Ulli...The Wall Street Bully — insights into no load mutual fund/etf investing

I Have Moved

2011-03-16T08:49:00.000-07:00

I have redesigned our blog and taken on a new name, The ETF Bully, to better reflect the main topics of my weekly newsletter.

More exciting changes lie ahead, but for right now, please follow me at:

http://www.TheETFBully.com

See you over there.

Nikkei Loses 16% in 2 Days—Domestic Losses More Modest

2011-03-16T04:08:00.000-07:00

Uncertainty surrounding the Japan natural disasters, and unknown consequences from the affected nuclear facilities, pushed the Japanese Nikkei down by over 1,000 points in early trading yesterday.

The domestic indexes followed the path down but to a lesser degree and staged a nice recovery as the chart above shows. The market reaction was based on only scant news reports but lots of rumors and assumptions. Hard facts were hard to come by, or to verify, so reaction was bound to be negative.

The enormity of the problem is truly mind boggling as the world tries to get a better handle on the nuclear crisis and its potential impact. There does not appear to be a fast solution, which means we will continue to have to live with the developments as they unfold.

Natural disasters are on things, but this triple punch consisting of a major earthquake, a deadly tsunami as well as unknown fallouts from the damaged reactors is unique. The markets will have to digest the news as it comes and all you can do as an investor is follow your strategy.

There is never a good reason to participate in panic selling, and this is no exception. If your trailing sell stops get triggered, then make your move and unwind your positions. If they don’t get triggered, stay with the major trend.

Almost lost in the news was the Fed’s announcement that the economy is on a “firmer footing.” They also said, I assume in reaction to the Japan crisis, that they will continue to buy Treasury securities to support the economy. That sounds like QE-3 is on its way; ahh, I am feeling much better.

Bouncing Off The Lows

2011-03-15T05:38:00.000-07:00

Yesterday started out to be a difficult day in all of the global markets as the Nikkei sank some 6% in the aftermath of Japan’s devastating earthquake and tsunami.

The domestic major indexes pulled back right after the opening as well, but the drop was contained in terms of magnitude. Mid-day buying kept the damage limited with the S&P 500 losing only 0.61%.

It could have been a lot worse, but a recovery in oil stocks seemed to have provided a lift. Nevertheless, the Nikkei’s 6.2% loss was its worst since December 2008.

Gold inched up and interest rates moved lower, while the dollar rallied against the yen but closed lower against the euro.

The U.S. markets will certainly be impacted by Japan’s problems today, as the struggle in attempting to gain some control over the nuclear reactors will be front page news.

Sharing the spot on the front page will be reports from Fed’s FOMC meeting, where it is widely expected that interest rates will remain unchanged. The main focus, however, will be on the QE-2 campaign and if these efforts really will come to an end by June 2011.

Will there be more fallout on stocks globally or will the main effect be limited to the Japanese market? For some thoughts on that please refer to the WSJ article: “What the Japanese Quake Means for Stocks.”

Gimmick of the Week: A Smartphone ETF

2011-03-14T05:48:00.000-07:00

With smartphones being all the rage, an ETF consisting of the major players in this business was recently brought to the market. FONE started trading some 3 weeks ago as MarketWatch reports:

“The index includes companies primarily involved in the building, design and distribution of the handsets, hardware, software and mobile networks associated with the development, sale and usage of smartphones,” said First Trust Portfolios L.P. in a fact sheet on the fund.
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First Trust ETF strategist Ryan Issakainen said that before launching any new fund, the firm establishes that investor appetite exists and that the product has investment merit in a long-term strategy.

“We’re in the early stages of a secular trend that is transforming how people access the Internet,” Issakainen said. “This ETF allows investors to participate in the growth of the smartphone industry without taking on stock-specific risk. This a very transparent, low-cost and tax-efficient way to do so.”

The new fund will have an expense ratio of 0.7% of assets. The average expense ratio for equity ETFs in the U.S. is 0.34%, according to BlackRock Inc.

The tracking index classifies a smartphone as a “wireless mobile-communication device offering advanced capabilities and functionalities, including Web access, through the use of an identifiable operating system,” according to the fact sheet.
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Although the ETF business has been growing rapidly in recent years, not every fund is a success, and many ETFs have been shut down after failing to gather assets. In 2010, 173 new ETFs were launched, while 49 funds were delisted. In 2009, 46 were delisted, according to research from BlackRock.

There are hundreds of exchange-traded products with less than $100 million in assets, and the industry has faced criticism for introducing highly specialized funds and portfolios targeting trendy sectors.

The smartphone fund will be an “interesting test” for the progress of the ETF business, said Michael Johnston, senior analyst at ETF Database.

While I like my smartphone as much as anybody else, I am not sure if an ETF in this very narrow area can actually survive.

Volume is simply not there yet to even give this ETF any consideration, and the expense ratio of 0.7% is way out of line. As with all ETF newcomers, I will want to see price data for at least 9 months in order to evaluate trends and momentum figures.

On the other hand, this could be one of those niche products that actually have a chance of prospering, but at this time there is no hurry to jump in. Over the next year, we should be able to tell if this is a worthy addition to the ever growing ETF menu.

Disclosure: No holdings

Sunday Musings: Who Will Buy Treasuries When The Fed Doesn’t?

2011-03-13T06:10:00.000-07:00

Bill Gross wrote and interesting piece in InvestmentNews titled “Who will buy Treasuries when the Fed doesn’t?” Let’s look at some highlights:

Speaking of investment tips, no clue or outright signal could have been any clearer than the one given in December 2008, labeled “Quantitative Easing.” While the term was new, the intent was obvious: (1) pump public money into the financial system to replace private credit that was being destroyed in the process of deleveraging; (2) lower interest rates on intermediate and long-term mortgages/Treasury bonds and in the process flush money into risk assets – most visibly the stock market; and (3) forecast publically then hope that higher stock prices would lead to a wealth effect, and in turn generate new private sector lending, job creation and a virtuous circle of economic expansion that would heal the near-fatal wounds of Lehman and its aftermath. If that was the game plan, then so far, so good, I'd say. Interest rates are artificially low, stocks have nearly doubled since QE I's first announcement in December of 2008, and the U.S. economy will likely expand by 4% this year, although a $1.5 trillion budget deficit must share QE's Oscar for most stimulative government policy of 2009/2010.

Many critics, though, including yours truly, would wonder whether Quantitative Easing policies actually heal, as opposed to cover up, symptoms of an unhealthy economy. They might at the same time ask simplistically whether it is possible to cure a debt crisis with more debt. As I have discussed in numerous Investment Outlooks, the odds of an ultimate QE success seem critically dependent on several criteria: (1) initial sovereign debt levels that are relatively low. Reinhart and Rogoff in their book “This Time Is Different” have suggested an 80–90% of GDP limit to sovereign debt levels before they become counterproductive; (2) the ability of a country to print globally acceptable scrip – especially enhanced if that nation has the reserve currency status now ascribed to the U.S.; and (3) the willingness of creditors to believe in future real growth as a rebalancing solution to current excessive deficits and debt levels.

Most observers would agree with us at PIMCO that QE I and II programs were initiated and employed under the favorable conditions of (1) and (2). The third criterion (3), however, is more problematic. A successful handoff from public to private credit creation has yet to be accomplished, and it is that handoff that ultimately will determine the outlook for real growth and the potential reversal in our astronomical deficits and escalating debt levels. If on June 30, 2011 (the assumed termination date of QE II), the private sector cannot stand on its own two legs – issuing debt at low yields and narrow credit spreads, creating the jobs necessary to reduce unemployment and instilling global confidence in the sanctity and stability of the U.S. dollar – then the QEs will have been a colossal flop. If so, there will be no 15%+ tip for the American economy and its citizen waiters. An inflation-adjusted “negative buck” might be more likely.

Washington, Main Street – and importantly from an investment perspective – Wall Street await the outcome. Because QE has affected not only interest rates but stock prices and all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences in the reverse direction. To visualize the gaping hole that the Fed's void might have, PIMCO has produced a set of three pie charts (see above) that attempt to point out (1) who owns what percentage of the existing stock of Treasuries, (2) who has been buying the annual supply (which closely parallels the Federal deficit) and (3) who might step up to the plate if and when the Fed and its QE bat are retired. The sequential charts 1, 2 and 3 are illuminating, but not necessarily comforting.

