Check Yourself

Yesterday I was asked a question about preemptively taking defensive action before a breach of the 200 DMA in what has obviously been a poor tape for the last couple of weeks or so. Weeks like this is exactly what all those posts about discipline and avoiding emotion are all about.

The market has backed off enough to apparently make people nervous. Getting nervous or even scared is perfectly valid but what matters is what you do in the face of being scared or nervous.The reason to put some sort of objective trigger point in place at a time when emotions are not involved is so that there is no need to guess about what might happen at a time when you might be clouded by emotion.

For anyone feeling emotion right now all that needs to be done is to remain disciplined. We may have opinions about what comes next and while those opinions may or may not be correct no one actually knows what comes next. It is possible that any sort of strategy you might use (including my preference for a simple breach of the 200 DMA) will turn out to work very well on this go around or maybe not so well but if you use some sort of strategy like this then you must have some basis to believe it works more often than not even if it is not the single best on this go around. No defensive strategy can be the best every time but it still can be very effective.

My hope for the 200 DMA strategy is simply that it allows us to miss the full brunt of the next large decline whenever that comes. Going down a little, for investors, just goes with the territory. Traders may view that one a little differently.

I have unyielding faith in our strategy in terms of getting us to our long term objective but a part of that equation is that there will be periods where clients will be uncomfortable. It would be great if that were not the case but it is and does not have to disrupt achieving the long term goal unless someone succumbs to their emotion. Anyone really freaked out by the current decline probably has a short memory and probably has too much equity exposure.