IBD had a project they called Market School. Mike Webster, Justin Neilson and Charles Harris did deep dives into the markets over time and tried to come up with black and white rules to help them judge the market without emotion. One result of this was the recommended exposure level. This is relatively new to the retail subscribers but had been used for the institutional subscribers. Before that, we go declared market states like:
- Market In Correction
- Attempted Rally
- Market in Confirmed Uptrend
- Market Under Pressure
- Market Resumes Confirmed Uptrend.
In the background they were using the exposure levels they created in market school. It works like this…
During the 8/16/24 Friday Video, Mike Webster was talking about the Market School rule:
Count
• 0 - In correction (0% invested)
• 1 - FTD (20%)
• 2 - xx (55%)
• 3 - xx (75%)
• 4 - xx (90%)
• 5 (6,7) 100% invested
You add “1” for different good things that happen. For instance, after the 8/13 FTD, the S&P then got above the 21dma, so that took us from 1 to 2. On 8/15, there was a subsequent FTD, so that took us to 3. The S&P low got above the 50dma and that took us to 4. If we get below 21dma, 50dma, etc, the we start subtracting. This is how they decide on their exposure levels.
You will notice a odd jump between 2 (20%) and 3 (55%). I will be watching for clarification on this. The curret
Here is what their exposure ramp looks like…
There also seems to be a conflict with Mike saying we are at #4 (90%) and the ramp saying 60-80% invested. When I learn more, I will update this post.
Some things that might bump us up soon: 21dma goes above 50dma. Naz starts closing above 50dma and then 21dma.
Update 8/19/24:
Risk Management In The Stock Market: How Much Money To Invest Now | Investor’s Business Daily (investors.com)
So what’s changing? Our Market Pulse had highlighted a three-tiered current outlook: confirmed uptrend, uptrend under pressure, and market in correction. We often referred to these as our traffic signals for the market, with the tiers representing green, yellow and red lights.
But risk management in the stock market requires a little more granularity. When stocks are in a correction, we look for a follow-through day when a major index closes significantly higher in heavier volume. But some follow-through days are stronger than others. While some deliver many stocks to buy, others offer no emerging leaders. And not every emerging uptrend means you should invest heavily.
So to give more guidance and insight, our three-tiered system is expanding to five different levels centered on market exposure that equate to the percentage of your investing portfolio that’s invested in stocks:
- 0%-20%: The most cautious level. Put very little, if any, of your investing capital at risk.
- 20%-40%: Remain cautious, with your portfolio tilted toward cash. But you might try out some of your stock ideas when the market starts to improve. If the market is pulling back from higher levels, this might suggest a correction is near and more defense is necessary.
- 40%-60%: The stock market is showing more signs of improvement, so you might put more of your portfolio to work in stocks. In a weakening market, a drop in exposure to this level means you should be raising cash and avoiding new stock buys.
- 60%-80%: The market shows more signs that an uptrend is gaining steam. In a weakening market, a drop in exposure to this level means you cut back on stock buys and take profits on at least some winners.
- 80%-100%: An uptrend is well in place. (But always remain on the lookout for signs of a change in direction.)
More detail in the web link, so check it out.