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Smart Money

Weathering radical stock market movements

By: Marc Cuniberti
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With the Dow falling hard over the last few weeks and the S&P 500 now below its 50-day moving average for the third time in seven years, investors find themselves wringing their hands in fear and frustration. 2011 and 2015 marked the last time the S&P fell under the 50-day average indicator and in both years, the corrections continued for months.

The 50-day moving average is one of many technical indicators analysts might consider when trying to forecast where and when markets may move and it is considered by some a serious indicator of possible things to come.

No one can forecast market direction and the 50-day indicator, like all indicators, is not without its detractors and skeptics however.

But if an indicator isn’t reliable, why use it?

The answer to that question may be a simple one. None of the indicators or market theories are foolproof so this one might be as good as the next.

In reality, just because the S&P continued into a correction in 2011 and 2015 after falling through the 50-day average back then, it isn’t a foregone conclusion it will repeat its dismal performance this time around.

Although it’s not a good thing the S&P has broken the average, markets, like a herd of wild animals, can turn on a dime or a day, and forecasting what something might do because of what it did in the past can be a mistake.

At the time of this writing, the S&P, regarded as a major market index, had fallen at its worst point, about 11.1 percent. It has recently recovered some from that low point set on Nov. 19.

Ten percent is regarded as correction territory and once it’s down 10 percent, some analysts think that’s a precursor of more bad things to come, mainly more falling stock prices and therefore more investor pain.

Although various indicators, averages, nominal stock and index levels and other methods are used to forecast imminent direction by some, there is no hard and fast rule or theory to rely on.

No doubt, the market has not been kind these past months and fall is the season for falls, so some believe. But buying or selling stocks based on a theory of some sort is probably not the best action for the average investor to take.

To better weather these radical market movements without buying or selling the farm entirely, it may be easier just to lighten up on stocks if and when you reach the sleepless or restless stage of the investing universe.

I use a combined strategy of setting some predetermined selling levels of stocks and indexes that I may have bought as well as taking into consideration a variety of other indicators and theories.

Simply put, I look at a few things to give me a feeling as to how dangerous the market may be becoming.

Thankfully implementing this belief and subsequent strategy is simpler than developing it.

What I mean by that is although it takes a complex set of circumstances to arrive at a decision, once I do decide to do something, the next action is a simple one.

My goal is to protect the majority of principal while slowly lightening up the portfolio. I do this by selling some holdings and moving more and more into cash if markets move farther south.

In a nutshell, moving into a more cash posture by selling some positions will lessen the movement both up and down of the portfolio in question.

In the extreme, if one goes to all cash there will be no movement but an all-cash position is a rare position, at least for me.

The point is the more cash you have in lieu of stocks, the less you will lose in downturns, and on the flip side, the less you will make if the market decides to turn north again.

One final word which I think is very important to all investors.

Make sure you have SOME sort of exit strategy to possibly help prevent against a catastrophic wipe out.

Without an exit strategy, you may be setting yourself up for more pain than you can afford, both mentally and monetarily.

Marc Cuniberti is an investment advisor representative through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Contact him at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603, 530-559-1214.