Last week’s market plunge and subsequent exchange traded fund (ETF) decline unsettled many investors. However, if you had an exit strategy with specific stop-loss points, then the drop was hopefully less stressful for you as it prevents small loses from turning into there-goes-my-house losses.
If you followed your exit strategy, you more than likely sold several ETFs last week. But what do you do if the ETFs you sold end up rebounding? Try this:
- Treat the newly available cash as "free agent" funds. Just because you sold an ETF doesn’t mean you’re obligated to buy it back when it rebounds.
- Look for ETFs that are above or rising above their trend lines.
- Look for ETFs with positive, relative strength. When markets rebound off a low, it’s usually those with the greatest momentum that enjoy sustained uptrends.
For example, we sold iShares Russell 2000 Index (IWM) for our managed clients when it went below its 200-day moving average because that’s part of our exit strategy. IWM’s recent performance is a general indicator that small-caps are in a declining trend.
Rather than waiting for small-cap stocks to regain strength, look to other market sectors such as energy ETFs. PowerShares WilderHill Clean Energy (PBW) never went below its trend line during last week’s drop and is doing well overall. (For disclosure purposes, we are not buying this ETF for our managed clients.)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.