Timing the Market
YES ... You can TIME the market
"Learn to always sell stock quickly when you have a small loss rather than waiting and hoping they'll come back"
By William J O'neil (Founder of Investors Business daily
Market has been treading water for the last 3 weeks and finally this week it exhibited major signs of stress. $SPY ( general market performance) as well as the $QQQ (growth stock performance) seems to have topped out on July 14th and is now headed down towards the 50 day sma (simple moving average). IBD (Investors Business Daily) changed the tone of the market down a notch to "Market Under Pressure" as of Friday July 16th close of session. That is our first signal to:
- REDUCE exposure in the market and conserve CASH
- Harvest partial profits in stocks that have attained gains of +20 to +25% or higher
- Close out losing positions or positions that you added to existing positions that are showing losses.
- SELL into strength - partial position - in stocks that are rising above the 8 day ema (exponential moving average)
If you are following the IBD style of investing in Growth Stocks and want to Out Perform the general market utilizing the performance of $SPY - proxy for general market performance - it's critical to control your losses NOW when the market is not going anywhere and heading lower. Market will once again provide you with the opportunity to invest in new and up coming leaders and you want to have the CASH available and ready to invest once the market rights itself.
Recent History
One of the visual indication that I often look for on daily stock charts is the distance between the 8 day ema and the 50 sma. I often call it the 'White Space'. Those of you that attended my monthly IBD Meetup sessions in the Tampa Bay area, I often used to show this white space on stock charts and charts of the 2 indices ($SPY and $QQQ) to highlight when they are extended. During the last 5 recent corrections in the stock market that we went through, you will notice visually that there was a wide white space between these two moving averages. We are at that juncture in the market at this time. One should be prepared with the scenario that the market could very easily drop down to the 50 sma - a drop of -5% or more. Utilizing recent history as a guide, this is what occurred during the last 4 brutal correction:
- Feb 19th 2020 ... -35%
- Sept 2nd 2020 ... -10%
- Feb 16th 2021 ... -11%
- Apr 29th 2021 ... -9%
One would have to make up +25% gains on a stock that loses -20%. It's an uphill battle and the way to increase the size of portfolio is to mitigate the losses and conserve CASH. Personally I have been gradually reducing my positions as of 3 weeks ago and reduced the number of stock/etf's from 12 down to just 6.
"Treat your stock positions as your employees. You would fire the ones that do not perform for you. You will retain the ones that do perform for you."
It seems brutal but than again this is your hard earned money that you are putting at risk in the market. The way to increase the size of your portfolio is to minimize losses and be out of the market when conditions are not favourable. Aggressively pursue the market when IBD changes its tone of the market to "Confirmed Uptrend". You have to have the CASH available when the market conditions become favourable for you.
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