SPECIAL NOTE. Germany this month (May 19, 2010) banned certain short sales and theatens to ban short sales in all German stocks. This is part of the seismic shock waves continuing to roll though the worldwide economy, the markets, and policy-making legislatures and agencies. Such bans are mistakes. Regulators' sole purpose should be to abate fraud and to enforce orderly processes, not to restructure free markets. When you impose structure, they are no longer free. Accordingly, the 'rules' here are amended to suggest a simple short sale of the S&P 500 or its equivalents whenever short sales of any other stock or funds is indicated. Adopted as of November 27, 2009 and reaffirmed January 22, 2010.
Although not necessary nor advocated (see rules), some (myself included) may want to use the system rankings and timing for shorting. The rule is: when the trend turns down, sell short the single bottom-ranked ETF.
Short selling in Retirement Plans.
Not allowed by regulations. You may, nevertheless, legally accomplish effective short positions by the use of so called 'inverse' funds or by buying put options. These move exactly opposite to the funds you may wish to sell short.
The system uses none. That's because they are already built into the system and are multiple. When a fund drops in ranking out of the top two, you sell it. That is a form of stop-loss. If you use the system short-term timing indicator, and it drops, you sell any funds owned. That's a stop loss. If a bear market emerges, one or more of three of the funds in the portfolio, Treasury Bills, Gold, or Rydex Ursa (Inverse S&P500 fund), will automatically climb into the top ranks and may become the fund(s) of choice to buy and hold subject to the Rules of buying and selling. If a serious bear market emerges, the long-term trend indicator kicks in and overrides all else. Please See Rules.
I have always had a problem with 'stop-loss' orders. The fixed percent or dollar amount or initial or trailing price levels that you set are completely arbitrary even if you use a volality factor to adjust the decision. The market knows nothing of your personal cleverness, predilections, and caution.
It seems better to me to let the market itself by its own internal actions automatically set loss-control operations with respect to itself and its components rather than to impose random, personal, psychological criteria from the outside.
I did not always believe this, but after years of experiment surrendered to market behavior itself with me as a participant rather than as the dubious director of arbitrary orders.
Tips for Getting Started.
Wait for a drawdown. Then watch the two weekly timing indicators, short-term trend and long-term trend. When the short term trend turns up, commit funds. This trend information appears in the
weekly chart or in the portfolio Summary in the middle of each weekly Rankings & Prices table. Special case: the long-term trend under 10 is very bearish and trumps the short-term trend: stay short. Commit funds when the long-term trend turns up provided it is above 10.
A further safeguard to prevent buying at the peak of a price move just before a drawdown is to divide the size of your intended position into two or three or four parts and space each entry several weeks apart, separately, one portion at a time.
'Trends' mentioned on the site refer to the Portfolio Trend, the trend of all the funds in the portfolio taken together--not the general overall market, nor the widely followed indexes like the Dow Jones or the S&P500. Treasury Bills, Ursa, and Gold are excluded because they behave, or tend to behave, inversely to the general market.
All systems degrade, or they (rarely) self enhance. Periodic adaptive testing discloses when the system needs upgrading if required.