What should we to do with our stock holdings when we get a sell signal from Market Breadth Ratios or the charts?

Let us go over how to handle our portfolio when we get SELL signals.

Case 1:

We got a sell signal from Market Breadth Ratios, though the long term uptrend is still intact.   

In times like this, what should we to do with our stock holdings?

Answer: This is the time to sell stocks from your holdings where the price action is not performing well, in other words the price action is showing weakness.

Some of the sell rules are:

• The price has gone 8% below buy price.
• The stock price has broken down on high volume.
• The stock price is forming a “wedge”. A “wedge” pattern is when the stock price goes down, then tries to rally up but the rally is anemic.
• If the stock price has had a long advance and then closes below 10-week moving average and stays there for 8 to 9 consecutive weeks.

Money from selling these stocks should be invested in the remaining stocks in your portfolio when the Market Breadth Ratio gives a buy signal again.

The thing to remember is that a short term correction can turn into a long term correction. The technique employed here to weed out weak stocks and not put that cash back into remaining stocks, till we get a buy signal from Market Breadth Ratios. This methodology will have the effect of getting us more and more into cash as the short term correction proceeds. In case the short term correction turns into a long term correction or a bear market, we will already be holding some cash and thus not get a big downside hit to our portfolio.

Case2:

We have a SELL signal on the Charts (that means the market has gone into a long term correction), what should we do with our stock holdings?

When we get a sell signal on our Momentum Leaders Stocks Index, we should be 100% in cash at that time. If we were doing prudent money management we would start selling weak stocks (as mentioned above) when we get a sell signal from Market Breadth Ratios and hold on to that cash. This strategy in effect gets us more and more into cash as the correction proceeded instead of waiting till, we get a sell signal on the charts.

One of the most helpful things we can learn is to give up trying to catch the last eighth or the first. These are the two most expensive eighths in the world. Applying this thought to the scenario we had in May 2012, we should have started selling weak stocks when we got a sell signal from Market Breadth Ratios (on 5/3/2012) and held on to that cash. This in effect would have gotten us more and more into cash as this market weakness continued and turned into a sell signal on Momentum Leaders Stock Index on 5/18/2012.