Re: “When To Substitute Out Current Holdings.”
Donald Creech
Nov 22, 2014
Tom Dorse says it takes 5 years to get good at this - 10 if you are smart. That's because "smart" tends to make simple things complicated. Our first year (2010) resulted in too many trades, too soon being too scared of facing another 2008. We shifted to using the DWA model accounts while we continued to learn the charts and signals. Currently, we are running our own portfolios using ETFs and the DWA query tool. We 1st screen for Optionable ETFs. Not because other choices might not be stronger RS, but because we want liquidity IF we NEED to sell. We were stung on the sell side in May 2010. We screen for TA of 3, 4 or 5. That reduces the universe to >100. Build a matrix. Own leaders. Sell laggards. Review weekly. Start over every month. Selling too early misses the long-term PnF trend. Trading too often can create client management issues. You can't duplicate Jack's trades. He can't tell you what he is doing until he has executed all of his trades. Read Tom Dorsey's Book, the Daily Market report for information at impacts your investment policy. (It doesn't affect you everyday. Do you want to miss the day that something important to your accounts is covered?) Write down the steps you are taking to build a portfolio and to sell positions. When you can do that, you can explain to clients with confidence what will be done and why. Download our free report on Managing the Unexpected at Hope this helps.

“When To Substitute Out Current Holdings.”
Jill Olsen
Nov 21, 2014
Jill Memmott Olsen 3 mins Here is a question that was posed by one of the graduates: I’m wondering how Danny and Jack determine when they are going to reallocate their portfolios into other assets/holdings that are showing strong relative strength. Meaning for example, if large cap and their current sectors that they are long in are still all looking good and going strong, if small or mid caps came into favor, how would they make the decision to reduce exposure in investments they still really like to add exposure to another asset class, then how would they determine the percentages of each going forward. LikeLike · Jill Memmott Olsen Here is the reply Danny sent: (we thought you could all benefit from it): We actually just did what you are discussing below last week. By that, I mean that we sold our Utilities position because it was starting to deteriorate not only in relative strength but momentum was rolling over and it was beginning to underperform the S&P 500. We had owned it for about a month and a half and it was holding up quite well until the beginning of last week. This created a situation where we decided to take preemptive action and shoot it before our stop-loss was even close to triggering in order to free up some dry powder to possibly deploy in to a stronger sector or broad based position. To be completely candid with you, there is no real silver bullet when making this type of decision. I can tell you that if you have a profit in the position, it makes life a lot easier however. We are essentially monitoring how every position we own performs on a daily basis compared to the benchmarks as well as the other positions we own. If it begins to fall out of bed, behave abnormally, stagnate, and/or underperform, we will then consider taking it off the table. Something that I like to rely on when making these decisions is the slope and the condition of the MACD line. If it is turning over and beginning to have a negative slope (and the broad based market and rest of our positions are still showing strong momentum), that could be the first red flag or spark we would need to consider selling it. This situation typically only happens when the market is going up obviously, so it is much easier to identify the position or positions that are creating drag in the portfolio. One thing that we are not basing these decisions on is changes in DALI. The reason being is that DALI is very slow to react to changes in asset class or sector relative strength so hopefully we have been able to identify the deterioration before DALI does because our trading system is much more active. As far as determining the percentages of the replacement positions, it’s all going to depend on the type of position, the state of the overall market, and the % we had in the position that we sold. In most instances, if we sell a sector, we are going to look for other stronger sectors to replace it with. In that case, we will usually just use the same % (typically 10% per sector) we had in the previous position when buying the replacement. If there aren’t any other strong sectors to replace it with or if we already own the possible replacements, we will then look elsewhere and out into the broad market. The reverse applies if we take preemptive action to sell a broad based position. If we have cash available and the market is still strong, we will usually go with a higher % in the broad based positions (typically 15-20%/per). I hope that I didn’t add another layer of confusion to your question, but like I said above, there is not a silver bullet to these types of situations. If the positions are being monitored on a daily basis as well as the overall market, you should be able to get a pretty good feel when something is amiss with one or more of your current holdings.

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