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Sell And Go To Cash Position? Or, Hang On By Your Fingernails?

By Chris VermeulenStock MarketsMay 12, 2022 12:17PM ET
www.investing.com/analysis/sell-and-go-to-cash-position-or-hang-on-by-your-fingernails-200624095
Sell And Go To Cash Position? Or, Hang On By Your Fingernails?
By Chris Vermeulen   |  May 12, 2022 12:17PM ET
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As professional traders, we spend a lot of resources determining whether we are in a bull-up market or a bear-down market. The follow-up to this is our additional efforts in finding the right places to buy or sell in either of these scenarios.

As traders, we also have different styles or time frames that we trade. For instance, longer-term trend traders may utilize the daily, weekly or even monthly charts. In comparison, shorter-term swing traders may utilize the 4-hour or 1-hour charts.

Much emphasis and resources are committed to these efforts. However, we have learned that going to cash or having a cash position is just as important, if not more important, than having an actual position in the market.

The beautiful thing about trading is that the trader is in control. We do our research, and then after weighing the evidence, we have the edge in that we have complete flexibility in determining whether we buy, sell, or do nothing.

Cash Position Versus Invested In The Markets

Taking a position and making +20, +30 or +40% is great. But going to cash and avoiding a 20, 30 or 40% drawdown is just as important. We could even say that having the ability to go to cash is even more important, as it protects our attitude and our health. There is nothing enjoyable about worrying about a position 24 hours a day, seven days a week.

A trader should ask themselves: Is holding onto this position worth the stress and worry about whether the market is going to rally? Or, will the market give me back a small portion of my hard money losses? Or, will the bottom completely fall out of the market, which will destroy my account?

Age is a defining factor in answering this question. Depending on our age, do we have the time or the energy to make back losses if the unthinkable happens? Successful traders have learned the hard way that retreating (going to cash) may be the best option, as you live to fight another day.

Carvana -91%

Carvana (NYSE:CVNA) is the perfect example of the bottom falling out unexpectedly. The rallies were short-lived, ranging from four to 14 days. After CVNA had dropped about 25%, it only rallied back about 14 days before it started a steep but steady decline. CVNA is a textbook example of the importance of accepting a loss and going to cash.

As technical traders, we exclusively follow price. This, too, is an important concept to grasp. Following and trading price simply means that the market tells the trader what to do, and not the other way around. Being one with price will deposit money into your trading account. Fighting price will withdraw money out of your trading account. The market (or price) does not care what a trader’s opinion or bias is.

Managing and protecting our hard-earned capital is our individual responsibility and should be the top priority.

CARVANA CO. • CVNA • NYSE • DAILY

CVNA Daily Chart.
CVNA Daily Chart.

U.S. Dollar – A Strong Buy

If a trader doesn’t trade currencies, why should they even care about what is happening to the USD?

Think about the world economy. Whether a stock, ETF, bond or commodity, everything is affected by the currency it is traded in. Currency is part of the fundamental make-up of each market. Tracking and understanding global money flows provides us with the big picture.
Armed with that information, a trader can make better decisions about the markets they trade or how they manage their cash position. In other terms: risk-on, risk-off, trade-on, trade-off, capital invested, capital not-invested, etc.

The U.S. Dollar continues to attract capital from investors all over the world. But could this be a double-edged sword for U.S. stocks? As capital flocks to the USD, this, in turn, hurts U.S. multinationals, as they need to convert their weak foreign currency profits back into USD.

The USD safe-haven trade may eventually trigger a broad and deep selloff in U.S. stocks. As the USD continues to strengthen, corporate profits for U.S. multinationals will shrink or disappear.

U.S. Multinational $1-Billion Revenue Example:
  • $1 billion in revenue-generating a 15% net profit with a net neutral 0% currency translation equals a $150 million profit.
  • $1 billion in revenue-generating a 15% net profit with a negative -15% unfavorable currency translation expense equals a $0 profit!