What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes' “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who's to worry? This Sammy Scheme as I've described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn't. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn't?
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Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day – a day of reconciliation and healing) but more like June 6th, 1944 (D-Day – a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets.

[Emphasis added]

Will the real economy, or the real stock market for that matter, please stand up? We have not seen anything in terms of real growth or demand in a couple of years since stimulus became not only the buzzword but also the savior of the day.

While Bill Gross describes the past and current circumstances far better than I ever could, I am just as curious as to what will happen once QE-2 expires. No one has the answer, so we’ll have to wait until June 30, 2011 to find out.

Let’s hope that the Fed in its infinite wisdom does not decide to kick the can the road again via introduction of QE-3. It’s time to face reality no matter what the consequences might be.

What Do You Do When An ETF Folds?

2011-03-12T06:17:00.000-08:00

Out of the 1,000 or so ETFs that are currently available, I feature about half of them in my weekly StatSheet via the Master ETF list. The other half is too new and not yet worthy of tracking, since I like to see about 9 months of price data in order to be able to evaluate their trends.

Out of the 500 that I monitor, there are many tiny ETFs as far as net assets are concerned. Some will not survive, which brings up the question “What happens when an ETF folds?” Should you be worried?

I recently received an e-mail from a reader who was mulling an exchange-traded fund (ETF) investment. This reader had been told that ETF investors stand to lose their entire investment should an ETF fold. While this isn’t impossible, the odds of this outcome are astronomically small.

Why would an ETF close its doors?

Often an ETF will fold if it fails to pull in enough assets to make running the fund profitable for the issuer. Competition in the ETF market is fierce and many outfits have launched funds that compete head to head with existing products on the market. It’s difficult to overcome that first-mover advantage.

Issuers also launch esoteric offerings that fail to garner much attention from investors. However, for many issuers, these exotic funds may still be worth the risk. Given the relatively low expenses of launching a new ETF, particularly for large firms that enjoy economies of scale, issuers can afford to take the chance.

A good rule of thumb to picking ETFs with staying power is to stick with those offerings that have at least $25 million in assets. That’s typically the breakeven point for ETF issuers.

Nevertheless, there will be occasions where you might hold shares of an ETF that is preparing to shut down. What should investors do in this scenario?

More often than not, it pays to sit tight.

When an ETF folds, the fund’s underlying holdings are sold and the cash is distributed to investors. Although there are costs associated with liquidating an ETF, the issuer generally covers those costs. Investors should receive the net asset value of their shares based upon their value the day the liquidation is executed. In reality, investors don’t lose money. Liquidation is generally handled in such a way that the value of the fund’s underlying securities will not be affected by the selling activity. Additionally, if the fund is focused on liquid securities, it probably didn’t hold enough of these securities to affect their value.

The worst consequences when an ETF shuts down are usually an unanticipated tax bill and an extra commission fee. When you receive the cash distribution from the liquidation, Uncle Sam takes his cut of any gains. And you’ll have to redeploy those assets, resulting in another fee from your broker.

But aside from that small haircut, there’s no reason to panic when an ETF folds.

Of course, one way to avoid getting stuck in a folding ETF, no matter how little the financial consequences might be, is not to get involved in the first place.

While the author above recommends that ETFs have at least $25 million in assets, that’s a good start. In my advisor practice, I have added a couple more conditions.

1. I like to see a price history of at least 9 months.

2. I look for ETFs with an average daily trading volume of over $10 million. That by itself will guarantee a high level of assets, along with low bid/ask spreads, providing liquidity and fast execution to accommodate larger transactions.

Currently, out of the 500 ETFs in my data base, there are 87 that meet these criteria. I am working on making these available to you as well in the near future. Stay tuned.

No Load Fund/ETF Tracker updated through 3/10/2011

2011-03-11T16:43:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A roller coaster ride took the starch out of the current uptrend, and the major indexes lost for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.16% (last week +5.58%) and remains in bullish mode.

The international index has broken above its long-term trend line by +4.91% (last week +7.86%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Still Struggling For Direction

2011-03-10T05:51:00.000-08:00

The roller coaster ride continued after the major indexes were not able to build on Tuesday’s rally. Yesterday, it was nothing but treading water as the markets essentially went nowhere.

Fluctuating oil prices and the Libyan turmoil combined to keep short term market direction neutral. On the other hand, the bull looks to be getting a little old and lacking upward momentum as Mark Hulbert observed in “A bull on steroids:”

Even if this bull market were to come to an end today, its second birthday, it would still go down in history as one of the most powerful in U.S. history.

And that’s worth noting, because it means that — to the extent this bull market continues into its third year of life — it will be venturing even further than it already has beyond what many of the historical norms would suggest we can rightfully expect.
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So as my contribution to the birthday celebrations, I will compare the current bull market to its predecessors over the past century.

That requires coming up with a list of past bull markets, of course. And that‘s easier said than done, since there is no agreed-upon definition of a bull market. I chose to follow the precise definition employed by Ned Davis Research, the institutional research firm.

For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow Jones Industrial Average in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric index. Since the beginning of the last century, using this definition, there have been 33 bull markets prior to the current one.

It turns out that only 14 of those 33 bull markets even lived to their second birthday. So we can see right off the bat that the current bull market, by continuing to exist through today, is already in the minority.
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In other words, the current bull market in its first two years gained more than all but two of the past 33 bull markets. From this perspective, the current bull market would have to be considered as getting somewhat long in the tooth.

To be sure, there are other ways of slicing and dicing the data that paint less of a sobering picture. One comes by focusing on the life spans of the 14 prior bull markets that did make it to their second birthdays. On average, those 14 bull markets lived to be over three years old.

We can only hope that this is the particular historical precedent that the current bull market chooses to live up to.

And that is the big unknown. I have no doubt that without outside influences this bull might have a ways to go but, globally speaking, we are all connected at the hip.

That means events on different continents, as we are seeing right now, have the power and influence to derail any bull market anywhere. This does not mean that a derailment is always the consequence, but the possibility exists and it pays to be prepared in the event of a return to bearish territory.

Backpedaling

2011-03-08T05:43:00.000-08:00

Oil continued to be in charge of market direction yesterday, as its intraday price rose to nearly $107 before falling back and closing at $105.44/barrel.

Driving prices higher was continued fighting in Libya, as insurgents squared up against Gaddafi’s forces in fierce battles with civilians now becoming casualties as well.

Since there seems to be no end in sight, fears of a stalling recovery as a result of rosining oil prices are certainly justified. Other hot spots in Saudi Arabia are not helping to ease any of these fears.

It appears that the current weakness in the markets is a result of those concerns with bearish forces slowly but surely getting the upper hand. Bill Fleckenstein had some thoughts in “Is the market rally breaking down?”

If you have been reading this column regularly so far this year, it should be clear that I expect 2011 to be dicey for stocks, as our money-printing, inflation and worthless-currency woes come home to roost.

My strategies to protect myself relate to what I think will benefit in such an environment -- namely gold and related investments, such as mining and mining services. (Eventually, short selling will be required as well.) However, a friend recently pointed out that the macro environment also provides some additional reasons why investors might want to own gold. He summed the situation up as follows:

1.The planet is engaged in a war, religiously inspired
2.Pirates are on the high seas, mostly unimpeded
3.Communist dictators are engineering a rapidly growing capitalist economy
4.The Fed is printing $600 billion to buy $600 billion of our own debt and
5.All of the Arab world is in play.

He closed with the statement: "I see the wisdom of the old economic platitude, 'If you forecast, forecast often.'" To which I would add, given the above, anyone who has a strong opinion of precisely how geopolitical events will play out does not really understand the situation.

There is a lot of truth in that last sentence. You can’t simply be convinced that, by analyzing a bunch of facts, you can arrive at an accurate conclusion as to how domestic and global events will eventually play out. That to me is the fallacy in using fundamental analysis.

Follow the signs the trends give you and act on their signals. While I have an opinion on the market, I never let that opinion interfere with the reality of market trends. I suggest you do the same and prepare yourself for the possibility that you may have to exit your positions and move to the sidelines.

As an aside, I will be travelling today and spending my fair share of time in airports and on planes, so I won’t have a chance to write Wednesday’s commentary. However, regular posting will resume on Thursday.

Investor Comfort Levels

2011-03-07T06:00:00.000-08:00

The markets have been on a slippery slope in part thanks to the price of oil catapulting above its $100/barrel threshold.

