Reader Q+A: 2008 Stop Loss Observations

I have had some email exchanges with reader Ken, and he commented as follows:

Thanks for your response and your very valuable information.

I would just like to relay my experience with your approach to stop losses.

When the market takes a tumble as in 2008, you could experience a 30% or greater loss before being able to activate a stop loss. I should also mention I had difficulty performing transactions online as well as over the phone due to the high volume of orders being placed and this occurred with different mutual funds. I have stop losses on my stocks which usually work without a problem. It just seems to me there must be a better way.

What are your thoughts or concerns and have you experienced any of these delays when the market has a panic attack?

Ken did not say as to when he began using sell stops in 2008, but if he had followed my postings and recommendations, experiencing a 30% loss before activating a sell stop was simply impossible.

First, from my observations over the past 25 years, markets don’t just crumble overnight and 2008 was no exception.

Second, using trailing sell stops will get you out of the market way before a major directional turn can be identified such as via the use of my Trend Tracking Indexes (TTIs).

Let’s revisit early 2008. The markets continued to come off their highs, but managed to generate a domestic Buy on 5/15/08. That turned into a whipsaw as the domestic TTI reversed and crossed its long-term trend line to the downside on 6/22/08, which gave us the sell signal to retreat to the sidelines again.

By the time the sell signal was given, we no longer had any outright long positions, as we had gotten stopped out of all of them leading up to 6/22/08.

We now sat on the sidelines in cash waiting for further clues from the market. There was neither recognizable market stress nor a crumbling in prices. It was an orderly retreat; however, its magnitude was great enough to move the TTIs into bearish territory.

The actual crash did not occur until 2 months later when violent market swings made it impossible for investors to get orders placed or even verified.

In other words, by following the trends, and acting on directional changes as they occurred, you would not have experienced the difficulties that reader Ken has described.

About Ulli Niemann

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