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.
Comments 1
Ulli,
I understand what this Fred fellow is asking about and my experience using the Wilshire 5000 index as a general buy and sell tool for a portfolio of mixed funds and ETF has too many whipsaws, but if one uses the turning up or down of the 40 week SMA line of the Wilshire 5000 that it works much better. I realize that this method will get one in later and out later, but one good point is that it does avoid a good part of the large market crashes with much less of a whipsaw problem.
While here in the Dominican Republic I observed people spending money like crazy and the ones that I had conversations with seem feel that the market will just keep going up, now that scares me a little.