As a rule, I avoid opinions on political matters and prefer to concentrate on the markets. Under current circumstances, it is a difficult rule to follow, states Ian Murphy of MurphyTrading.com.
Like everyone else in Europe, I am shocked and saddened by the unfolding events in Ukraine. Half a million refugees poured over the border in the past four days and the UN anticipate the number to swell to five million in the coming weeks. There is always a human cost to military adventures.
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Mr. Putin’s decision to place his nation’s nuclear arsenal on alert has raised the stakes, and the raft of economic sanctions and political developments over the weekend were so profound and rapid that I expect the market to react as if punch drunk in the week ahead. This morning lines formed outside Russian banks and the Moscow stock exchange has not opened for trading.
Some clients and newsletter subscribers have contacted me seeking guidance on their stock holdings. When the market tanks there is a temptation to examine long-term holdings in stocks and index tracking ETFs to see if we should sell or hold tough and ride it out. The choice we make is entirely dependent on whether we are investing or trading, the timeframe we are following and the strategy we are employing. As mentioned in last month’s newsletter, these decisions should be made at the time of the investment, not now. However, if we do decide to run, when do we start running? What must happen for the starting gun to fire?
Over the years I’ve searched for the perfect signal or indicator which offers the most profitable entries and exits on long-term stock investments but was unable to identify one which stood out. Every signal and indicator comes with unique advantages and disadvantages, and the challenge faced by stock investors is matching the appropriate indicator to the timeframe we are following.
For example, the Tidal strategy is excellent for semi-passive investing, but it only works on an index tracking ETF such as S&P500 ETF Trust (SPY) or the Vanguard S&P500 ETF (VOO). A crossover of 50 and 200-day moving averages is regularly quoted as the go-to signal for a pure play on the US equity market, but these signals must be monitored every day during times of high volatility, and they offer too many false positives in a sideways trending market.
Regardless of which signal we use, the exit is always the easy part, it’s the re-entry which presents a problem. If we re-enter too soon, we will have lots of whipsaws, and if we re-enter too late, we will miss the first part (and possibly the most profitable part) of the move.
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The best signal I have found for a long-term semi-passive approach to investing in stocks and index trackers is the -1ATR line on a weekly closing basis (lower dashed line above). It’s not perfect (no signal is) but it’s the best allrounder I know of. The signals are simple; when price closes below the -1ATR line on a weekly chart, exit the position. When price closes back above the -1ATR line re-enter.
The exit is always the same (a close below weekly -1ATR), the re-entry is more challenging, so you can wait for a weekly close above the EMA (thick white line above) or the 1ATR (upper dashed line) if you are more risk averse. These later re-entries are less likely to be whipsawed but you will miss the first piece of profit.
Help Strategy
This old reliable triggered on Friday with a perfect set of signals. In light of events in eastern Europe taking a trade coming into the weekend was not for the faint hearted but I bought two Micro E-Mini contracts (CME:MES) on the Interactive Brokers account. The entry and protective stop are shown below on the black chart.
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I believe futures are a safer bet than a geared ETF when holding a position over the weekend in volatile situations because trading commences at 6:00 pm ET on Sunday evening. This means we have a better chance of our stop orders being filled at the correct price and are less likely to have the market gap over our stop order on Monday morning. Also, a switch from euro cash to US dollars appeared to be the prudent thing to do in the current climate.
At 8:00 am ET this morning the Micro contracts were off by 1.2% from Friday afternoon’s close and the trade is still open. When the regular session opens at 9:30 am ET and stock traders hit the ground running, it could be a different matter.
Learn More about Ian Murphy at MurphyTrading.com.
