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How To Sell At The Top (And Buy At The Bottom)

|Includes: SPDR S&P 500 Trust ETF (SPY)

I'm being facetious: everybody knows that buying low and selling high is easy in theory, but hard in practice. But there is one method or procedure that will get you pointed in the right direction.

Pick a day, any day, and make sure you are holding an adequate amount of cash. What's adequate is a matter of debate: however, I like 30%.

From there, if the market goes up 1%, sell something. Then every time it goes up another 1%, sell something more. If it goes down 1%, buy something; and, if it goes down another notch, buy something more. The incremental buys and sells can be small, 1% or 2% of portfolio.

That way, when the market finally tops out, you will be selling at the top. And when it finally bottoms, you will be buying at the bottom. If the market has been trending up for a while, you might want to wait until it goes down 5% to start buying again, and vice versa.

If at some point on the upward journey it becomes too difficult to part with any of your various treasures that are still massively undervalued, start selling short.

A lot of my investments are in the form of vertical or diagonal call spreads, where selling the spread may mean buying back a call that is at the money and has a lot of time premium compared to what it had when it was sold. To get around that, it's possible to sell the underlying short. That way, you can wait until the time value on the covered call wears off before finally closing out the position.

Or, if you can stand doing naked calls, the long side of the call spread can be sold off, or portions of it sold off.

I prefer to do the above maneuvers on a conservative basis, selling short enough to make the position delta neutral.

There are numerous articles that make the bearish case for individual stocks. For example, Dunkin Brands (NASDAQ:DNKN) is getting a lot of attention that way, due to the shares having run up since the IPO, and the debt load being heavy. I sold a small amount short, just to lean against the wind of the market rally. Urban Outfitters (NASDAQ:URBN) has had recent changes of CEO and CFO, there could be stress and dissension in the executive suite. I sold a small amount short.

The way I work it, I set an alert on SPY, I'm using 1 point to keep the math simple. If it goes to 142, I will sell something, and reset the alert 1 point higher. If it goes down to 135, I will buy something, and set the alert 1 point lower.

I will be selling at the top.