In addition, the impact of inflation on the global consumer will lead to a pullback in consumer spending, which will further reduce corporate revenues and profits. Combining the global currency dislocation and the economic cool off will bring on a global recession.

Wisodom Tree Bloomberg – U.S. Dollar Bullish Fund ETF • USDU • ARCA • DAILY

ARCA Daily Chart.
ARCA Daily Chart.

RUSSELL 2000 SMALL CAPS -29.96%

The Russell 2000 stock index is considered the bellwether of the U.S. economy. The index measures the performance of 2,000 smaller companies whose focus is on the U.S. market. Tracking this index gives us a broad overview of the health of the overall stock market.

Since bottoming in March of 2020, the iShares Russell 2000 ETF (NYSE:IWM) has more than doubled. But in November 2021, the IWM put in its final top. Upon completing and then breaking out of a distribution wedge, the IWM is now solidly in a bear market.

Knowing this information tells us that we should seriously consider we are in a period of risk-off, no-trade and cash as a position.

For experienced traders, they may consider buying non-leveraged inverse index ETFs on days when the market has a sharp spike rally up.

ISHARES • RUSSELL 2000 ETF • IWM • ARCA • DAILY

IWM Daily Chart.
IWM Daily Chart.

Sell And Go To Cash Position? Or, Hang On By Your Fingernails?
 

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Sell And Go To Cash Position? Or, Hang On By Your Fingernails?

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Comments (14)
Franc Fil
Franc Fil May 13, 2022 1:50AM ET
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I shorted the IWM and it's going well!
Adnan Azam
Adnan Azam May 13, 2022 1:31AM ET
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yah .. you're late to call for cash only strategy... we will bounce for now . emini is going towards 4300 . you can relax
Paul IllTradeThese
Paul IllTradeThese May 12, 2022 11:39PM ET
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when Chris get bearish its time to BUY. btw he wont let us know he bought until its rallied 40%
Michael Galassini
RoyHobbs May 12, 2022 10:27PM ET
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Yeah, Chris is a bit weak on corporate finance. Multinational companies hedge their foreign currency exposures for the most part because they dont want translation risk to destroy profits.
Jeff Chevalier
Jeff Chevalier May 12, 2022 8:37PM ET
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I went all cash in January. Maybe a bit early, but things were getting funky and I couldn't afford to stress over 250k.
Joseph Obrzut
jzut May 12, 2022 5:06PM ET
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I'm a long term investor. I've been thru 2000-2003, 2008-2009, Nov. 2018- Jan 2019 and down 30% in 35 days Mar 2020. Never sold ( felt the pain) but nibbled and bought. I always have cash available. I'm not good at sell and when do I get back in. I've got some stocks from years ago that have very nice gains. In Apr- June 2020 I bought a lot of stocks that I did not own. Turned out a good move. I told my friends BUY. NO they said. We're all gonna die. Down 30% in 35 days you BUY! During this "correction" I am nibbling. Look at a long term  S&P chart. There's always dips along the way.
CTCS INSTITUTO
CTCS INSTITUTO May 12, 2022 2:50PM ET
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hodl!!!
Zafar Pathan
Zafar Pathan May 12, 2022 2:47PM ET
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Is this true for shiba inu holders
Murali Krishna
Murali Krishna May 12, 2022 2:22PM ET
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Best thing to do will be to dolar cost average and wait for stocks to go down more and sell off everything at the very bottom at least. Finally you will be safe
Rick Meyer
Rick Meyer May 12, 2022 2:22PM ET
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cost average correct.continue buying staying at 50% cash and when bounces happen sell to stay at 50% cash. you will be buying at the bottom that way.
Rick Meyer
Rick Meyer May 12, 2022 2:22PM ET
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or you could sell now and wait til they looking good again then buy back in. 🤣
Rick Meyer
Rick Meyer May 12, 2022 2:17PM ET
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50% cash always
 
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