Thursday, February 4, 2010

The Dow Jones Industrial Average takes a 268 Point Dive

If you have been following Gerritz InSight blogs for the last few weeks you know that we were expecting potential problems for the market; though I have to admit I did not expect such a large decline in one day.

My decision to sell our stock fund positions in the third week of December proved to be the right move. At this point I am happy to say that we had a big position in cash going into this market decline.

We still have significant positions in high yield funds, but rest assured we will be watching them closely. High yield funds normally trend in the same direction as the stock market, but with much less volatility. The reduced volatility filters out a lot of the short-term up-legs and down-legs in the stock market and this can lead many unwary junk bond investors to become complacent. Just because junk bond funds don't turn down as quickly as stocks doesn't mean they are immune to the market forces that drive stocks lower when a downtrend develops. At significant tops, junk bond funds often lag the stock market, but then turn down and decline steadily lower when investors start selling.

Should the recent weakness in the stock market develop into a protracted downtrend our junk bond positions will be protected by our “moving average stop loss strategy.” 

See this months issue of  The Gerritz Letter for a detailed description of our moving average stop loss strategy.

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