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From the Trading Turret
March 30, 2005
From: Bob Christy
To: CIG Distribution List
Subject: The Defense Takes the Field
Late last week, our NYSE Bullish Percent
Model signaled a move from offense to defense. In other words, we have
moved from the capital appreciation mode to the capital preservation mode.
After last Wednesday’s action, which many
media outlets regarded as positive (the S&P 500 was up marginally), the
market made a strong statement on its own. I noticed in the final tally’s
that there were nearly four stocks down for every one stock that moved
higher.
What happened was a number of NYSE stocks
went from Point & Figure Buy Signals to Sell Signals causing a reversal of
our Bullish Percent Indicator. This reversal comes at 72% after peaking at
78% in late-December. The NYSE BP indicator now joins both the OTC Bullish
Percent and Optionable Stocks Bullish Percent indicators in a column of
O's, putting ALL of our broad market indicators on defense.
As for sectors, 30 of the 40 that I follow
are in O’s on their BP chart as well.
The reversal down in the NYSE Bullish
Percent means that the risk premium in the market has heightened
substantially. It doesn't mean that the market indexes are going to skid
off their upward path and fall off a cliff. This may be a pause in the
market with a simple regression to mean. We saw something to this effect
last summer where the NYSE BP corrected from above 80% down to 54%, a very
normal condition, before bottoming and supporting a very broad rally in the
last 3 months of 2004. The other possibility to consider is an outcome
more along the lines of 1998, which resulted in a correction that went well
beyond a "normal" regression and took the market directly into washed-out
conditions below 30%, pulling the average stock down roughly 20% while the
NYSE BP moved lower.
Since I can’t predict which course the
market will follow, I need to be ready on multiple fronts to be successful.
I can still be successful, but there are risks involved when the indicators
reverse down. Mistakes now carry greater consequences and as a result, we
need to make some adjustments in all of the portfolios to compensate for
this higher risk level. I just wish that there was just one right answer,
but there isn’t.
What is right for one portfolio isn’t right
for another one. In going through the defensive playbook, there are some
basic strategies to consider. They are:
Initiate new positions only
on pullbacks
Begin with partial positions
in lieu of full positions
Tighten stop loss points
Use protective Put Options
on applicable positions
Use ETF's
(Exchange Traded Funds) to replace stocks and to add diversification
Add short-position exposure
to account
Sell Poor-RS holdings
Substitute Call options for
stocks to lower risk
Sell Calls against account
(overwrite)
Buy Inverse Mutual Funds to
hedge account
Diversify to other asset
classes (commodities, Int'l, etc.)
Buy Index Puts as a means to
hedge accounts
I continue to remain diligent about
sticking to the game plan. For some, there is no need at this point to take
any immediate action. For positions that are up 20% - 30% or more, it may
be time to lock in partial profits. For stocks that have positive trends
(68% of all stocks fall into this category) and strong technical attributes
raising stops may be the best course of action. My best advice here is to
monitor all existing positions closely.
As a wrap-up, the most important part of
this exercise is to make decisions on a conscious non-emotional level
because we have now entered a period of time where wealth preservation
takes precedence over wealth accumulation.
That’s
about it for now. Have a great week!
Bob Christy
Robert Christy is a professional trader,
author and money manager. Mr. Christy is also the President/ CEO of Christy
Investment Group, Ltd., a registered investment advisory firm. At the time
of publication, Mr. Christy may from time to time write about stocks in
which he, Plato Advisors LLC, or Christy Investment Group, Ltd. has a
position. In such cases, appropriate disclosure is made. Under no
circumstances does the information in this column represent a specific
recommendation to buy or sell stocks. Mr. Christy appreciates your feedback
and invites you to send it to
rac@christyinvestments.com.
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