Using the NYSI to buy and hold a high dividend stock risk free — $PSEC— 5/15/2024, updated 5/23/2024
THE NYMO/NYSI SWING TRADING STRATEGY
Kennedy Gammage, the late great market timer, used to say “Buy when the market tells you, sell when the stock tells you.”
With a wink of his eye what he didn’t say was most often the stocks tell you at the same time as the market, and except for rare exceptions, one might as well buy or sell at the same time.
Mr. Gammage’s market tools were the McClellan Oscillator ($NYMO) and the McClellan Sumation Index ($NYSI).
The NYMO is a short term market-breadth indicator based on the New York Stock Exchange Advance/Decline line, and the NYSI is its longer-term brother.
TAKEN TOGETHER
The two breadth indicators are the clearest indication of mass market psychology which is to say: market direction, up or down.
When the NYMO and NYSI rise, it is time to buy stocks, ETFs, calls, futures, whatever money-maker one likes best.
In investing the longer-term NYSI is the more important indicator.
It is the market timing signal that starts a trade and can put in place a relatively less risky investment for the long term.
UPDATED 5/23/2024-CLOSE OF NYSI UPSWING…
See below for the original post to lock in profits and hold for dividends.
Today, the profit lock, dictated by market timing, triggered on today’s open for half the position in PSEC at 6.7% for each $10K traded.
The second half of the position is now on a hold for the dividend, 24 cents estimated today at 12.65% annually. It is payable to owners of record on 5/29 with the pay out on 6/18.
The breakeven on the second half of the trade is at 5.23.
And as long as the breakeven stop is not hit the trade goes on…
5/15/2024 — DURING THE DAY…
Let’s just talk the NYSI and dividends here since the NYSI has been on a buy signal since the open of 5/3/24, ten trading days ago, and there are dividend stocks all over the place.
If you are an investor, you want yield and you want safety.
You can buy some big blue chip and grab three percent, maybe even five percent here and there. History says you will be safe even if the market sells off and rips your stock down more than the dividend. Sell offs happen all the time but the thinking goes the dividend will cushion the fall and long term the market’s bullish bias will take care of everything.
However, the same thinking, the same buy and hold, can apply to stocks with big “scary” yields, double digit yields which on their face would indicate there is a lot of risk in the stock price.
That brings us to PSEC (Prospect Capital) with its 13% annual yield (paid out monthly no less).
According to the company this is what it does:
Okay, fine. But how to buy and hold that stock, virtually risk free, and collect its 13% dividend virtually forever.
Here is the scenario currently in play:
On the NYSI buy signal May 3rd, take a position in the stock — let’s say $10,000 for the small investor, $100,000 for the bigger investor — at the opening price of $5.23 a share.
On the chart below the NYSI buy signal is color-coded (appropriately) in green and the current gain for each $10K invested is shown in the white flag on the chart’s right axis.
With the NYSI in play (“buy when the market tells you”) PSEC has been in profits every day since since the buy signal.
Now today, PSEC it up 7% with no sell signal is sight.
What to do? What to do? One could hold until the end of the NYSI signal or one could set a trailing stop to sell the stock but trailing stops turn investors into traders.
For investors here in what I suggest since I’m the one bringing this up.
Sell half and take the profit. It’s already more half the annual yield (in ten days thanks to the NYSI push to the upside).
Put in a breakeven stop at the entry price of 5.23 so it’s a free trade on the second half and let any further NYSI profits run while collecting the company’s 13% dividend for as long as the breakeven stop does not sell the stock.
Collect the yield…maybe forever.
That scenario is in progress so there is no buy right now. To buy now, after the train has left the station is too risky but it is a strategy to do again and again with any dividend stock going forward whenever the NYSI turns up out of each inevitable market sell off.