don provided this feedback a week ago:

This is in response to “How High Can We Go“, and the current overbought condition of the market. John Hussman has a superb article on this, which you can read here.

The title alone got my attention: The Stock Market Has Never Been This (Intermediate-Term) Overbought.

As a result, I’ve looked over all of my holdings and tightened up my stops, at least to just under the early October lows before we went to new highs.

But I have a related thought, for what it’s worth. I too have looked at thousands of charts over the last few decades, and have read the key works on charting, and as important as the basic concepts may be, I believe it’s essential to allow for the occasional Black Swan.

I have seen a handful of charts in my life that are similar to your current TTI index, which were the basis of liquidating my long positions (and even going short in some cases), which were followed by gaps to new highs (above the high point on your chart), which caused devastating losses for my short positions, not to mention a whole lot of wailing and gnashing of teeth over the profits not made on my prior bird in the hand long positions.

In terms of how to deal with the current market, instead of just making sure that one has stops in place because it’s likely that the market’s going to roll over soon, I think one should have stops in place all the time–including, and perhaps especially–in those markets in which it appears least likely that they’re going to roll over.

[My emphasis]

Yes indeed, the article by John Hussman is a worthwhile read.

Take a look at the highlighted sentence again. I want to make sure that there is no misunderstanding. Whenever you initiate any position (other than money market), you need to track your trailing sell stops no matter what the appearance of market behavior tells you.

Reader Don seems to imply that he does not have stops in place for those holdings that don’t appear likely to roll over, as he puts it.

That is not correct. If you are working with sell stops, the rule simply is to “track sell stops for all positions all of the time.” Never get caught without one, because you don’t know when and where the next shoe will drop.

About Ulli Niemann

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