This is likely to continue throughout next week and beyond as unrest in the Middle East and N. Africa is sure to draw attention. The effect will likely be that the major indexes will again be torn by bullish and bearish sentiment as fears of a consumer slowdown and a subsequent derailing of the recovery will remain a major concern.

That’s the negative. The positive is that the domestic labor markets, at least in the latest report, have given encouragement that we finally may have turned the corner.

So what’s an investor to do? Here is reader Bill’s response:

During the last drop I lost about 30%. Recently I have recovered that plus some and just don't see the funds I have going much higher. The replacement broker I have (for one who retired) is leery about making recommendations. So I went to cash with about $300k and am comfortable. I am looking for a time to get back in.

Bill brings up a topic I have touched on every so often but it bears repeating and that is the comfort level of the investor. While most readers prefer staying in the market until there is a reason to get out, such as a trailing sell stop being hit or a trend line crossing to the downside, there is nothing wrong with Bill’s decision.

After all, if you are not comfortable with current market conditions and don’t want any exposure at all, then that’s what you should go with. While you may miss out on some opportunities, it does not really matter.

What matters is what lets you sleep at night—and you’ll be the only one that can judge that. Don’t let anybody tell you different.

Sunday Musings: The Last Down Leg

2011-03-06T06:07:00.000-08:00

Last Sunday, I talked about “Looking Ahead To The Next Crash.” Today, let’s look at some highlights from “The Last Down Leg:”

My market outlook hasn’t changed much since 2000: we’re in a secular bear market.

I know, the market made a new high in 2007. It made a new high in 1973 as well, then fell off a cliff until it reached bottom at the end of 1974.

If you look at all the secular bear markets on a chart, they all look pretty much the same; three down legs interspersed by two profitable counter-trend rallies. October 2002 to November 2007 was a very profitable counter-trend rally; the rally off the March 2009 lows has been pretty spectacular as well.

The thing is, you have to have that last down leg to finish out the cycle. We were probably on our way last summer until Federal Reserve chief “Big Ben” Bernanke pulled the QE2 rabbit out of his hat. The elections added some fuel to the fire, as did the extension of current tax policy and the haircut in FICA withholdings. Rising oil prices will negate any potential stimulus from the extension of tax rates, and the reduction in FICA will come to a halt at the end of the year.

QE2 will come to an end in June and the bond market will go nuts if there is any talk about a QE3. State and local governments will be submitting budgets in June and July and those aren’t looking real good right now. So between the end of qualitative easing, rising oil prices, and the drag from state and local governments, those are pretty strong headwinds for a fragile recovery to survive without further stimulus.

I have been talking about a correction since early January, and then I think we’ll have one more rally before it’s all said and done. This time when they roll out the fat lady, I think she will sing until we find out if the March 2009 lows were the lows of this bear market.

With the above as a backdrop, I am pretty defensive. I own a lot of oil, which I bought in October 2008. Even back then I thought we would make a run at the old highs of $150 per barrel. Today that pretty much looks like a layup. If you aren’t long energy I think you’ll get another chance to buy, however. I have a suspicion we’ll see a technical rally in the dollar that will knock oil prices down a tad.
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However it plays out, the bear will breathe its last at the end of 2012. This will be the greatest buying opportunity for a long time. Most folks will miss it though. Bob Farrell had a list of rules and I think No. 9 was “the public buys too little at the bottom and too much at the top.” The public wouldn’t touch the market in March 2009; now they can’t get enough of it. Check out the outflows from bond funds and emerging markets into U.S. equities the last two months and you’ll see what I mean.

So play defense and stick to high-quality blue chips with long dividend histories and records of consistently increasing dividends. They may go down as well but they’ll recover first and the dividends will provide income; something tells me that’s something we’re all going to need.

If the author thinks that we might be revisiting the March 2009 lows, why on earth would you want to have any exposure to equities, even blue chips with dividends?

If there was anything to be learned from the past two bear markets, it’s the fact that no prisoners were taken. The better choice in my view is to step aside when the trend change to the downside occurs and reload your portfolio gun once upward momentum has been restored.

I agree with most observations above, especially that Bernanke interfered with market direction via QE2 in September 2010, which affected a deteriorating trend that reversed during the last quarter and pushed the major indexes into positive territory YTD.

It makes me wonder what the markets would be like had there not been any interference from various stimulus attempts. Maybe we will find out later this year once QE2 expires.

Two areas that I like in this environment from a fundamental and technical point of view are Energy and Commodities. Both are in strong up trends and, given the current political unrest in the Middle East/North Africa, along with continued population growth, their future prospects look bright at this point.

Check the current StatSheet for more details regarding no load funds/ETFs that cover those sectors.

Reader Q+A: Investment Management

2011-03-05T06:19:00.000-08:00

Reader Jason is looking to have his portfolio managed and emailed me as follows:

I am looking for someone to help manage my qualified, non-qualified and 401K accounts. I have spoken with a financial planner who wants 1.15% of account value annually for assets under management. I am concerned about how much we will be paying long term for this.

I don't have any experience and am looking for someone to help manage these accounts. Is this the right direction to go in or do you have any other recommendations?

I sure do have some thoughts and comments.

These days, I believe most investors considering such a move know that it is important to separate two important entities. That is the person managing your money should never be the same as the one holding your assets in trust and issuing your statements. The reason is clear; it is to avoid fraud a la “Bernie Madoff.”

That’s why all reputable advisors are affiliated with well known custodians, who handle the appropriate duties such as issuing trade confirmations and monthly and yearly statements. In such a set up, the advisor has merely a Limited Power of Attorney, but never access to your monies; just the way it should be.

Jason, you are asking the wrong questions. You need to familiarize yourself first with the planner’s investment approach and make sure that you are comfortable with it.

Of course, from my vantage point, the most important question you need to ask is “what is your exit strategy?” That is if you do not wish to see your portfolio fall off the cliff during bear markets.

Of course, if you do not mind that, and you think that markets always will come back, then that is your prerogative and you should go with it. However, I believe that as long as we are living in a Fed sponsored boom and bust economy, stepping aside with your portfolio every so often is not only smart but emotionally easier to handle.

What it comes down to in the end is a decision on which investment approach suits your risk profile best. Will it be following trends, such as I advocate, or will it be buy-and-hold, which is promoted by over 95% of those offering investment advice?

While my position on the topic is clear, it does not really matter in this case. What matters is how you feel about it; engage in some soul searching, talk to your better half or some friends who have gone this route, do some interviews and comparisons, and I am sure you will be able to align yourself with someone best suited for your needs.

No Load Fund/ETF Tracker updated through 3/3/2011

2011-03-04T16:37:00.003-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

It was a roller coaster ride in the markets, but in the end, the SP 500 added only 0.10%.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.35% (last week +5.58%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.95% (last week +7.86%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Crude Awakening

2011-03-03T05:46:00.000-08:00

Crude Oil was the major influence on market direction yesterday as it powered through the $102/barrel barrier and closed above it.

Crude’s move was the result of reports that unrest continued in Libya and the Middle East in general. Supporting upward momentum were news that almost all of Libya’s daily oil production was halted and that Gaddafi continued his assault on rebels in a major oil center.

Gold followed the path higher as uncertainty about the various hotspots (Libya, Tunisia, Yemen and Iran) took center stage. The dollar fell while interest rates rose.

With that backdrop, it’s no surprise that stocks struggled all day, but they managed to eke out a meager gain. The Fed’s beige report supported the domestic markets by suggesting that the economy was getting “modestly stronger” and employment was showing improvement.

While the ADP report indeed showed gains, it has not been in sync with the Labor Department’s jobs report due out this Friday. We’ll have to wait if those numbers will show an actual improvement, or if we’re still treading water.

Until that report is released, it looks like the markets will have to live with whatever the global hotspots will dish out in terms of news reports.

Continued uncertainty will not be helpful to the bullish cause in the long run. Solid economic news, not only domestically but also on a global scale, are needed to provide a springboard from which higher market levels can be reached.

A Shade Of Red

2011-03-02T06:01:00.000-08:00

While the month of February ended on an up note, the month March started on a downer, as various events combined to knock the major indexes off their lofty levels with almost non-existent rally attempts.

Red was the dominant color on most computer screens. Bucking the trend were precious metals, commodities and oil, which topped the $100/barrel mark causing fears that the economic recovery might enter stall mode.

Global tensions pushed oil and commodities higher as the fighting in Libya continued and Saudi Arabia attempted to deal with unrest in Bahrain. Not helping matters were reports that Iranian protesters had clashed with security forces.

