With the markets having fallen sharply off their highs, our domestic TTI (Trend Tracking Index) is still hanging on to bullish territory, but only by a thin thread.
Another meaningful down day/week and this indicator will most likely join the international TTI in bearish territory.
Several readers have emailed over the past week or so with a similar theme in regards to a possible re-entry point after having been stopped out. Apparently, more clarification is needed. This reader’s comment was typical:
Thanks to your Saturday blog; I finally understand your rule about taking out a former high before re-buying a fund.
Vanguard Capital Value still has not reached the 11.14 where I was stopped out in June 2007, but the TTI took out all of our highs in 2007 and again in 2008–in effect letting us whip-saw the market before it whip-sawed us and letting me buy back.
In terms of looking for new re-entry points, it is absolutely immaterial what the high prices were in 2007/08. What matters is what the high has been for your mutual fund/ETF during this buy cycle since you purchased it.
Here’s a simple example. The current domestic buy cycle started on 6/3/09. Say, a few days thereafter you purchased Fund A at a price of $10. The subsequent ongoing market rebound pushed this fund to a high price of $12.00 before the pullback stopped you out at around 11.16, which represents a 7% drop off the high.
$12.00 is the high price I am referring to when looking for a re-entry point, not some high price from a few years ago. In other words, a conservative way to re-enter would be once the old high of $12 has been taken out again, should the market resume its upward trend.
If you’re aggressive, you may not want to wait that long, but pick a lower re-entry point. Personally, however, I want to make sure that any rebound effort is not just a head fake but a real resumption of the old up trend.
Right now, with the extreme moves in the markets we’ve seen, I think it’s safer to be a little late than make a decision too early and get whip-sawed again.