More about the Bullish Percent
A question that’s often asked is, “if your signals suggest we are on defense, why does it seem like the market is still going up?”
Over the last few years, we’ve seen many pullbacks in the range of 5% to 8%. So it’s quite normal (and to be expected), that when we move to defense an initial 6% drop has already taken place.
So we sometimes see a pause (or even a brief rally), as soon as we get the signal to move to defense. It’s this pause, or lull, that often makes us inattentive. That’s exactly what we’re trying to avoid.
When we move to defense, it’s because more money is flowing out of stocks. The money sometimes flows out of the whole market. And sometimes the money flows out of the stocks or mutual funds that you and I own, and runs into the stocks in the Dow Jones.
So the Dow can stay flat (or even go up) even when your account falls apart. Which makes you think there’s something wrong with you: it appears you’re the only person losing money. Not true!
When the bullish percent index signals defense (as it is now), we need to begin focusing more on wealth preservation than trying to make as much as possible in the market.
See, when you lose 10%, you need an 11% increase to get back to where you began.
When you lose 15% in your investment, you need about an 18% increase to get back to where you began. And when you lose 20%, you need a 25% increase, just to get back to where you started.
The most important thing we can do with our investments is avoid losses. It’s glamorous to make a lot of money in the stock market. But it can be far more devastating to lose money.