Thursday, June 16, 2011

Is It Time To Sell?

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Dollar Cost Averaging
Rather than Buy and Hope, I mean Hold, I use the 200-day moving average to guide me in my investing decisions.  This has not always been the case.  There have been too many times in my past where I didn't know about things like moving averages.  Having money to invest meant dollar cost averaging into the market by tossing in set amounts of money at set intervals.  While this tends to average out over longer periods of time, I began to learn about a better approach.

First, why hope for average returns, when you can do much better?  Second, nowhere is it written that we must be fully invested all of the time!  Of course, this is total heresy in the eyes of the financial "experts".   Still, repeat after me, "Buy and Hold is, first, a marketing strategy, rather than an investment strategy".  Sorry, I digress.

200-Day Moving Average
My own research and my own experience going back decades, suggests that bad things happen in the markets after prices fall below the 200-day moving average.  Sure, things can go wrong when prices are above the 200-day moving average, but catastrophes can be avoided by stepping aside when below that level.  Did you know the largest single day price drops in the stock markets came after prices had declined below the 200-day moving average? 

Program Trading
If it was true in the past, it is likely even more so, today.  Large fund managers employ something called program trading where large numbers of transactions are executed by computer according to predetermined conditions.  I'm guessing, but I would bet dropping below a 200-day moving average is one of them.  Wikipedia suggests that in 2006, program trading accounted for between one third and one half of all trading on the New York Stock Exchange every single day!

Good News; Bad News
So, am I suggesting we should sell everything and wait for a better day?  First, I will remind people that I am not qualified to make such recommendations, but I will tell you I have taken my profits long ago.  For people still in the market, however, there are some encouraging signs.  Daily charts are in oversold territory which means we should see a bounce higher, and the S&P500 Index and the Dow Jones Industrial Index have not crossed their 200-day moving averages.  Neither has the commodity index.  However, there are no guarantees.  As long as a stock we own, or the TSX, in general, is below the 200-day moving average, there is a greater chance of negative surprises. 

I know there are just as many people out there who believe these conditions make great buying opportunities.  That is what makes a market.  Buying on the way down is great when it works; not so much when it doesn't.  Me, I am into capital preservation.  I'll hold onto my cash for other future opportunities, thank you.

As always, I welcome others' thoughts on this, and other topics, even if they are different from my own views.  What do you think?

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