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Q: My concern with this strategy is that I don’t doubt that we can make the right to decision to buy most of the time.  It is the sell decision that I fear is the most challenging. What is your philosophy around when to sell?

J: There are a variety of tools and indicators I use for this. First, if we discover our thesis for a given trade idea was wrong we should sell right away. Or if we’re using a stop that’s a built-in sell signal. As for trades that work, that’s a different story. So long as the trade is working and thesis is still valid we should hold on to at least a core position.

As for the ETF allocations there are a couple of reasons to sell. First, when something becomes ridiculously priced in a demonstrable way it should be sold. By this I mean when something with much greater risk than a treasury security offers less return than a treasury security it should be sold or reduced as a position at the very least. Second, when the trend turns negative it should be reduced or sold. In determining the trend I simply look at whether the security is both trading above its 200-day moving average (ala Paul Tudor Jones) and whether the 10-month rate of change is positive. Another easy way to determine the trend is to see where the 50-day is in relation to the 200-day (ala Jerry Parker – 50 over 200 is bullish and vice versa). This is the basis for the tactical positions relative to the target allocations.

Q: In your experience, are some companies’ stock prices immune to crashes or bear markets? In particular, would you be looking to exit HLF when it is certain that the markets have rolled over, or do you think it can still go up? I’m curious how much risk there is owning even the best companies at great prices at the top of the market or when the wind is starting to blow against you.

J: Absolutely, it’s possible. Back in 2000, even while the dotcom stocks were incredibly overpriced there were a number of value opportunities that performed very well through the subsequent bear market. Ball Corp may be the greatest example and is very relevant to the HLF discussion because Bill Stiritz was/is heavily involved in both. Ball went from 3 to 13 (split adjusted) during the bear market and is about 75 today.

Having said that, the overvaluation today is much more pervasive across both equity sectors and asset classes so there really is no place to hide. For this reason the only trades I’m willing to put on are the ones that are so attractive I just can’t resist. That doesn’t mean they will necessarily do well in a bear market but I just don’t believe in letting macro get in the way of good micro opportunities.

Q: While we’ve seen substantial divergence amongst global equity and REIT assets, with some European and Asian assets turning in good performance over the past half year, US markets have languished. Markets such as Russia and Latam still have very low valuations (understandable for sure). As an ETF-based investor with a domestic bias toward Asian markets, I have been very concerned over the past year by the argument we all know so well about valuations in the broad US markets along with the piling up of accelerants on any downside such as high leverage ratios and corporate profit margins hat could revert toward the mean.With substantial cash on the sidelines from some property sales and trimming assets, I’ve been able to find a few value opportunities over the past year. My nagging sense, however, is that if US markets topple, global correlations will rise sharply and markets will move in sync toward cheaper valuations. Obviously, I would like to deploy these funds at lower valuations.My question is how best to deploy funds into assets during a downturn. Should I average into falling prices or make larger moves based on valuations. Also, you argue that the S&P should come off by 50% to put it at a decent valuation. This seems about spot on mathematically, but unlikely in terms of trade ranges. I’m concerned about missing a shallower bottom and anxious about deploying too early. How best to play this?

J: This is one of those things that really has to be addressed in real time as the risk/reward equation changes. Having said that, I think there are a few simple tools that will help. First, comparing the US stock market forecast returns (so long as you’re using a good model) to the yield on the 10-year treasury has been a successful timing tool in the past. See my post titled: “How To Time The Market Like Warren Buffett.” Once stocks once again offer better returns than bonds it’s usually a good signal that it’s safe to get back in the pool. Additionally, a simple trend-following signal can be of great help, too. Using just the 50 and 200-day moving averages can also be an effective timing tool. Once the 50-day crosses back above the 200-day moving average as it did in May of 2003 and June of 2009 on the SPX after those two major bear markets it was a good signal that the coast was clear.

Q: I like to get many different opposing professional opinions on investing and trading techniques and philosophies, so I read a lot of investing books. Most of them are super boring (buy the S&P 500 index and hold for 50 years). The latest one being “How to Make Money In Stocks” by O’Niell. His CAN SLIM system is interesting, and I’ve also read some bloggers who swear by it. I’m curious if you’re familiar with it? If so, does it or any parts of it influence your investing style? Since you do lots of chart analysis, I thought there might be a connection?

J: I have read O’Neil’s book and there’s value in it. It’s mainly a momentum-based system which doesn’t necessarily suit my personal style so much. Having said that, it works well for some and I’ve tried to incorporate some of it into what I do. As a stand alone system, though, it’s just not my cup of tea.

Q: Gold took a beating today. You were looking for a puke—-was that enough?

J: It was enough to put a starter position on again. See my latest weekly comment. I’m getting very bullish here on the miners but I’d like to see some follow through/confirmation here pretty soon. If the trend were to turn back up I’ll be putting on a full-size, if not overweight position.

Q: I have been a member since the first day. I am wondering what are your requirements to manage accounts. I have about 420K in accounts and I am hoping if you can mange it.

J: I’m not managing any outside money anymore. That’s why I started the new site – to help people do it for themselves.

