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End of 3Q and stocks are at record levels. When do you worry about your stock investments?

Start with a move below the _____ day MA

It is the end of the 3Q today.  There are three more month’s to the end of the year. The S&P and Nasdaq are looking to close the quarter at record highs….again.

If you are invested in your 401K plan, that means you should have done pretty well. The S&P is up 12.35% year to date.  The Nasdaq is up 20.52% year to date.  Not bad.. The rule of 7 says make 7% and you double your money in 10 years. If you have a 21% gain in one year that speeds up that doubling.  

Getting nervous? We know about fear of failure in our trading and investing.  That fear says “I fear I am going to lose money.”  

There is also what I call the fear of success.

Fear of success?  What the heck is that?

If you are up 12% to 20% in your retirement account this year, aren’t you a little fearful of that success?  Don’t you worry about those profits being taken away?

Most people would say “Yes!”.  

They start to hear those voices in your head that say:

  • “We are SO due for a big correction”, 
  • “A 10-20% decline (if not more) is right around the corner.”, 
  • “No one went broke taking a profit”. 
  • “Bulls and bears make money but pigs get slaughtered”

Those voices get you out of the market and you feel ok for a little bit, but eventually if the market continues to march higher, instead of losing sleep because of your “fear of your success”, you have the “fear of not being invested.”

Fear of failure.
Fear of success.
Fear of being square. 
Damn. How do you get rid of this fear?????

Well one thing you can do is not worry about the topside, but instead worry about a risk defining level on the downside.  What do I mean?

If you look at the daily chart of the Nasdaq (see chart above), the blue line represents the 100 day MA.  

In 2017, the price has not moved/closed below the 100 day MA all year long. In fact the last time the price closed below the 100 day MA was back in November 2016.   In 2017, the price tested the 100 day MA twice in August and each time the market bounced.  

So there have been zero, nada, no, none, zilch closes below the 100 day MA.

I looked back in time, going back to the 90s, and the other year the Nasdaq stayed above (or below) the 100 day MA all year long was in 2013.  Ironically, the price was below the 100 day MA on the last day of 2012, but opened and closed above the MA on the first trading day of the year – and remained above it for the entire calendar year (and until April 2014)

So instead of being afraid about your success or of not being invested, wouldn’t it make sense that you stay invested – i..e. not be fearful-  until the price dipped below the 100 day MA at least?

Let “the market” take you out, not your fear – whatever manifestation that fear may present itself.

What about the loss from the price to the MA?  

It is true that if you wait until the market goes below the 100 day MA to start to exit or reduce risk, you will have a loss from the peak? 

Yes of course, but that risk today at 6492 would be about 3%.  The Nasdaq is up 20% this year.  If that 10 to 20% decline is coming, does it make sense to risk 3% before losing sleep (and the potential for more upside profit)? I think so. 

What about the S&P?

Like the Nasdaq, it is looking to close at a record level today and also like it, the index has not closed below it’s 100 day MA all year long (the last time was also in November 2016).  Going back in time, it too did not have any other recent years where that dynamic of not going below the MA for they year was true.  

So with the S&P 100 day MA at 2449 and the price currently at 2515.61, you would have to sacrifice 2.6% before taking some risk off. If that 10-20% is to be right around the corner – maybe – giviong up a little,  to stay in the market in case it does not happen is worthi it.

Another thing you can do to hedge risk in your stock investments without waiting for the break below the 100 day MA, would be to buy puts after big rallies.  

I like to use QQQ puts. They tend to mimic the Nasdaq.  I will buy fairly close in strikes (1-2 months out).  I am not looking to hedge the whole portfolio – just some  of it so that it gives me some comfort.  

Doing this is not a perfect hedge on declines, and it does not stop company specific risk (say if a high flyer loses 20% on some news while the rest of the market rises), but it is wonderful for your fear on those days when N. Korea is shooting off missiles.  You see some positives in your investment account and it allows you to say, I saved x amount because of the gain in the puts.  A gold ETF also gives a “hedge”/diversified feeling.   The options will expire worthless if records continue, but if your portfolio mimics the indexes, you should be ahead of the game.  

SUMMARY: If the stock market scares you especially after these oversized gains. If you have fear of your success, and that tempts to get out (and switch fear to the “fear of being uninvested”), take the unique technical clue that the 100 day MA is giving us, and use that to decide to reduce, get out or hedge your investment portfolio.  

You will sleep better AND be ready for when – and if – that huge correction around the corner, does show up.

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