The stock market has had two months of upheaval since making new all-time highs in late January. Nobody knows if we’re near the end of the increased volatility or if this is just the start.

As individual investors, we might not know where the market is going to go, but it is our responsibility to have an investment plan in place no matter what the market ultimately decides to do.

At the recent Oxford Club Investment U Conference, the question we heard most was “when do I get out?” Here are a few TradeStops ideas on when’s the right time to get out of the market (by the way, we’re saving the best for last).

1. The Sector ETF Strategy

TradeSmith covered this strategy most recently in this article. As of market close on 3/23/2018, four of the ETFs are in the Stock State Indicator (SSI) Red Zone, and the others are in the SSI Yellow Zone.

Displaying Sector ETF SSI Results
Since only six are giving an active signal (by not being in the SSI Red Zone), then as they stop out, you’ll want to move those monies to cash.

There are currently 10 SPDR Select Sector ETFs. XLRE is the ETF for the real estate sector. It’s been trading for a little more than two years, so we couldn’t include it in our original testing as there’s not enough historical information. But because three of the original sector ETFs have hit their SSI Stop, the “go to cash” rules that are listed in the article still apply.

2. The 40% Rule

TradeSmith warned you earlier this month that when 40% of the stocks that make up the Dow Jones Industrial Average (DJIA) are in the SSI Red Zone, it acts as a drag on the entire market.

Currently, 15 of the 30 stocks are in the SSI Red Zone. That’s 50%. Here’s a list of the 15 stocks.

Highlighting 40% Rule with SSI Image
That’s a lot of red on the screen. Only 6 of the DJIA stocks are in the SSI Green Zone.

Continuing 40% Rule, Six DJIA Stocks in Green Zone
The 40% rule is screaming for you to take caution right now.

3. The Major Indices

What if you decided to exit when the major averages all move into the SSI Red Zone? It’s a little trickier here. Currently the S&P 500 and DJIA have hit their SSI Stop signals and are in the SSI Red Zone, but the Nasdaq 100, S&P 400 mid-caps, and Russell 2000 small-caps are still in the SSI Green Zone or Yellow Zone. We’re using the ETFs here to determine our signals.

Displaying Major Indices SSI Results
It would make sense that if all of these averages are trading in the SSI Red Zone, then that would be a good time to exit and go to cash until we get new SSI Entry signals on these indices.

Our current SSI Stop prices, as of 3/23/2018, are as follows:

  • MDY – $323.26
  • QQQ – $153.33
  • IWM – $140.24

4. The PVQ Solution

One of the powerful features in the Premium and Lifetime TradeStops memberships is the ability to see the volatility of your overall portfolio. We wrote about the portfolio-level tools in TradeStops here.

The Portfolio Volatility Quotient (PVQ) tells you what the normal volatility of your overall portfolio is by looking at the correlation of your stocks. Here’s a portfolio of stocks sorted by Volatility Quotient (VQ).

Portfolio of Stocks Sorted by Volatility Quotient (VQ)
The PVQ of this portfolio is 14.01% which is considered Low Risk even though the majority of the stocks are considered to be Medium Risk.

Image Reveals Percentage of Low and Medium Risk Stocks in Portfolio
Knowing that the normal volatility is 14.01%, if the value of the overall portfolio drops by this amount, then that could be a good time to exit the market completely. Better to drop 14.01% and sit on cash than to “hope” the market recovers on the way to a 50% loss.

There is no “one size fits all” solution for determining when to exit the market. But if you want to be a successful investor, you have to know when you are getting out of the market.

At TradeStops, we’re always talking about having rules in place. You, the individual investor, make the rules that are best for you. Then, when market conditions are volatile, and the headlines are screaming fear, your rules will guide you to make the best decisions possible.

You make the rules; the rules make the trades. That’s the best way to overcome emotional trading in difficult markets.

We’ll discuss these ideas as well as a few others that we haven’t talked about yet next Wednesday, April 4th at 1:00 p.m. Eastern. Click here to register.


Tom Meyer
Education and Research Specialist