Protecting the downside is a way of avoiding risk in some volatile areas. A very simple rule anyone can implement is to look at the 200-day moving average of every ETF in your portfolio. For example, if you’ve got a commodity ETF trading below its 200-day average, the translation is that it’s in a downtrend. If you’re not going to buy and hold, and you’re looking for short-term opportunities, that opportunity may have passed and what you want to do is protect principal and sell until it goes back above that trend line.
There are a couple of areas in the past year that have been beaten up, including financials and housing stocks. People may say that’s ridiculous and that we’ll continue to see deterioration over the next few years in that sector, but when everyone is throwing the baby out with the bathwater, it’s usually a good time to buy. If you’re looking to take full advantage of trends, this is the way.
ETFs trading above their 200-day moving average:
- CurrencyShares Japanese Yen Trust (FXY), up 9.7% year-to-date
- PowerShares DB US Dollar Bullish (UUP), up 7.1% year-to-date
For full disclosure, Tom Lydon is a board member of Rydex Funds.
