I often advise you to have sell-stop orders in place in order to ensure you lock in profits on positions that have gone up. I want to make sure you protect your gains in case the market declines sharply. This is always a part of my strategy, but it’s even more important now. I urge you to place sell-stops on your holdings now if you haven’t already done so.
Why?
Because my research and experience suggest that stocks and equity ETFs are in danger of falling substantially over the next few months. I’ll tell you why in a moment, but first, let’s review how sell-stop orders work.
A sell-stop is an order you can place with your broker to automatically sell a holding if it falls to a price you specify.
For example, let’s assume you bought the Vanguard Small-Cap Growth ETF (VBK) at $164.65 and you placed a sell-stop order on this ETF at $255 as I recommended. VBK is above $255 now, but if it were to fall to $255, your sell-stop order would trigger your broker to automatically sell it. You’d get a 55.4% profit (sales price of $255 + $0.93 dividend divided by your $164.65 purchase price). So you’re locking in a nice gain and protecting yourself against future losses.
While I usually recommend using sell-stops on positions that have appreciated considerably so you can lock in gains, you can also use them to limit losses. For example, we have a sell stop of $11.75 on the Nuveen S&P 500 Buy-Write Income Fund (BXMX). We bought BXMX at $13.51, and if the stop order gets executed, we will lose money. But our losses would be minimal. In this case, we’re using a sell-stop to protect us from a sharp decline.
Why Using Sell-Stop Orders Is Important Now
Stocks have rallied sharply, with the S&P 500 gaining 68.5% from March 23, 2020, to January 25 of this year. Those big gains are no surprise to me, as I told you in April of last year that I expected the world’s major economies to recover in the second half of 2020.
However, now my research suggests that investors have become way too ebullient about the market, putting stocks in danger of pulling back sharply in the months ahead.
In addition, some key economic indicators are now suggesting that the U.S. economy will continue to expand over the next few months, but at a slower pace, and it may even contract modestly.
For example, personal spending declined for the second consecutive month in December, falling by 3.3%, as compared to the same month a year ago. And I expect that trend to continue, since many businesses are slashing their workforces. Remember, personal spending accounts for approximately 70% of U.S. GDP, and stock prices tend to move in the same direction as GDP.
There is also the likelihood that long-term interest rates will continue to trend higher. That’s a negative for stocks, because stocks generally fall when mid- and long-term interest rates trend considerably higher. So, if you own our recommended stocks and ETFs, please be sure to place sell-stop orders on the holdings I list in the portfolio if you haven’t already done so.
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