Q: I have been following the news on HLF today and have been tracking the after hours trading. My question is, who is doing this trading? Is it foreign markets that are now open for business, or is it some sort of special member club? Just curious!

J: See this:

Q: I enjoy your blog and looking forward to following your advise on the premium site. Would you advise use of your tactical portfolio for money I need in 6 years ? If not, I’d appreciate an alternative.

J: I can’t really say because it really depends on your own goals and risk tolerance. I will say that the goal of the tactical is to achieve returns similar to buy and hold while reducing drawdowns.

Q: I have been reading your premium newsletter with much interest and following your tactical portfolio. Right now you seem to be down on everything except Herbalife? As Somone who worked for Herbalife many years ago I can not get myself to invest. A pyramid scheme it is!! Recently you spoke of Meb Faber. I am 61 years old invested in your tactical portfolio, what about an allocation to the GAA ETFS OF MEBS?? I am total confused by Buffets most recent comments as well. THE MARKET LOOKS CHEAP AT ZERO INTEREST RATES AND BONDS WAY OVERVALUED. Appreciate your thoughts.

J: Regarding Herbalife, they have changed their business model fairly dramatically over the past few years. I don’t believe there’s any way it can be classified as a pyramid scheme in its current form. As for country ETFs, I’m watching them (especially Eastern Europe) but I just don’t see anything worth putting capital at risk right now. Finally, regarding Buffett, I believe he’s just far more concerned about his legacy right now than sharing his candid thoughts. As respected Buffett-watcher Jeff Matthews recently said, the annual meeting used to be fantastic because it was the no-spin zone. This year was all spin.

Q: I’ve read some of Meb Faber’s work and am intrigued by the idea of managed futures. Do you see a role for a managed futures component in an LT portfolio, or is the idea that the tactical allocation approach accomplishes similar goals already (through trend following, diversification, etc)?

J: I think managed futures is a great addition to a diversified portfolio – so long as it is low cost. The main problem with them has been the very high cost. And yes, what we’re trying to do in the tactical portfolio does share those similarities to managed futures.

Q: Two questions while I’ve got you on the line:
1) I know you mentioned all of your money is in trade ideas.  Would it be possible to add some type of Jesse’s portfolio column to the Target and Tactical portfolio allocations (or at least mention % of net worth you’re allocating to a trade when you suggest it)?  I’m just thinking that would be very helpful to understand where you stand with your trades, and what type of weight you have against them, and what % of your money is in cash.  Otherwise, we’re left a bit in the dark as to where you’re at, which is a large part of the reason why I’d subscribe to this type of service – to achieve those outsized returns and understand the mind of a great investor. 2) Do you use VGSH/SCHO for your personal cash accounts instead of money market (which I know is basically zero)?  Isn’t there a good bit of duration risk there?  The other option I use for 401k’s is the managed money type of fund with some guaranteed interest (1-3%).

J: 1) This is an interesting idea. I’ll definitely consider it. Honestly, I’ve sort of struggled with how to share this sort of information effectively. I can’t really provide personalized advice. It’s up to each investor to determine how they go about implementing any of the ideas I share. Having said that, I think sharing a variety of portfolios like 1-buy and hold ETF, 2-tactical ETF and 3-trade ideas may be a good idea. Thanks. 2) I actually just use a government-only money market fund most of the time. However, it’s sometimes helpful to build a little ladder or just buy one of these ETFs for a bit better yield.

Q: based on your cautious tone like Fleck and Hickey would you start buying the model portfolio stocks now or wait?    Also, HLF has taken off is that still a stock you would buy today after a big runup.     Do you have stops under gdxj?

J: I think that scaling into positions is always a good idea. Having said that, all of the trade ideas on the home page are things I’m actively buying. As for HLF, I think that there’s a good chance it could see new highs this year once the FTC boogie man issue is resolved – especially if the dollar rally is over. I especially like how NGD and GDXJ acted today – very nice reversals there. I have no stop on GDXJ and fully intend to buy more if it falls to new lows.

Q: NXRT insiders came back for another helping:

J: Yeah. Thanks. The CEO keeps buying loads of shares for his fund.

Q: Although it goes against your general expectations, would you find it to be all that crazy for a true rotation to be initiated whenever some nominal and purely symbolic rate hike is finally executed? I’m subscribing to this theory – I believe we are destined for nosebleed highs before you get to shave your beard. As usual, enjoyable posts lately.

J: That’s a good question and something I really don’t have any feel for. Having said that, one of the main reasons equity valuations are so high is that interest rates have fallen so low. Longer-term I have to think rising rates is not constructive for stocks.

Q: You talk about the demarks sequential?? What is that?

J: I met Tom DeMark about 10 years ago when he was working for Steve Cohen. At the time, Steve was the most successful hedge fund manager in the world. Before that Tom worked for Paul Tudor Jones. Now he has his own research service he sells to all the top funds. His TD Sequential is just a timing device that works amazingly well at times. 9 indicates a completed buy/sell setup. 13 is a completed buy/sell signal. You can learn the details in this book. I also wrote about Tom a bit last year – check it out here.