Bumping Against Trading Limitations

With the markets having corrected three straight days in a row last week, some readers are getting close to having to execute sell stops and/or contemplating how to reenter the market should this downturn to be short-lived.

Reader Bruce had this to say:

Preparing for a market exit, I have been reading up on the short-term trading rules for funds in my 403b account. Most seem to forbid a repurchase in less than 30 days.

Could you discuss the typical time frames that the TTI in the past has kept money out of the market, and any problems with short-term trading rules? I guess one option would be to just buy back in the market with different funds.

Unfortunately, there are no typical time frames. You just have to deal with the facts as they develop. Sure, if your custodian will not let you re-purchase the same fund for 30 days, then simply use another one that is comparable. On the other hand, if you get stopped out, we could be heading towards much lower levels, or even into bear market territory, which would make this a moot point.

Most important is the execution of your actual sell stop. I have touched on this before, but it bears repeating.

If one of your fund holdings comes off its high by say -7.10%, don’t sell right away. Make sure that your 7% level gets clearly pierced. Since you are working within the trading limitations of a 403B account, this is more important here compared to an unrestricted account. You may give up a little more to the downside, but may avoid a whipsaw signal.

To me, that means that for the restricted trading accounts I manage, such as 401ks, I will wait with the actual execution of a sell stop until I see a level of worse than -7.50%. That gives me a little extra leeway in case of a market turnaround.

Again, this is not an exact science, and you need to use a little common sense. Keep the ultimate goal in mind, which is to limit any losses so that you don’t succumb to bear market forces.

About Ulli Niemann

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