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Yesterday’s post about a different type of sell stop generated some reader feedback. As always, I appreciate the commentary; although I don’t necessarily agree with all opinions.

Here’s one comment that I feel needs clarification:

Something that you definitely are missing when talking about trailing stops is the Market trend.

If the Market indicators are Bullish, one really should think twice about selling an ETF/Mutual fund on a 7 percent down turn. Had I not used common sense and not sold my ETFs/Mutual funds on a 7 percent down turn, I would have missed out on the 50 percent bull Market run over the last 7 months. I believe you have also advocated using common sense/intuition before selling mutual funds/ETFs.

The reason to use trend tracking along with trailing sell stops in the first place is to have a clear cut plan in place in order to avoid emotional decision making and to control downside risk.

If what you are describing works for you, fine, but it may not work for others. Introducing another subjective variable, such as the identification of the market trend (however you want to define it), causes additional decision making and confusion.

To be clear, when a trend for an ETF/Mutual fund ends, reverses and triggers my trailing sell stop, we get out. At that moment, however, we have a plan in place as to what will have to happen in the market in order for us to re-enter. If you don’t have such a plan, yes, then you will miss out on the potential upside.

2008 was a perfect example in that by most measures the market was still in an uptrend when we moved to the sidelines on 6/23/08. My preference is to act immediately when the signal gets triggered and ask questions later.

As I have often commented, being disciplined and exact with the execution will lead to whip-saws from time to time. That’s the price we simply pay to be sure we avoid the big drops in the market whenever they happen.

Since you apparently use a sell stop along with an analysis of the market trend, I’d be curious to know when you got out last year and when you re-entered this year.

My philosophy over the past 20 years has been to keep things consistent, effective and simple without any attempt of curve fitting my approach to current market conditions.

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Comments 7

  1. Ulli,

    I agree 100% with what you said and that is if one is following a Market Timing Method of one kind or another then follow it 100%. My experience is that if I start bending the rules it is most likely due to emotions and they will most certainly get me in trouble. We start to feel like geniuses at market tops and total failures at market bottoms. Hoe could we possibly make good decisions on our own at those points without a second opinion from someone such as Ulli or some of the other good market timer out there?

  2. Hi,

    The person that was confused about your 7% stops and not using them and now bragging about not selling and then making 50% probably wouldn't follow any advice except their own. Consistency is the key and not "Lean not on thine own understanding" from the Bible is my motto.

  3. Ulli,

    Quoting that person that questioned using a 7% sell stop. He/she said: Had I not used common sense and not sold my ETFs/Mutual funds on a 7 percent down turn, I would have missed out on the 50 percent bull Market run over the last 7 months.

    That statement makes no sense at all as I think the person meant to say was had I not used common sense and sold. (the word not just before sold makes it have a totally different meaning.) Maybe a little grammar lesson is needed huh?

  4. Ulli,
    Great response to an investor who got lucky. And thanks for teaching me how to protect my portfolio using stops!

    In the current market, what do you look for with regards to Beta, and Alfa for your clients long positions? I would assume that you attempt to have the lowest Beta with the highest Alfa when picking ETF's and Mutual funds.

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