THOMPKINS FINANCIAL ADVISORY SERVICE |
WHEN TO SELL (MARKET TIMING) |
The overall market and the selected fund will go through multiple periods of rising and falling prices. At times the falling prices will be mild and of limited duration while at other times the falling prices will become severe. We want our sell strategy to ignore the mild declining prices, treat them as annoyances, but also possess the capability to recognize when the mild declining prices are on a verge of becoming severe and thereby provide a signal to exit the market. The rising and falling price scenario applies to the market as well as to the mutual funds. To determine when we should exit the market, we utilize the five moving averages and the composite indicators associated with each of the three indices looking for a sustained declining trend (The moving averages and the composite indicators were discussed earlier). When a sustained declined is detected on two of the three indexes and their corresponding composite indicators, the fund is sold and the proceeds are placed in a money market fund. A similar type analysis is applied to each fund. We further protect our capital by employing (1) a stop/loss function which forces us to sell a fund if it falls 7.5% or more below the price at which it was purchased-AND (2) a capital preservation facility which causes us to sell a fund if it declines 15% or more from its peak value during a buy/sell cycle. Our stop/loss function and our capital preservation facility coupled with the analysis described above for determining when to sell a fund, allows us to exit the market with much of the profit in tact. This is a trend following model and the exit signals occur after the market or the fund has peaked. Since (80%) of the exit signals are associated with the market and since under this scenario the fund in which one is invested would not have declined to the point where it would be sold, further profit erosion of the fund is limited by selling the fund at the time of the market sell signal. . |
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