How to Handle a Flip From Offense to Defense Correctly – January 2007

by | Jan 20, 2007 | Point and Figure, Stock Market Comments

Should we just sell everything and raise cash when the market flips from offense to defense?  The short answer is NO.

Look, going to 100% cash is a very aggressive call.

We’d have to be pretty certain there’s no hope at all for the market to make a decision like that.  It’s the most aggressive call you could ever make. So the next step is to simply STOP buying.  This alone will enhance your returns in a falling market. You’ll have cash to put to work when the market does finally go back on offense: when the odds are stacked in your favor.

After that, we review stocks or mutual funds where we’ve got large gains.  We want to consider whether to take some profits off the table.  So many people simply did nothing and watched over-size gains become super-size losses a few years ago.
Look, it just makes sense to periodically take some money off the table.

When a stock has moved up 25 to 30%, I’ll suggest we take 1/3rd of your money off the table.  When the investment has moved up 50%, we’ll look at taking another 1/3rd off.

OK, how will we know what else to dump?

We’ll find them this way: Any stocks or funds on relative strength SELL signals are the next to go.

First, realize that any stocks with a relative strength BUY signal is a stock that’s often RISING faster than the overall market.

But stocks that are on relative strength sell signals usually FALL faster than the overall market.

Ever notice that when the market falls, there are some stocks that hardly get scratched and other stocks get crushed? Well, stocks with relative strength sell signals usually get crushed when the market falls.

So they have to go.

Next on our checklist are stocks that have recently given multiple sell signals on their trend chart.  Multiple sell signals tell us supply has taken control and is forcing prices lower. Since the main thing we want to do is to protect the value of your account, we want to dump stocks where supply is in control.

It’s an economic law: anything with too much supply will see a price drop.

The two main points here are to stop putting money INTO the market and to raise cash.  By selling off the weakest names first, we’re automatically raising cash.  And that also keeps us in the strongest names in our basket, right?  And the cash we raised will give us a chance to buy some bargains when the market finally goes back on offense.

Over the years, I’ve met with many people who simply refused to ever sell.  They rode the roller coaster all the way up, and then all the way back down.  By never selling, they were locked into certain investments.

So they usually have little or no money to buy good stocks when they’re on sale.

The only play in THEIR playbook is to simply wait until these lousy stocks get back to even or reach a price when the owner feels it’s OK to give up.

These investors will always struggle in the stock market.  They’re also often skeptical about the market and feel the odds are stacked against them.

They’re right.

I believe they’ve got to change their thinking about investing.  We haven’t got forever.  Someday we will NEED this money, so we can’t just hope for tomorrow to bail us out.

Henry Ford said, If you think you can or think you can’t, either way, you’re right.