Known and unknown uncertainties dominated the news menu today, despite manufacturing in the U.S. growing more than expected with factories adding workers and boosting production.

As I have said before, the undoing of the current market rally will very likely be caused by external events (based outside of the U.S.). While it is too early to tell if this is beginning of an extended trend reversal, or just a temporary blip, the bull has gotten pretty old and upward momentum has slowed.

The current social unrests in North Africa and the Middle East are likely to spread further, and the long term outcome is anyone’s guess. However, uncertainly is here to stay, which will bode well for precious metals.

While they had a slow start in 2011, their upward momentum has picked up, and their prospects look bright given the ever increasing number of global hotspots.

Chart courtesy of MarketWatch.com

Closing February On A Positive

2011-03-01T06:10:00.000-08:00

What a difference a week makes. Last Tuesday, the markets retreated sharply and now, 5 trading days later, decent economic news, sliding oil prices and hopes of a quick Libyan resolution pushed the major indexes higher.

Providing the necessary ammunition to reverse yesterday’s mid-day sell off were decent reports on consumer spending and manufacturing. Adding to the bullish mood were Warren Buffett’s comments that he’s on the prowl for some new acquisitions this year.

In a letter to shareholders he said that his war chest had grown to some $38 billion and “our elephant gun has been reloaded.”

Those notes must have evoked the warm fuzzies on Wall Street and helped the rebound during the latter part of trading. To be sure, it was not all bullishness; there was a lot of short covering going on as a result of open short positions left over from last week.

It was one of those days when most of the major asset classes ended up higher including bonds, emerging markets, precious metals, energy, commodities and domestic equities.

Let’s wait and see if this feel good attitude will carry into March as well.

Word Of The Day: Contango

2011-02-28T05:50:00.000-08:00

One of the terms you hear frequently when reading about commodity ETFs, is the word “contango.”

To enhance your understanding of what it means and how it affects ETFs, here are some highlights from “Contango and ETFs: What It Is, What You Can Do About It:”

Investors love commodity exchange traded funds (ETFs), and with good reason. Aside from the usual benefits that ETFs offer, commodity funds deliver the kind of exposure to commodities that would otherwise be very challenging, very expensive or both. But not all commodity funds are created equal, and one of the most important types to understand are those that hold futures contracts.

One of the most popular commodity ETF types are those that hold and trade futures contracts for the underlying commodity. Futures are a promise to buy or sell a commodity for a set price on a date that’s in the near future. None of the ETFs that hold futures contracts claim to track the spot price of their respective commodities.

The majority of these funds buy the near-month contract, selling it before expiration and buying the next month’s contract, and so on. If the price of the next month’s contract is higher than the current month’s, it’s a situation called contango, and it could cost you money when the contracts are rolled over. A negative roll yield (contango) could cause the net asset value (NAV) of a fund to deviate even further from the spot price of its underlying commodity. The opposite situation is backwardation.

One way to mitigate the effects of contango is to look for ETFs that hold contracts throughout the year. There are just two such funds now: United States 12-Month Oil (NYSEArca: USL) and United States 12-Month Natural Gas (NYSEArca: UNL).

The purpose of a 12-month strategy will help protect futures investors from the problem of contango. Two weeks before the expiration of the nearest-month contract, the fund will roll forward another month, picking up the then-12-months-out contract.

[Emphasis added]

While contango is not something you as an ETF investor will have to worry about, if you stick to non-commodity ETFs, it’s nevertheless a term that you need to be familiar with should you decide to venture into the commodity arena.

Sunday Musings: Looking Ahead To The Next Crash

2011-02-27T06:06:00.000-08:00

While I don’t agree very often with Paul Farrell, he did have some interesting thoughts in “Market Crash 2011: It will hit by Christmas.” Here are a few highlights:

Our brains never learned 2008’s lessons, will fail again in 2011

Remember, we can’t help it. Our brains are defective, biased, manipulated by unseen forces 93% of the time. So blame all the lies, lying and liars on our brain wiring. A perfect excuse. Sure, political dogma and insatiable greed factor into our bizarre mental equations. But your brain is as susceptible to the “great con” as Ben Bernanke, Henry Paulson, Bernie Madoff.

Go back a few years: The subprime credit meltdown was widely predicted years in advance. For example, back in 2007, the IMF’s Chief Economist, Raghuram Rajan, “delivered a stark warning to the world’s top bankers: Financial markets were headed for doom. They laughed it off,” said the Toronto Star. Both Alan Greenspan and Larry Summers were there.

In April 2007, Jeremy Grantham, whose firm manages $107 billion, also warned investors: “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … Everyone, everywhere is reinforcing one another. … Bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.”

We knew a crash was coming, Wall Street laughed.
...

Warning: Cyclical bull ends in 2011, new cyclical bear roars back

At the beginning of 2011 USA Today reported a contrarian forecast. Ned Davis Research says the S&P 500 will make a run at the 2007 high of 1,565, but hit a “midyear peak.” Then it will crash as interest rates rise. Davis concludes: “The midyear peak could mark the end of the cyclical bull market that began in March 2009 and the start of a new cyclical bear market.”

Warning, even though your brain doesn’t want to hear it, there is a high probability a new cyclical bear market will begin this summer … and overshadow the 2012 elections.

The Journal’s also warning: “Inflation jitters spread through emerging markets, prompting China’s central bank to raise interest rate for the third time in four months amid worries that a drought threatening the country’s wheat crop will put further pressure on global food prices.”

Wake up America: With commodity prices rising rapidly, all the bizarre rationalizations Wall Street uses to keep Bernanke’s interest rates low are rapidly vaporizing. Yes, Ned Davis’ prediction of a bear will soon be a painful reality.

S&P 500 inflated, worth just 910, get out before it tops 1,500

Grantham also sees inflation and rising interest rates killing the lies, popping the bubble and ending the rally: “As a simple rule, the market will tend to rise as long as short rates are kept low. This seems likely to be the case for eight more months and, therefore, we have to be prepared for the market to rise and to have a risky bias.”

With $107 billion at stake Grantham better be concerned. He predicted the 2008 meltdown, now sees a repeat dead ahead: “Be prepared for a strong market and continued outperformance of everything risky, but be aware that you are living on borrowed time as a bull.”

Yes, the bubble will pop this year says Grantham: “If the S&P rises to 1,500, it would officially be the latest in the series of true bubbles. All of the famous bubbles broke, but only after short rates had started to rise.”

So keep a close watch on those two tipping points in your planning, interest rates breaking to the upside and the S&P closing near 1,500. When inflation pushes interest rates up they’ll choke off this bull market. If you’re active, better stop chasing higher returns, especially emerging markets.

Bottom line: In what sounds like a direct shot at super-bull Jeremy Siegel, Grantham says that GMO’s research warns that “the market is worth about 910 on the S&P 500, substantially less than current levels” just above 1,300.

Then Grantham throws his fast ball right down the middle: “The speed with which you should pull back from the market as it advances into dangerously overpriced territory this year is more of an art than a science, but by October 1 you should probably be thinking much more conservatively.”

[Emphasis added]

Jeremy Grantham has been one of the few who predicted the 2008 market massacre, so you want to pay attention to what his view of the future is.

The critical point, as he mentioned, are short term interest rates. Once they start to rise, this trend may very well reverse and another bubble will burst. I would add that his time frame could change in a hurry in the case of a major financial disruption, such as a European debt default, causing rates to rise sooner than anticipated.

Again, markets generally don’t crash overnight. As we’ve seen in the past, sharp corrections are preceded by a slow deterioration in prices. If you follow the trends, and especially my Trend Tracking Indexes (TTIs), you should have ample warning that a directional change has occurred and that it’s time to stand aside.

Right now, market direction is clearly bullish and, who knows, we may very well get to the S&P’s 1,500 level, which Grantham refers to as bubble territory. Ride the bull for as long as it lasts, but remain aware that a directional turnaround is lurking on the horizon.

Make sure you have your exit strategy in place—just in case Jeremy Grantham is right again with his prognosis.

Reader Q+A: Bond Talk

2011-02-26T06:06:00.000-08:00

Several readers have emailed wanting me to talk about bond funds/ETFs in this current market environment. Here’s one request:

Would you please share your thoughts on investing in bond funds/ETFs? Several articles talk about the possibility of raising interest rates resulting in a drop in bond prices.

