POPULAR BLOGGER "THE FLY" GIVES UP ON THE MARKET

Although the S&P500 is still within 2% of its all-time high, an awful lot of damage has been done beneath the surface. After grinding higher for 7 of the last 8 days and coming within a hair's breadth of the all-time high, the market took a nasty dip again on Friday confirming that the current market correction is not over. The Business Insider article linked below describes how a popular stock market blogger who calls himself "The Fly" was obliterated by this market and finally threw in the towel on Friday. It illustrates how the popular "buy the dips" strategy, or prematurely guessing that a bottom has been reached, often results in the most devastating losses, and why it is so important to rigorously cut any and all losses at a predetermined limit.

What that limit should be depends on market conditions and your recent won-loss record. In a choppy market where you are having a hard time keeping your won-loss record above .500, you should probably aim to harvest most of your wins at 10% to 15%, sometimes even less, while cutting losses at 4% to 6%. In a better market where your win-loss percentage is .600 or better, you can aim to harvest gains of 15% to 20% while limiting losses at 6% to 8%. In other words, aim for a 2.5:1 ratio of gains to losses.

This does not mean that you should sell everything at the upper limit. Truly strong stocks can be held for much larger gains, but recognizing that such stellar performers do not come around that often, and since even the best usually pause to catch their breath after a run of 20% to 25%, it’s a good idea to take some money off the table by selling at least a small part at that point. You can often get back into these stocks with a larger holding when they take off again after a rest, while redeploying the proceeds into better performers while they consolidate.

Before you rush off to buy anything, remember that the market is currently in a correction so nothing should be bought until a new uptrend is confirmed. You won’t catch the exact bottom, but you will be much better off waiting patiently for the all clear signal rather than rushing in prematurely and being crushed by a dip like last Friday’s or worse.

http://www.businessinsider.com/the-fly-out-2014-4