Three Ways to Avoid Market Crashes
How many times have you seen the markets crash and watch portfolios shrink like a never washed cotton shirt? Before the market dives there are three methods that can help you preserve your shirt and your cash.
With the aid of computers and many software programs you can activate key signals that can tell you when to exit the market before your portfolio becomes totally at risk.
• Equity Curve
• Benchmark Exit
• Ticker Rank + Combo Charts
Equity Curve – Michael Carr, in his book “Smarter Investing in Any Economy” writes about using an equity curve to signal when to stop using a particular investment strategy.
This equity curve chart is a type of moving average chart. When the price line of the group’s strategy cuts down through the moving average of the groups tickers, then a sell or “don’t use” this strategy signal is generated. In other words, this strategy is not making money and it is either time to switch strategies with this group, switch to a different group of ticker symbols, OR move to cash or bonds to safeguard your money.
In his book, Carr writes about an equity curve based on 250 trading days, but in turbulent market times an equity curve based on 100 trading days or even a bit less will provide more safety.
Benchmark Exit – this exit signal is similar to an equity curve or moving average but is based strictly on the performance of a major index. I prefer to use the S&P 500 (SPX) but the Dow Jones index or the Nasdaq index could also be used.
The signal is based on the price line of the index as compared to the moving average of the index. When the price line cuts down through the moving average or equity line of the index it is a signal to exit the markets and move to either bonds or cash. In my experience I have found a setting of 100 trading days works extremely well and has consistently moved me out of the markets prior to major crashes.
Ticker Rank + Combo Charts – this technique is a bit more complicated yet is still easy and gives very strong signals for reducing risk and keeping your money safe.
The first element of this method is to see where the ticker symbol of your holdings or potential buys stands in comparison to the performance of the benchmark in your group of tickers. For Example: Is the ticker you hold or want to buy ranked above or below the S&P 500 based on your method of analyzing the data (relative strength, alpha, return, etc.). If your ticker is below the S&P 500 then it is under-performing and is most likely not a good investment choice.
The next step in this method is to examine two key charts: moving average and full stochastic. Both of these charts should be giving out buy signals if you are going to buy the particular position.
If the ticker ranks below the S&P 500 and both charts are giving sell signals then the best course is to protect yourself by either moving to cash or bonds.
These three methods will enable you to avoid losing large chunks of your portfolio. You can either employ all three or just one or two to protect yourself.
Author Raymond Dominick is the designer of Dynamic Investor Pro investment software for stocks, ETFs and mutual funds. He has been investing in the markets since his teenage years. An experienced business manager and journalist, he has been a registered investment advisor representative, also a professional photographer who loves escaping to the wonders of Glacier National Park in Montana. View his software at: http://www.dynamicinvestorpro.com/