Would you recommend keeping the bond portion of the portfolio in money market or CDs?
I realize that you do not talk about bonds much. So, I will not be surprised if you do not want to respond to this.

The above 1-year chart shows the Total Bond Market Index (BND), which is best suited to look at the big picture in the bond market.

The current trend is clearly recognizable, as bond prices have declined, and interest rates have risen, as an unintended result of the Fed’s implementation of the Quantitative Easing program (QE-2) back in September 2010.

Most recently, however, prices have bounced off the bottom and headed back up, but it’s too early to tell if that is just a temporary blip in a declining market.

There are two main reasons why an investor would invest in bonds. One, to generate income, and two, to balance a growth portfolio. These are entirely different objectives and need to be treated as such.

If you are looking strictly for income, you are in a difficult situation as the slide in bond prices pretty much has eroded the annual dividend you were looking for. You might want to consider adding some utility ETFs, as I briefly discussed in Income Plays.

If you are holding a growth portfolio, even within the frame work of trend tracking, a bond portion is an important component to balance out temporary market pullbacks.

That point was just proven during this past week when the Libyan crisis pulled the rug out from under the equity market. As stocks retreated, bonds rallied, supporting the view that a portfolio with exposure to various asset classes is very necessary.

While the markets staged a recovery yesterday, it’s my belief that in this global environment, where unexpected uncertainties can pop up at anytime, a balanced portfolio, along with a clearly defined exit strategy, is an absolute must.

While that might curtail some of your upside potential, the downside risks given the current lofty levels of the market, along with a wide variety of ever increasing global hotspots, are far too great to be ignored.

Disclosure: Holdings in BND

No Load Fund/ETF Tracker updated through 2/24/2011

2011-02-25T17:34:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The unrest in Libya took a toll on the markets with major indexes declining 2% for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.58% (last week +6.01%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.86% (last week +10.25%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Extending The Slide

2011-02-24T06:06:00.000-08:00

As was to be expected, the markets continued to face some headwinds yesterday in the form of HP’s poor quarterly results and continuing civil unrest in Libya.

The day could have been a lot worse, but the S&P 500 found support mid-day at the psychologically important 1,300 level, rebounded and managed to cut into its losses.

Crude oil was the big story of the day as it touched $100/barrel before settling at $98.10. Gold headed higher as well joined by the energy complex and commodities.

The turmoil in Libya continued as the country’s oil production was shut down and exports were halted. Speculation grew that crude could hit $220/barrel, which would cause economic turmoil around the globe.

The fallout from Libya was great for the oil and energy sector, but there is certainly more to come that will affect global stock markets. Whether this will be the beginning of the end of the current bull cycle is anyone’s guess at this point.

So far, with the S&P 500 having lost 2.7% over the past 2 days, this correction can only be considered modest. Time will tell if this pullback will serve as a new springboard for higher prices, or if we’ve seen the highs for some time to come.

Tripoli Turmoil

2011-02-23T05:32:00.000-08:00

All weekend long, the Libyan uprising had been gaining steam and made front page news, especially after the turmoil turned bloody, which spread concerns of this becoming an all-out civil war.

The futures pointed to a lower opening Monday night, and the markets obliged by heading south during yesterday’s session with the S&P 500 losing over 2%.

The markets were ripe and overdue for some kind of correction so these events were just as good of a reason as any to push some sell buttons. The question remains if this will be an isolated event or the beginning of more downside action.

Chaos and concerns increased as dictator Gadhafi talked about “rivers of blood flowing” while deploying tanks, helicopters and jet fighters to combat protesters.

As is to be expected, oil rallied, as did gold and silver, while interest rates headed lower as investors were looking for safety.

On the earnings front, Wal-Mart and B&N disappointed, while HP offered lower than expected guidance after the close, which may affect the markets today.

Technically speaking, the S&P’s 1,316 level, its 20-day moving average, had been closely watched to see if it would hold. Any close below might invite more selling. At the end of trading yesterday, this index ended up at 1,315.

Until the situation in Libya calms down, or a peaceful resolution is found, you can expect more volatility in the world markets.

These events are some of the unknown uncertainties I have been talking about. There is nothing you can do; you need to let the markets dictate your next move. If the break is further to the downside, make sure you know where your sell stops should be and execute them as necessary.

Income Plays

2011-02-22T06:16:00.000-08:00

For income investors, the recent past has been anything but kind. Ever since the Fed’s Quantitative Easing program, which started in September 10, interest rates have headed higher and bond prices have turned south.

Munis have been on a downward swing as well and may face more fundamental problems as States and Counties are mired in budget woes.

Bucking the trend so far have been utilities. In the above 1-year chart, I compared the total bond market (BND) with a well diversified, insured muni ETF (PZA), and one of the utility ETFs (XLU).

While utilities took a dip down back in May/June 10 (see chart above), when the S&P 500 lost 16%, they currently seem to have regained upward momentum. Sporting a current dividend yield of 4.13%, XLU might be worthy of your consideration.

Here are a few other utility ETFs that I track in my data base: DBU, JXI, PUI, FXU, IDU and VPU. Check them out to see if they are a fit for your portfolio.

Disclosure: No holdings

Reader Q+A: 2008 Stop Loss Observations

2011-02-21T05:43:00.000-08:00

I have had some email exchanges with reader Ken, and he commented as follows:

Thanks for your response and your very valuable information.

I would just like to relay my experience with your approach to stop losses.

When the market takes a tumble as in 2008, you could experience a 30% or greater loss before being able to activate a stop loss. I should also mention I had difficulty performing transactions online as well as over the phone due to the high volume of orders being placed and this occurred with different mutual funds. I have stop losses on my stocks which usually work without a problem. It just seems to me there must be a better way.

What are your thoughts or concerns and have you experienced any of these delays when the market has a panic attack?

Ken did not say as to when he began using sell stops in 2008, but if he had followed my postings and recommendations, experiencing a 30% loss before activating a sell stop was simply impossible.

First, from my observations over the past 25 years, markets don’t just crumble overnight and 2008 was no exception.

Second, using trailing sell stops will get you out of the market way before a major directional turn can be identified such as via the use of my Trend Tracking Indexes (TTIs).

Let’s revisit early 2008. The markets continued to come off their highs, but managed to generate a domestic Buy on 5/15/08. That turned into a whipsaw as the domestic TTI reversed and crossed its long-term trend line to the downside on 6/22/08, which gave us the sell signal to retreat to the sidelines again.

By the time the sell signal was given, we no longer had any outright long positions, as we had gotten stopped out of all of them leading up to 6/22/08.

We now sat on the sidelines in cash waiting for further clues from the market. There was neither recognizable market stress nor a crumbling in prices. It was an orderly retreat; however, its magnitude was great enough to move the TTIs into bearish territory.

The actual crash did not occur until 2 months later when violent market swings made it impossible for investors to get orders placed or even verified.

In other words, by following the trends, and acting on directional changes as they occurred, you would not have experienced the difficulties that reader Ken has described.

Sunday Musings: Reader Feedback On Complacency

2011-02-20T05:40:00.000-08:00

As the markets have ratcheted higher over the past few months, I have repeatedly commented about investor complacency setting in.

Some of the feedback I received even had a touch of arrogance as some seem to have thrown caution to the wind by jumping aboard of only the fastest moving ETFs.

Reader Steve had his experiences and shared the following thoughts:

Thanks for encouraging us readers to stay sharp during this time of market peaks. I for one am not complacent at all. I took charge of my investing last Oct. (was going through a broker for 10 years before that) and am trying to catch up for some lost months last year.

I have invested in some of the more volatile ETF's in order to try to make a bigger return, and this keeps me paying close attention. I was invested in BRF and a couple other Emerg. Mkts., but got out a bit before you did as I hit my stops. I have been working at improving my fund selection by downloading Google finance data and calculating the MaxDD% you write about. It seems to be helping me choose ETFs that are in the upper echelon of your M-Index ratings, but with lesser volatility.

Too early to tell if my selections are getting better, but at least I am more informed about them. The present market conditions seem to make it a bit difficult to find performing ETF's that have less than a 7-10% MaxDD%. Though this is more of a job than I thought it would be, I am learning.

I have been reading Karl Denniger (Market-ticker.org), and I like the mathematical approach he takes to analyzing the current market and economy. He has me convinced that a big haircut is coming. I am hoping that the downswing is not so rapid that it wipes out my modest gains before I can act on my stops.

