12-10-2020: Knowing when to blink

Year-to-Date Strategy Stats as of today:

+ 43.37% : Turner Quant Advantage (TQA)

+ 15.84% : Tactical Growth (TG)

+ 5.77% : Diversified Income (DIS)

+ 27.13% : Leveraged Index (LI)

+ 13.54% : S&P 500

I know what 'some' of you were thinking yesterday... Some of you, deep down inside that you don't talk about at parties (are we allowed to have parties any more??), thought yesterday was the first leg down in the much anticipated "major market correction". You were afraid that here we are, rolling down the stock market highway, pedal-to-the metal, fully invested, and the bridge is out... That's ok... You had every right to think that way. I mean... after all... I've been saying for the last couple of weeks that the market is 'almost' overbought and when the market gets overbought, the odds of a correction boom higher.

But, a one day sell-off (or 2 or 3 or even a few) does not a trend make. At this writing, it 'looks' like yesterday was nothing more than a slightly jarring pothole. Let's call it, the do-nothing-Congress pothole. It's as good a name as any. The COVID-pothole was already used (overused, actually).

Here's the point of this evening's blog... It's knowing when to blink... If the market had tanked other 1% or 2% today, the Monday-morning quarterbacks in this audience would be shouting, "See!!! I told you we should have gone to cash on Tuesday!!" But, when you think about it, making that decision on Tuesday would have simply been a guess. A good guess in this scenario, but still just a guess. I hate guessing. And, I hate listening to guessers. CNBC and, to a lesser degree, Fox Business is chock-full of guessers (aka, analysts). Ask yourself this question the next time you're listening to a so-call pundit... If they are so good at what they do, why aren't they so rich from their accurate forecasts that they don't need to be getting paid to be on TV? I would love for CNBC to interview me and ask me this question? "Mike... You have been very successful this year... What do you think the market holds for us next year?" My answer, would mean I would never be invited back... I would say, "No clue. I don't know what the market is going to do in the next hour, or next week, or next month, much less for next year... and what is most important, no one does. All I can tell you for sure and it cannot be disputed... the current trend in the market will last exactly until it doesn't. And that is ALL you need to know to make good decisions about your stock market investments."

But... I digress.

Back to the blink or don't blink analogy...

Knowing when to blink (go to the sidelines) is the absolute key to long-term success in the stock market. I did not blink yesterday. I did not blink today. But, I can tell you exactly when I will blink...

I will blink and go to the sidelines when the stops fire that I have in place for each holding in each portfolio. I predetermine, by rule and by math, where to set the stop loss on each holding in each portfolio. Those stops basically say, "The market can come down only enough to trigger my stops, before I move us to the sidelines." Yesterday, the share prices got closer to their stops, but for the most part, the share prices didn't get close to hitting the stop loss prices. That means I didn't get close to blinking yesterday.

Now... don't get me wrong... losing a couple of percentage points is nothing to sneeze at. I certainly DID NOT like the pull-back we saw yesterday, but I knew we had our stops in the right place to allow the market to have room to move without triggering a move to the sidelines (cash). I do have the stops a bit tighter than normal, but not nearly as tight as I will make them once the market gets overbought.

And, after the pull-back yesterday, the market is even further away from being overbought than it was the day before. Yesterday's sell-off just let a little steam out of the pressure-cooker. Today, the market sort of meandered around and lost a little ground. Most of our models moved a bit higher today from yesterday's sell-off.

One lesson that every serious investor learns sooner or later is: Buying is easy and Selling is hard. In my world, that is still a truism. But, in my world, I at least know, to the penny, when I will be selling. My stop loss setting govern the exit strategy and in a way (a big way, in fact), that takes a lot of pressure off the conundrum that most investors have of when to sell... when to blink. Knowing when to blink is the key to long-term success in the stock market. We always know when to blink.

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