The Dominator: Sell Stop Or Trend Line?

In regards to last Tuesday’s post “You Don’t Need A New High,” reader Fred was looking for more clarification:

Since you were on the subject of sell stops today, I have two questions related to it.

Do you recommend a single one size fits all sell stop percentage for all sectors, or do you use different percentages for different sectors?

Also, at what point would you use, for example – an index (like the Wilshire 5000) moving below its 200 Day MA instead of a sell stop to get out of a position?

The first part of Fred’s question has been discussed many times. I use a 7% trailing sell stop for broadly diversified domestic and international equity funds/ETFs. For more volatile sector and county funds/ETFs, I recommend using 10%.

However, if you were to invest in the W5k via an ETF or a mutual fund, you would not use its own trend line to make a buy/sell decision, but you would use the direction of the domestic TTI.

For example, back on June 3, 2009 when the domestic Buy was generated, you could have taken a position in the W5k. The markets moved higher but corrected in July, but never moved below the TTI’s long-term trend line again. That means you would have held on to your position unless your 7% trailing sell stop would have been triggered.

Right now, with the TTI hovering above its long-term trend line by +6.11%, there is mathematically no chance that it will drop below it before the 7% sell stop on the W5k gets triggered.

The TTI is a slow moving indicator, which will always lag the price movements of individual equity funds/ETFs. In other words, the sell stop will be your dominating guide as to when to get out.

About Ulli Niemann

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