When to Exit the Markets or Get Back In

Opinions abound about when you should quit investing in the stock market. Equally, there are just as many onions and theories for when you should start investing or going back into the markets. Some of these make sense while many are simply based on feelings, too many beers or whims.

There are arguments for never exiting the markets, although the recent recession and losses, however, temporary, of substantial dollars in almost everyone’s retirement or regular investment account, makes this a hard argument to support.

On the other hand, making an “exit” decision is possible if it is based on reliable, measurable criteria.

There are different techniques to establish a signal for when to stop trading, whether it be mutual funds, stocks or ETFs within which you place your hard-earned cash.

In his book, Smarter Investing in Any Economy, Michael Carr speaks of an equity curve as giving just such an “Exit” or a “Return” signal. Carr applies the equity curve to particular investment strategies that are based on universes of ticker symbols. This same technique can be used to give an overall signal without being tied to any on particular investment strategy.

An equity curve is created by using a moving average chart with both the fast and slow parameters set to the same period. In his book, Carr uses and equity curve of either 30 or 50 weeks which corresponds to 150 or 250 trading days; so the chart settings would be 150:150 or 250:250. In my experience, during volatile markets a setting of 100:100 works very well and would have prevented almost all losses during the recent recession and when the market has bounced around since the recovery began.

The equity curve is read by looking at the price line of the investment strategy. When the price line crosses down through the relatively smooth equity curve line it is a signal to exit or stop using that particular investment strategy. Conversely when the price line of the strategy goes up through the equity curve and while it remains above the curve line, one should be investing with the particular strategy.

An overall market signal can be created by using the S&P 500 or a similar major index. My experience using the S&P 500 index with a setting of 100:100 for the equity curve helped me preserve my cash during the recession and whenever the market dropped substantially.

Settings lower than 100 may react more quickly to market volatility while settings like 250 are slower to react. Low setting can result in frequent trading, while higher settings may involve less frequent trades depending upon other buy/sell rules. Personally my experience indicates large losses were not totally avoided when the equity curve used a 250 setting but settings in the range of 100 or possibly 150 resulted in safety while still allowing for substantial profits when the equity curve signaled to be in the markets.

Some software programs allow you to create equity curve signals or have them built in and allow you to adjust the settings to meet your goals of frequent or less frequent trading, aggressive or conservative investing.

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