Ideally, I'd like to get to a 10% unrealized gain, and then drop into a more conservative profile. I hope I get the time to do so before the markets reflect the reality that the economy is not that great. In any event, my stops are set and current, and I'm ready to bail if need be.

Thanks for your words of wisdom.

I agree with Steve that a severe haircut is coming; the timing of it is the unknown. It therefore is wise to be invested in a mix of ETFs, including those that are not the highest ranked ones in the M-Index food chain. The higher the ranking, the greater the volatility when a pullback occurs.

Slower and consistent growth, with limited whipsaws signals and a bear market avoidance approach, will beat fast growth over a longer term, such as five years, anytime.

Steve is talking about my MaxDD% indicator (Maximum DrawDown), which is not featured in the weekly StatSheet. This indicator allows you to select and hone in at those ETFs that have displayed less volatility during a given period, usually the past year.

It is very cumbersome to calculate this by hand, and I am looking for ways to include this important tool at some time in future StatSheets.

The goal of MaxDD% is to find ETFs/funds that have shown resistance to sell offs in the recent past by not having triggered their trailing sell stops. Even during the sharp pullback during May/June 2010, during which the S&P 500 lost 16%, there were very few ETFs/Funds that bucked the trend.

One fund that stood out during that period, as it has many times before, was PRPFX, which we own. It came off its high by only -5.68%, for the period ranging from 12/31/09 to 2/18/11. Not only did it show above average resistance to sell offs, it also performed well when the market moved back into rally mode.

Out of the over 1,200 ETFs/No Load Funds I track, there was not one ETF that came close to this balance of upside potential with limited downside risk, while I found maybe 5 no load funds that were similar. Their MaxDD% was less than 7%; however, the upside potential was limited.

My point here is that at these lofty market levels, you need to have more balance in your portfolio to withstand some of the market’s hiccups. It pays to have exposure to ETFs/funds that have the potential to limit whipsaw signals during those market pullbacks that end up turning out to be temporary in nature.

Reader Question: Which High Point Is Right When It Comes To Sell Stops?

2011-02-19T05:52:00.000-08:00

Amazingly, there is always a question that has not been asked, although I thought I had heard them all. Here’s what reader Gary had to say:

In using a high, from which to calculate a 7% or 10% stop, it's pretty easy with a mutual fund, because there is only one price per day.

But for ETFs, there is an intraday high and a closing price. I know you said to consider the stop triggered when the ETF CLOSES below the stop. But do you set the stop using the ETF's highest high, or its highest close?

Which of these do you designate as the high from which you calculate the stop?

For the purpose of finding the high point, from which to calculate the trailing sell stops, I treat mutual funds and ETFs exactly alike.

To my way of thinking, there is only one price that matters and that is the closing price. What happens intraday is just market noise and of no consequence to me when it comes to sell stops.

Therefore, the high price, based on a closing basis only, is the one I am selecting. To clarify again, it is highest closing price of an ETF, since you bought it, which will be used as a basis for calculating your trailing sell stop.

No Load Fund/ETF Tracker updated through 2/17/2011

2011-02-18T16:36:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Slow and steady was the theme of the week as the S& 500 gained about 1%.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +6.01% (last week +5.47%) and remains in bullish mode.

The international index has broken above its long-term trend line by +10.25% (last week +9.08%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Cheering The Fed

2011-02-17T05:45:00.000-08:00

It was a bit of a roller coaster ride yesterday, as the chart above shows. Strong earnings from Dell and Deere got the rally going, which was derailed shortly thereafter based on news reports that two Iranian warships were passing through the Suez Canal on their way to Syria.

Gold and oil rallied while the markets sold off, but they later regained footing as fears of a provocation subsided. Stepping in to lend an assist to market direction was the Fed by boosting their 2011 economic forecast to the 3.4% to 3.9% range, which was up from November’s announcement of 3% to 3.6%. The unemployment rate was projected to drop into the 8% to 9% range by yearend and below 8% next year.

That was all Wall Street need to hear, the cheering started, and the major indexes pulled off their lows and closed solidly above the unchanged line. Even the recently beaten down emerging markets participated while energy recovered from Tuesday’s pullback.

Touch And Go

2011-02-16T05:54:00.000-08:00

Yesterday was a day of pondering in the markets, as concerns mounted about the possibility that the global recovery might be slowing down.

Inflation concerns in China and Great Britain occupied front page news followed by disappointing domestic retail sales in January.

Energy shares were a drag on the market, after Monday’s strong jump, following the theme that potentially slower sales growth will translate into less demand for energy products.

The beneficiary of the inflation fear story was gold, which headed higher for a second day in a row. Even though gold has been flat since the beginning of the year, it still should be an important component in an investor’s portfolio. Not only will inflation concerns in other parts of the world support its trend, so will sudden unexpected global uncertainties, which are sure to surface again.

While inflation is not a threat in the U.S. at this point, it sure is in other countries, such as China and Britain, among others. China reported a 4.9% inflation rate last month, which is about a 2-year high. Great Britain comes in at a close second with 4% followed by Spain with 3%.

Food prices have been rising around the world, which is represented by the fact that the commodity index (DBC) has risen sharply. While prices have not always been passed on to the end user yet, this development is worrisome in the sense that those with current high inflation rates will have to step on the economic brakes, so to speak.

Depending on the severity of the actions taken, that will not bode well for future global expansion and will eventually affect stock markets worldwide.

Disclosure: Holdings in DBC

Dip Buying Is Alive And Well

2011-02-14T05:52:00.000-08:00

Despite elevated market levels, and fears of a correction, the dip buying mentality is alive and well as Reuters reports in “Buy That Dip, Baby:”

The new national pastimes are calling the top of the stock market, commenting on Middle Eastern affairs and -- buying dips.

Stocks have shown remarkable resilience as investors snap up any drop in prices, even in the face of what seem like considerable risks -- an overbought market and a still potentially explosive situation in the Middle East.

Confidence in the economy, strong earnings, and inflows into equities from bond funds have been enough to push indexes to new highs on an almost daily basis even if light volume and slight gains show investors are not making aggressive moves.

Robert Auer, a fund manager at SBAuer Funds in Indianapolis said that after eight months of outflows his Auer Growth Fund had started to see inflows.

"I'm wondering if this is happening at American Funds and Fidelity and everyone else," he said. "I'm having to put it to work because we typically don't hold any cash, so it is causing me to do buying."

Bond funds have seen three months of outflows, the longest streak in more than 2 years.

Over that period $23 billion has moved out of bond funds while $16 billion has flowed into equity funds, according to data from the Investment Company Institute.
...

Rising yields have accompanied increasing optimism over the economy that will again be tested with retail sales and industrial output data during the week.

"Investors right now think the pullback is already here and they're not buying stocks - and not selling but not buying at a time of inflows is forcing the market to drift higher," said Thomas Lee, U.S. equity strategist at JPMorgan in New York.

Volume hit its lowest levels so far this year on Tuesday with just over 7 billion shares traded on the NYSE, Amex and Nasdaq compared to last year's average of around 8.5 billion.

Lee is expecting a pullback in the March and April time frame, with the S&P 500 rising to 1,333 before falling to around 1,250, taking the market back to where it was in late December.

"You really need to start buying at the 1,270 level," he said. "You need to be selective and getting ready to buy that dip."

The 1,333 level is the double-your-money mark from the bear market intraday low of 666.79 in March 2009 and is seen as a significant level by some investors.

[Emphasis added]

There you have it. 1,250 is the first number I have heard of where the eventual correction might end up, which is about a 6% pullback from current levels.

While buying dips in a bull market can have its obvious rewards, it only works….until it doesn’t. And that is the moment when a pullback turns into an actual trend reversal and market direction changes from bullish to bearish.

I for one will most certainly not rely on forecasts, like the above, by blindly using the 1,270 as a buy point. Make sure that the actual uptrend remains intact before deploying more monies in the market. That may cause you to enter at a slightly higher level, but you will have reduced downside risk considerably.

Sunday Musings: An All ETF 401k

2011-02-13T06:04:00.000-08:00

It had to happen eventually. A major player would offer an all ETF 401k plan. While only very few custodians have ventured into that arena, Charles Schwab & Co. has announced that they are up to the task as well, as ETF Trends recently reported:

This news should cheer investors who want to see a wider array of all-exchange traded fund (ETF) 401(k) plans on the market: discount brokerage and ETF provider Charles Schwab is getting in on the action.

