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 From the desk of Robert Christy

From the Trading Turret

October 4, 2005

This week’s comment …

NYSE Bullish Percent Reverses Down

Last week, as expected, we saw our number one market indicator turned negative and generate a sell signal.

As you know, the BPNYSE is the number one indicator we use when it comes to determining whether we are on Offense (capital appreciation mode) or Defense (capital preservation mode). It’s calculated daily by taking the number of NYSE stocks that are on Point & Figure buy signals and dividing it by the total number of stocks on the NYSE. This number is then plotted as a percentage on our daily charts.

You might be asking, what exactly is “Defense”? It doesn’t mean that a train is bearing down on us and that a large decline is imminent. What it means is that supply (the amount of stock being sold) is greater than demand (amount of stock being purchased). In other words, it’s economics 101 and that the risk of owning stocks is heightened. It’s time to lookout for potholes.

In turning to the defensive playbook, there are a number of steps you can take right now to help mitigate risk:

1. Get out of lousy stocks. The first step is to look at your portfolio and weed out the inferior positions. These are positions that are either weak fundamentally, weak technically or both. These are also the names that you have no idea as to why you own them in the first place.

2. Make sure of stop-loss points. The next step is to establish stop loss points and/or tighten the ones that you already have in place. If you’re not using stops, we need to talk because many investors have already forgotten the nightmares of 2001-2002. Incurring a small loss is acceptable, they are inevitable. Incurring a LARGE LOSS IS NOT ACCEPTABLE.

3. Sell Calls. If you have a large capital gain and don’t want to part with a stock, consider selling call options against it. You’ll generate cash flow and some peace of mind to boot.

4. Buy protective Puts. If you like a holding and don’t really want to part ways with it, consider purchasing a put option against it. Buying a put is like buying an insurance policy. You can do this on each stock or on the portfolio as a whole. If the worst come to pass, a little insurance can go a long way.

5. If you want to buy. As for new positions, we want to buy (a) partial positions on (b) pullbacks to the uptrend line. We also want to make sure that they are (c) sound fundamentally and technically.

6. Think about using Call option as surrogate positions. A strategy not often used and one that I like a lot is to use call options in lieu of buying stock outright. Here your risk is defined to the amount paid for the call option. If the stock goes up, you can exercise the option and buy the stock at the strike price. In the murkiest of waters, I like to know exactly how much I stand to lose if I am completely wrong.

7/8. A couple of other strategies that come to mind are to buy ETFs in lieu of individual names and to utilize other investment classes such as currencies or commodities. Both offer broader bands of diversification.

9. On the short side, I like the idea of using “inverse funds”. These are mutual funds that go up when the market goes down (hence the name). The Rydex fund family has a number of inverse funds. I use them in almost all of the portfolios I manage because it’s easier than shorting a stock AND you can use them in your IRA. When was the last time you heard that!

The bottom line is this – now is not the time to panic or to think this is the end of the world. (It might be if you have to buy gas in Atlanta though). We’ll take what the market gives us.

As always, if you have any questions, please feel free to give me a call or zip me an email. I’ll do whatever I can to help.

Until next week – peace.

Bob Christy

PS – Remember this: A capital gain is a capital gain and it can’t be one until you take the profits. And your checkbook doesn’t know the difference between long-term and short-term. 

PSS – Next week, I’ll go into the concept of playing the market from the short side. Many think this is un-American. We have a tendency to think that “buy low” and “sell high” is a directional trade in which you buy first and sell second. I also believe in the buy low/sell high thesis with one exception. I think you don’t have to do it in any particular order. If you’re against the notion, I have one question – would you buy a car, do you make sure it has a reverse gear or do you just prefer to go forward?

Robert Christy is a professional stock trader, an author and a 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.