Now You See It, Now You Don’t

May 16, 2013

Despite the weight of evidence pointing to a market which will grind steadily higher ( see my immediately pre-ceding post ),  a couple of incidents relating to relatively minor ( intellectual exercise ) investments  have alerted me to the capability of this market to whipsaw equity and ETF sector investments, in a heartbeat.

I was ahead $5,000 in Linked In ( LNKD  ) until the company  made a less than robust revenue forecast.  My $5,0000 was gone in one trading session, and me too, but,  with no loss..  That was followed by a smarty pants investment in an ETF ( DXJ ) which represented a long bet on Japanese exporters combined with a short bet on the Yen.   Ahead $5,000 until someone decided to question the resolve of the Japanese government to weaken the Yen.  That was all it took overnight for a $5,000 of profit to be  gone, and me gone too ! In both these cases momentum was snapped in a heartbeat, leaving me with  a clear impression  that although this market deserves to go higher, the tape will be the tell, and the tale,  not fundamental arguments  open to any doubt whatsoever.

So, with the market ( SPY ) 10% above its 200 day moving average , for sure, there is risk that Mr. Market will decide that 10% is too much to accommodate opposing scenarios and decide to sweep chips from the table while the getting is good.

Under these circumstances, the question of sustainability of market momentum, can be answered by ”  a pullback is healthy “.  But, not healthy if your position averages 8% above the 200 day moving average mainly because you yourself have exhibited cowardly trend following behavior with lots of profit already realized and new more dangerous positions subsequently established and open..

Under the above circumstances, it pays for me  to withdraw all my funds and then cautiously re-enter the market as follows:

Starting May 31 take my newly replenished investible resources and divide into 4 equal piles of money.

Invest dollars equal to 25% in VTI every 60 days at month end.  ( May – July- September – November )

If the price of VTI is below its 200 day moving average at any of the above month ends,  reduce the scheduled investment by 75% ( in dollars ) and invest only 25% of investment scheduled. I will not sell any shares of VTI accumulated up to that date.

Once the price of VTI finishes a month above its 200 day moving average, I will invest all my postponed investments at once and include any funds which remain scheduled.

Once all my resources are invested, I will liquidate entire holdings any month end  the price of VTI finishes below its 200 day moving average.

Once the VTI price again is above  its 200 day moving average at month end, I will re-enter the market 100% in tune with my stated methodology.

And so on and so forth

Bottom line…surfs up….but you better have a plan on how to ride these waves.


Richard Maurice Gore


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