Schwab President and CEO Walter W. Bettinger II told a group of advisors recently that the firm has been hard at work on the launch of an all-ETF 401(k) plan in early 2012, says Lisa Shidler at RIABiz.

In keeping with Schwab’s low-cost ethos, its plan would save participants between 35% and 85% off a mid-sized plan, Bettinger said.

Schwab isn’t the first-mover in this growing space, but when the plan launches, it will be the biggest player by a long shot.

The move is huge for the ETF industry, which has been trying (and slowly succeeding) in cracking this market. There’s an estimated $3 trillion in 401(k) assets, and naturally, the ETF industry would like a bigger chunk of that.

The fear among naysayers has been that some 401(k) investors would trade all day, every day, but some employers may opt to limit such active trading if they add the plan to their rosters.

Schwab’s 401(k) plan is timely, since Congress has been closely eying the fees and expenses that mutual fund-based 401(k) plans charge. If Schwab can introduce a plan that saves people serious money, combined with the fact that ETF commissions are shrinking fast, the industry could be looking at moving well beyond its current $1 trillion in assets.

To me, it is not the old battle as to whether ETFs are a better investment than mutual funds. What it comes down is lower cost and less trading restrictions. Especially the latter has been a thorn in my eye for a long time.

I manage a few 401ks for clients, and the hoops I have to jump through to be sure I don’t rub the custodian the wrong way by making one too many portfolio adjustments are simply ridiculous and out of touch with reality.

I welcome this development and hope that other custodians will follow suit. After all, you as the plan participant are the one who stands to gain the most; and that’s what matters.

On Risk And Complacency

2011-02-12T05:34:00.000-08:00

I don’t quote Barron’s very often, but they featured a nice piece on risk titled “That’s Better Now.” Let’s look at some highlights:

Investment success last year meant embracing risk. Certainly, it wasn't hard to find.

Following 2009's sharp rally, investors had to confront their fears about weak U.S. housing and employment, Europe's ugly sovereign balance sheets, May's violent flash crash, a sharp swing in U.S. political sentiment, deficit-ridden state and local governments, and the effects of easy U.S. monetary policy in order to partake in a second-half stock-market surge that many reasonable people mistrusted. Risk was rewarded.

In such an unpredictable year, the mutual-fund families that delivered the best overall returns for their shareholders didn't take money off the table, flee to defensive stocks or hide in Treasury bonds. That made for some unusual winners in our annual ranking of the best fund families. A prime example is the leader of the Barron's/Lipper ranking: Dimensional Fund Advisors, a quantitative-fund group with many index-like qualities. DFA was followed by Nuveen Fund Advisors, newcomer Principal Management, Oppenheimer Funds, and Waddell & Reed Investment Management.

Overall, they topped their rivals with strong returns in areas like emerging-market stocks, which were up 19.54%, small- and mid-cap growth and value plays, which gained 27.74% and 24.19%, respectively, and global high-yield funds, which rose about 3.50%, according to Lipper.
...

CAN MUTUAL-FUND FAMILIES and their investors continue to dodge the raindrops for another year? Not only are stocks at higher levels and bond yields still low, none of 2010's risks have disappeared and a new one -- political upheaval across the Mideast and North Africa -- has appeared. The unrest in Egypt and elsewhere is a challenge for big oil companies that depend on the region for much of their supply, says Henry Herrmann, CEO of Waddell & Reed. And the worries about U.S. states and municipalities have worsened of late, driving $13.37 billion out of municipal-bond funds in December, a trend Degroot warns could continue.

"This could be the trend in the year ahead -- risk on, risk off -- with people thinking 'the world is coming to an end' or 'maybe I'm missing the trend,' " observes Degroot.

Possibly a little late, retail investors seem to be getting their courage up to wade into U.S. stocks again. From Jan. 1 to Jan. 26 of the New Year, $11.82 billion flowed into U.S. large-cap growth and value equity funds, more than triple the $2.82 billion that went into international stock funds, according to Lipper. In 2010, $74.88 billion flowed out of U.S. stock funds, while $42.71 billion came into international stock funds, and a gargantuan $213.25 billion poured into taxable-bond funds.

Not everyone agrees that risk levels are rising: "The risky stuff is more stable this year," says Art Steinmetz, chief investment officer of Oppenheimer.
...

"Appetite for risk will work until it doesn't," adds Jeff Tjornehoj, senior research analyst at Lipper in Denver. "The time to take risk is when people are absolutely scared out of their minds." That time may have passed.

[Emphasis added]

There is much more to this article so check out the link if this interests you. I think the last paragraph above sums it up nicely. Risk has clearly increased with the major indexes hovering at these multi-year high levels.

I have repeatedly said that no portfolio growth has really been accomplished since June 2008, because the past 2-1/2 years have been spent making up losses—nothing else.

Of course, we could march even higher from here although the markets are priced to perfection as are expectations of future economic developments. Add to that the usual menu of potential global uncertainties, and I have to question whether this rally will end well.

For a better and well researched historical perspective, Mish at Global Trends wrote a fine article on the subject, which you can read here. It’s a bit lengthy but well worth your time.

No Load Fund/ETF Tracker updated through 2/9/2011

2011-02-11T15:58:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Continued upside momentum pushed the major indexes to another winning week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.47% (last week +4.85%) and remains in bullish mode.

The international index has broken above its long-term trend line by +9.08% (last week +9.25%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Short Post

2011-02-10T05:37:00.000-08:00

No post today, since I finally had my long overdue cataract surgery done. It turned out to be successful, but my vision is still a little blurry, which makes reading and writing a bit of a challenge.

I should be back to normal within a day and plan on sending out Friday’s weekly newsletter as usual.

Overcoming Resistance

2011-02-09T05:55:00.000-08:00

Rising shares of some of the heavyweights like McDonald’s, IBM and Apple definitely contributed to yesterday’s rally, as the S&P 500 overcame major resistance in the 1,313 area, a level which was last reached in August 2008.

The advance occurred despite some headwind in form of China’s second interest hike in a month designed to control inflationary pressures. Gold and silver were the beneficiaries and finally rallied after having pulled back since the beginning of this year.

Of more concern is what impact China’s slow but continuous tightening will have on global economies as we go forward. A potential real estate bubble, and the desire to rein in inflation, are events whose outcome can’t exactly be measured or anticipated.

Much depends on the magnitude of their inflation fighting efforts. Nevertheless, for the time being the domestic U.S. market hears and sees no evil and continues to head higher.

I have written much about investor complacency and it is alive and well judging by the emails and phone calls I have received. I am not being negative here, but there is only so much a market can gain without any serious correction.

Day Of The Deals

2011-02-08T05:57:00.000-08:00

Yesterday turned out to be another solid day in the market as a slew of takeover deals, along with continued confidence in the economy, provided the firepower to push the major indexes higher.

Even political turmoil in Egypt appeared to ease, which temporarily alleviated fears of more uncertainty.

While the markets did not end up closing at their highs, which was a bit of a negative, we have now reached some very lofty levels. The Nasdaq, for example, is now within striking distance of taking out its 2007 peak of 2,859; the point from which a pullback occurred, which subsequently turned into the 2008 crash.

If you have more investable funds to deploy, I suggest you move down on M-Index rankings in order to avoid too much volatility when the inevitable correction occurs. I have no idea when that will be, but at these levels, the economy better perform as anticipated, with no major disappointments, or this run up could be over in a hurry.

Revisiting The Biggest ETF Loser

2011-02-07T05:47:00.000-08:00

Several readers have emailed me and were wondering if there was some credence to articles suggesting Natural Gas (UNG) as an investment was ready to explode.

Maybe there are new fundamental reasons, but I have heard most arguments every so often over the past few years as UNG plummeted further into abyss.

The following 5-year chart clearly depicts the misery those investors, who followed past buy recommendations, have gone through as this ETF gave a new meaning to the word gravity:

Here are some of the current momentum figures:

4-wk: -1.83%
8-wk: -3.13%
12-wk: +3.88%
YTD: -1.67%
%M/A: -11.87% (% below its long term trend line)

The natural tendency for investors is to want to pick the absolute bottom and ride the trend back up. The 3-months chart shows that indeed UNG has popped off its December bottom a few times:

However, so far all breakout attempts have been head fakes. Until UNG actually pierces and breaks clearly above its long-term trend line, defined as %/M/A in the weekly StatSheet, the downside risk is simply too high.

