After hitting another all-time high Tuesday, VectorVest’s MTI closed at 1.39, well into overbought territory in Canada. This is where we begin to say the market is searching for a market top.
Could the market could continue higher? Well, we have seen the MTI reach unprecedented high watermarks this year, including 1.71 in June. And it stayed near or above 1.50 in June, July and August, and the market kept rising. Again, unprecedented. The current overbought situation is the same in the US where the MTI closed Tuesday at 1.67, off of its 1.72 high the previous Thursday.
What does it mean for investors? Well, historically when the market is overbought and near a top, three things can happen. The market can push ahead but usually not with the same momentum that it does when the market is closer to a bottom in the early stages of a rally. Second, the market reset by pulling back five to ten percent, and third, the market can go beyond a normal pullback and move into correction territory, just like we saw in late February and March. That was painful.
One thing from history is certain, it is easier to be right more often and make more money when the MTI is near or below 0.60 than when the MTI is near or above 1.20 to 1.30 in Canada and 1.50 to 1.60 in the US.
As investors and traders, we should plan to invest accordingly. Be aggressive and invest more when the market is near the bottom and be defensive and invest less when the market is near a market top. Since we are now closer to a top than a bottom, here are 10 ways you can maximize profits and minimize losses.
- If Price crosses below the 40 day Moving Average, that is an excellent warning sign.
- If RT crosses below 1.0, that tells you with certainty the stock’s price is now in a downtrend. You don’t know how far down it can go, so remember Warren Buffet’s first and second rules of successful investing:
1. Never lose money.
2. Never forget rule number 1.
- If the REC has turned to a SELL, ignore it at your own risk. This is especially true when the market is falling from an overbought or “toppy” condition.
- Never give back more than one-half of your profit.
- Have a profit objective. When you buy a stock, consider how high you believe the stock could go based on its price history and what price you would be happy with. Once you reach that target, you can do one of three things: Sell and be happy you reached your target; sell half and let the other half ride with a tight Stop; let it all ride with a tight Stop.
- If Price crosses below a trend line, consider selling. You can adjust trend lines up, but once you set your line, never adjust it lower.
- Sell a covered call to generate cash and lower your cost base.
- Buy a Put option for protection on a stock you believe is at risk of falling sharply, but one you don’t want to sell for tax reasons or the compounded dividend yield you have achieve over time.
- Combine 7 & 8 to make a Collar option.
- Sell the stock outright. This is the ultimate protection, and even if the market pushes higher for awhile, you will have peace of mind and cash to buy aggressively when the market eventually falls and the MTI is closer to 0.60 or below.
If you are like me, it bothers me more to lose money by being aggressive than when, in hindsight, I played it safe and missed an opportunity make more money. When VectorVest’s indcators show the market is closer to a top than it is to a bottom, it is a good time to consider 10 WAYS TO MAXIMIZE PROFITS AND MINIMIZE LOSSES.