When the market is in a downward spiral how can you preserve your money or perhaps even continue to make money? A declining market is the greatest challenge all investors face, but there are certain key actions that you can take when the market heads downward.
With the market in a sustained decline, you can:
Invest for the Long-term
Analyze and invest based on Short-term Signals
A Cash Out requires reading a few signals that can predict the best time to exit the markets. Perhaps one of the strongest exit signals is the equity curve of the S&P 500 with a setting of 100 days. This signal is generated when the price line of the S&P 500 cuts through the moving average of the S&P, which, in this case, would be set to 100 days.
Other cash out signals might be when the equity curve of the group strategy gives the signal, or when both the moving average and the full stochastic chart are all in sell mode. Another technical analysis signal would be if the symbols of the group are ranked below the benchmark or S&P 500.
Investing for the long-term means you are willing to ride out a market drop because of the overall future strength of your holdings. When the market is in decline, it can be a good time to buy such positions (whether they are individual stocks, ETFs, or mutual funds) if they have a strong history of paying high dividends. Besides future growth capability, these holdings will produce income in the form of dividends which can be automatically reinvested so your investment continues to grow and is ready to surge when the markets go up again.
Short-term signals can be generated using technical analysis. This may mean switching to a different set of strategies for your investment groups. Analyzing relative strength with an Alpha period of 10 continual trading days-or even 30 days-will be more responsive to market changes than they would be if you were analyzing based on trading periods of 60 or 90 continual trading days.
Also, if your group contains one to four treasury ETFs, or similar bond funds, and your analysis indicates these are the best choice, you have received a signal to move out of the markets. With this signal you have the option of going to cash or actually purchasing the treasury, ETF, or bond funds.
The most difficult decision that I have, and that you have, when these signals to exit the market are given, is to actually follow through and exit the market. Human nature is generally optimistic and we don’t want to admit that maybe what we own isn’t going to make us money. So we don’t want to sell. This is our biggest human flaw; we need to be willing to sell and lock-in our profits when the sell signal and especially the get out signals are generated.
Dominick is the designer of the investment program Dynamic Investor Pro, an investment software used by individual investors and professional investment advisors for stocks, ETFs or mutual funds.