May 22nd, 2009

Is it déjà vu or something new

If you’re anything like me, then your focus is beginning to turn from “what-should-I-buy” to “what-should-I-sell”. Although it was a phenomenal run since March 9, it was just too good to last. Sure, the Index crossed its 180-day moving average (I’ve added the more conventional 200-day moving average to the chart as a gray dotted line for the traditionalists) but it never was with convection. It did so for only a day or two and volume actually declined and continues to do so.

We’re now stuck with the toughest question in stock market investing/trading – when should you sell? Accepting the proposition of a 10% market correct to around 800-810, what should we do with stocks we now own? I wish I could give you an answer but no one answer or rule of thumb covers every situation.

More importantly, the question you should ask yourself is whether there are strong, compelling reasons to not sell a stock. As a general rule, I would say that market direction and momentum rules; if the market is starting to trend down, you should sell nearly everything (especially since the Index is still below the 180-day moving average). Because you think it’s a good company, pays a good dividend, you already own it and believe it will come back or because Cramer just mentioned it on his show are not good enought reasons to continue holding a stock.

Other factors you should consider:

  • Did you buy the stock close to the March 9 bottom and now have a large profit [at least sell half]? Or did you just recently buy the stock and it now has a small loss [no loss in selling and starting again later].
  • Is the stock volatile [will drop 20%, for example, if market drops 10%] or relatively stable [perhaps weather the storm with some]?
  • Contrary to everything a regular reader of this blog believes, are you a buy-and-holder who’s owned the stock since before the crash and are hoping it will return to pre-Crash levels when the market and economy finally recover [you’re a lost soul – Sell]?
  • Do you actively monitor and manage your portfolio [conserve your capital to gain relative to the market when it’s time to jump back in]?
  • Do you have a way of knowing [like, for example, through reading this blog] when it’s time to get back in and what stocks might be the right ones to buy then?

Here’s a strategy I’ll be following myself:

  • I plan to be no more than 30-40% in stocks. If the market declines more than 10% (or, coincidentally, below the now converged 60- and 90-day moving averages), I plan moving again to nearly 100% cash.
  • Holdings will be limited to stocks related to:
    • weak dollar (forex ETFs),
    • commodities (steel, coal, ag products),
    • precious metals (gold, silver and miners),
    • higher interest rates (Treasury bond short ETFs),
    • foreign stocks (Australia, Chinese, Brazil, India, Asian)
  • As a further hedge, I have a small percentage in the S&P double short ETF, SDS.

I know this sounds extremely conservative, some might even call it pessimistic. But I’m actually quite optimistic. I, like many others, have been waiting on the sidelines and are anxious to jump in with both feet. There are reports of huge amounts in money market accounts waiting for just that opportunity. I’ve been anticipating this pullback and have written often about it as you know.

It’s not going to be much longer but the doubts, fears and anxieties will turn the next several weeks into a déjà vu kind of experience.

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