Reader Sell Stop Question

Ulli Uncategorized Contact

As the markets begin to show signs of weakness, questions about the sell stops keep coming in. Here’s one from a reader asking for clarification:

You also suggest selling a fund if it has dropped more than 7%from its most recent high. My question is, if a most recent high occurred in May this year and the fund/ETF is down more than 7% now since May, do you still consider it a sell? What if it was bought since May (maybe shouldn’t have)?

It’s not the recent high, or the high since May, that a fund/ETF has made that’s important. It’s the high that was made since you bought it that counts.

When using a trailing stop loss, which will limit your losses and/or lock in your gains, only the price action, which occurred after your purchase is of any relevance. To be clear, what a fund/ETF has done in the past in terms of price movement maybe a consideration in your selection process, but has nothing to do with the execution of the sell stop discipline.

Once you have made the purchase, only then will the tracking of the closing prices going forward form the basis for your exit points—not before.

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Comments 3

  2. I had made the same mistake once. Right now I find several of my holdings have gone past the 7% threshold. So whichever I can sell I am.

    Whichever I can sell? Why say that? It's because I used NTF funds at brokerages. Some of them are closed to new investors and I don't want to sell. Others are within 90 day or 180 day limits. If I sell I might pay hefty fines.

    So what I'm doing is this. I'm buying inverse Rydex / Profunds to hedge all the positions I cannot sell. Basically I approximately total those fund assets I "cannot sell" and look at the corresponding tracking index. By using 2x inverse leveraged funds, I invest half the amount.

    If the market turns up, I'll remove the hedge. I used this technique quite successfully in 2008.

    Best.

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