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?

If you had to choose one thing which, to you, is the most important advantage the retail investor has over the larger institutional investors, what would you choose?  I hear lots of talk about the advantages the institutional investors have over us - research, resources, time, money, and education, to name a few.  What would you say is our largest advantage? 

Certainly, the lack of politics and red tape would be one.  If you have ever worked for a large company, let alone a large financial services company, you know how politically charged the atmosphere is.  I don't mean politics in the sense of government, either, although regulation would count as a major drag on productivity that the retail investor doesn't have to face.  Some might argue there has been a lack of proper regulations put in place, but I would say they are there.  It's just that they have not been enforced.

Not being tied to a particular mandate is another advantage for the retail investor.  Sector and index fund managers are limited as to what they can invest in.  Some might say the problem for retail investors is they can be all over the map and lose capital by churning their investments.  They hold one product just long enough to lose more money before switching to the next.  As I see it, though, one of the biggest disadvantages for fund managers is the limited amount of cash they can normally hold, even at the worst of times.

The retail investor also has the advantage of not having to chase returns.  Fund managers aren't going to receive any bonuses if they don't finish at the top amongst their peers.  They have their tricks they can use to put the best light on their results, and to catch up to the herd, but playing catch-up can also force them to make mistakes.

There is no doubt in my mind the single largest advantage retail investors have is size.  Institutional managers can take weeks to move into, or out of, a position.  It usually takes me a day - two or three at the most.  It can take fund managers weeks to buy enough stock.  The size and duration of their trades make what they are doing fairly easy to see.  Nobody needs a microscope to spot an elephant.  Using the charts, it is easy to see where the big money is headed.

Even though I feel the speed with which we can run circles around the big managers is our single largest advantage, most people don't even try to profit from it.  I'm not necessarily talking about day trading, either.  In fact I think day trading has become a whole lot harder because of high frequency traders and program trading.  Still, buy what the fund managers are buying, and sell when they are selling.  You and I can't generate the volume required to show up on the charts, but they always do.  That doesn't mean we have to be in and out every day.  It means we need to tune out the incessant chatter, a little, and watch for the underlying trends.

Tim Horton's Timbits hockey has a different purpose and has different objectives than the NHL games.  Believe it or not, retail investors have a different objective than the professionals do - to make us money.  Don't get me wrong, financial firms like it when we make money, it just isn't their top priority!  I, for one, believe that when it comes to exploiting our advantage, size does matter.

Do you feel we have any advantage over the pros?