Stopping Out of the S&P 500 Trade

From my research I have come up with the idea that a 5% stop loss is reasonable for the S&P 500 trades. Thus, in my imaginary portfolio I am out of the position opened on Aug 2nd for a 5% loss.

Again from my experience, once out of a trade because of a stop loss, one stays out until the next signal. What does that mean? Notice, that we exited the trade before the end of the ending period (end of the month in this case), thus, it might as well be the case that at the end of the month S&P 500 is still in buy mode with respect to its 10 month MA. However, we are not going to re-enter until S&P 500 triggers first a sell, then another buy signal.

Out of Nasdaq 100 for a loss

Following the 20-week MA, one needed to close the long position in Nasdaq 100 on the open last Monday, August 16th. This position entered on the open of July 26th, was an especially frustrating trade. At first it seemed as if it had caught a new trend, but the sudden and steep market plunge that developed after August 10 turned it upside down.

Quantitatively: this trade delivered 3.7% loss, being up 3.6% before that. Looking at this result one can’t help but to think that a more sophisticated gain protection strategies are useful. However, the commonly advertised line “if you were up X%, you shouldn’t have lost money” is seldom true in real life. Yes, one would have ended up making money on this trade, but might have missed the entire leg up if this was a real trend. Just look at the up move after March 2009 – what gain protection strategy would have kept you in for the whole leg up? There were Jerks of a few percentage points, so any tight stop loss would have seen you out long before the end of the trend.

False Alarm – the S&P 500 Latest Sell

At end of May the S&P 500 closed below its 10-month MA, a significant bearish sign. Now, two months later, the S&P 500 closed at the end of July above its 10-month MA, thus, triggering a buy.

Let’s look closer at these trades. Using the opening prices of the following day, the exit would have been at $1,087.30. The re-entry on August 1 at $1,107.53. The whole re-entry business amounts to a “loss” of about 2% of gains. In the meantime, the S&P 500 hit a low of $1,010.91, which amounts to a downturn of another 7.5%. In other words, the 2% missed gains saved us from watching our investment going down another 7.5%.

At the end of July S&P 500 closed also above its 12-month MA (which was penetrated at the end of June) which makes the current signal even more significant.