Many people are scared and uncertain right now in these very turbulent markets, and advisers are taking special care to look out for their clients’ needs.
The sinking markets have shown that not everyone is comfortable with a long-term buy-and-hold strategy as emotions reach levels we haven’t seen in a long time.
To protect against further losses, some advisers have reduced their equity exposure.
Today, we’ve seen the importance of having a trend-following discipline and an exit strategy. We have also learned about the perils of having a blind adherence to a strategy when it comes at the expense of future opportunities.
We are living in historic times, so it’s important to step back and evaluate if the old way of thinking still applies. In our case, we don’t think it does, at least for the time being.
For years we have used the 200-day moving average as our guide for buying and selling exchange traded funds.
Once an ETF position drops below its individual 200-day moving average, there is no question, we sell. This helps protect accounts from participating in major market declines. Likewise, when the markets come back around and cross above the 200-day moving average, we buy.
Given the whip-saws of the major indexes, and their plunges to the lowest levels in years, we have been given the opportunity to re-evaluate our strategy for getting back into the markets when they begin to recover.
We can’t rely on one or two good days — a firm trend needs to be in place, and we need to have a sound strategy.
But the markets have fallen so sharply and swiftly that, with our strategy, we’d have to wait a long time before we begin to capitalize on a new up trend if it materializes quickly.
A case in point: the Standard & Poor’s 500 stock index is 27% below its 200-day moving average.
That means we would have to wait for the index to climb almost 30% before we have a “buy” signal. The fact is indexes have not been this far below their 200-day moving averages in decades.
That is why we’ve recently instituted the 50-day moving average. As the current market begins to recover, we plan to enter in stages. When the S&P 500 goes above the 50-day trend line, we’ll invest 25%.
The S&P is 14% below. Once that initial investment appreciates 5%, we’ll invest another 25%.
This strategy would allow us to participate if a meaningful rebound occurs and have new appreciation in client portfolios when ETFs cross back above their 200-day moving averages.
This strategy allows advisers to put cash positions back to work and gradually enter the markets without risking everything at once.
If markets continue to hit lower lows, the moving averages will keep us out for the time being. These trend lines will then decline further; allowing us to buy in at lower levels in the future.
We plan to use the 50-day moving average as our sell point, as well. This strategy can be applied to any ETF in any asset class, whether it is commodities, currencies, sectors, domestic or global. It’s simple to track ETF moving averages.
ETFtrends.com and Yahoo! Finance offers free intraday tracking of the 50- and 200-day moving averages.
Thomas F. Lydon Jr. is the president of Global Trends Investments of Newport Beach, California.
For more, visit our new ETF Center.