It’s better to be patient and wait for an actual breakout, which increases your odds that a true trend reversal has in fact taken place. Going bottom fishing right now is simply wishful thinking and may satisfy your gambling instinct, but may turn into a disappointing experience.

Disclosure: No holdings

Sunday Musings: Disconnect

2011-02-06T05:46:00.000-08:00

Emerging markets, the leader of the past, have been holding up relatively well since the Egyptian crisis has erupted as MarketWatch reports:

For emerging markets investors, the unrest in Egypt has been unsettling, to say the least. But the steep losses in Egypt’s now-shuttered stock market barely have affected the returns of emerging-markets mutual funds and exchange-traded funds.

The Egypt market’s 21% slide year-to-date is painful, but Egypt represents about 0.38% of the MSCI Emerging Markets Index (Egypt is not a so-called frontier market, according to MSCI). The emerging-market benchmark is down about 1.4% so far this year. What is Egypt’s contribution to that loss? About eight basis points, or 0.08%.

Of course, the political storm engulfing Egypt is taking aim at other countries in the Middle East and Africa, so fund and ETF investors may be in for more shocks. But this is the price of risk that emerging-markets investors pay in exchange for the promise of extraordinary returns. Only now that risk is extraordinarily high.

Sure, while the effect of the Egyptian uprising has been limited in scope so far, there seems to have been some directional change in the emerging markets since the beginning of this year, which happened even before Egypt entered the picture.

Here’s a 6 months chart showing the S&P 500 vs. the emerging markets ETF (VWO):

As you can see, since the Fed’s Quantitative Easing initiative (QE-2), which was enacted the beginning of November, VWO has been very volatile and seem to have disconnected from the domestic market, as represented by SPY, since January 2011.

You could argue that this was one of those unintended consequences of QE-2 as was the rise in interest rates. While the S&P 500 has been on a straight upward path, VWO has headed south and has come off its high by -4.58% as of 2/3/11.

It’s too early to tell whether the major trend of the emerging markets has indeed come to an end, but you should be prepared to exit in case things get worse. Remember, for country funds/ETFs, I recommend the use of a 10% trailing sell stop.

I have written about known and unknown uncertainties. Egypt was definitely an unknown and unexpected one with more fallout potential from other surrounding countries a real possibility.

It appears that the world we are living in grows more uncertain by the day, which eventually will affect the domestic stock market as well. Although right now it seems that things are a lot worse elsewhere than here in the U.S., so we may have some more upside potential.

However, when directional changes occur, they may happen fast and furious, if they are triggered by a major adverse event. Don’t become complacent; always be prepared to exit and establish your strategy now, and not when the market heat is on.

Disclosure: Positions in VWO

An Active Bear ETF

2011-02-05T06:03:00.000-08:00

Hat tip goes to reader Larry who pointed to a new ETF that recently came on the market. It’s a managed Bear ETF and it works as follows:

The investment objective of the Active Bear ETF (HDGE) is capital appreciation through short sales of domestically traded equity securities. The HDGE portfolio is sub-advised by Ranger Alternative Management, L.P. The portfolio management team implements a bottom-up, fundamental, research driven security selection process. In selecting short positions, the Fund seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period.

In addition, the portfolio management team seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.

There are several reasons listed as to why an investment in HDGE might make sense:

As a Tool to Hedge Equity Exposure - HDGE can be used as part of a long/short strategy in which an investor may synthetically integrate by pairing HDGE with a long-index ETF (or an investor’s portfolio of long positions), providing the investor with a “buy and hold” option to hedge their long domestic equity exposure.

For Diversified Portfolio Construction - The Portfolio Management Team’s portfolio construction process emphasizes diversification across a number of industries and specific companies with a special focus on catalysts that drive lower stock returns. The portfolio will typically consist of between 20-50 equity short positions, with an average position size of between 2% and 7% of the portfolio exposure.

For a Fundamental Investment Process - The HDGE Portfolio Management Team utilizes accounting metrics across the income statement, cash flow statement and balance sheet to identify companies with low earnings quality or possible aggressive accounting practices. These factors may suggest operational deterioration in a company’s business. Qualitative analysis is also considered. An assessment of the management team, accounting practices, corporate governance and the company's competitive advantage are analyzed before a company is included as part of the HDGE portfolio.

As you would expect, an actively managed ETF has higher annual expenses, and HDGE is no exception. The current net annual expense ratio is listed at 1.85%.

This is a new kid on the block with currently only $26 million under management and no track record. The concept sounds very interesting, but HDGE will need to prove itself for a minimum of some 9 months. That will allow enough time to establish a pricing and trading history to better evaluate how this ETF has fared in various market conditions.

I will report on in it again later on this year.

Disclosure: No Positions

No Load Fund/ETF Tracker updated through 2/3/2011

2011-02-04T17:40:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A breakout to the upside moved the Dow and S&P 500 above their milestone 12,000/1,300levels.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.85% (last week +4.71%) and remains in bullish mode.

The international index has broken above its long-term trend line by +9.25% (last week +7.64%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Treading Water

2011-02-03T05:31:00.000-08:00

As is usually the case, when milestone levels are broken, the markets took a pause yesterday as mixed news did not provide enough of an impetus for the bulls to drive the major indexes higher.

As the chart above shows (courtesy of marketwatch.com), the S&P 500 trended within a five point range and closed slightly lower.

Some contributing factors to the sideways activity were violent outbursts in Egypt and miserable weather conditions in parts of the U.S. Nevertheless, the markets remained fairly resilient despite no shortage of opinions that a major correction is about to occur.

ADPs announcement of strong private sector growth was taken in stride as those numbers (187,000 jobs added in January), have not been an accurate reflection in the past as to how Friday’s unemployment report will turn out.

Party Time On Wall Street

2011-02-02T05:13:00.000-08:00

It was party time on Wall Street yesterday as both, the Dow and the S&P 500, cleared their respective milestone hurdles of 12,000 and 1,300 by a solid margin.

Setting off the move past the resistance levels was a report indicating that U.S. manufacturing is showing the most strength since 2004. Helping matters was the fact that Egypt remained fairly quiet and that the traffic along the important key waterways was flowing normally.

This was encouraging news in that it alleviated fears that global economic activity won’t be interrupted—at least not for the time being. Markets around the world participated in yesterday’s rally and most asset classes were higher with the exception of bonds, which fell due to rising interest rates.

The S&P 500 closed at 1,308, its best finish since June 25, 2008, just two days after our domestic sell signal effective June 23, 2008. In other words, if, as a buy and hold investor, your portfolio tracked the performance of the S&P 500, you will now have almost reached the breakeven point…

The market will face some headwinds today in form of the ADP National Employment Index and a report on layoffs. Maybe yesterday’s euphoria can carry us through these numbers as well, should they not turn out to be as anticipated.

Leaving Friday’s Losses Behind

2011-02-01T05:28:00.000-08:00

Yesterday, the markets looked past the turmoil in Egypt and recouped a good chunk of Friday’s losses.

Supplying the initial boost were a couple of takeover announcements and better-than-expected earnings from Exxon Mobil. Further helping the upside cause were two economic reports showing that the recovery maybe gaining steam.

Consumer spending rose more than forecast as purchases, which account for 70% of economic activity, climbed for the second consecutive month in a row. Additionally, another report showed that businesses expanded at the fastest rate in two decades according to the Institute for Supply Management.

Gold lost and interest rates rose. Nevertheless, the markets managed to close up in January, which can bode well for the rest of this year.

According to the Stock Trader’s Almanac, a rise in January has resulted in gains for the rest of the year 90% of the time since 1950. While these are good odds, it does not say anything about the magnitude of the gains. So we’ll have to wait another 11 months to find out for sure if this will be an odds defying year or not.

Reader Q+A: Re-entering A Position After Getting Stopped Out

2011-01-31T05:35:00.000-08:00

Here’s a reader question that comes up on a regular basis:

As an employee of the xx company, I manage my Federal Thrift Savings Plan. If I get stopped out, what rules should I use to re-enter the market? I know you must get this question a couple of times a week but I couldn’t find the answer in your past postings.

Re-entering after having experienced a whipsaw signal is always a challenging task. There are no hard and fast rules and much depends on the individual’s risk tolerance. I can suggest several scenarios for you.

Let’s assume the high price a fund has reached, since you bought it, is $10, and the market starts to decline. If you apply the 7% sell stop rule (for domestic and international funds/ETFs), you should be pulling the trigger once the fund breaks through a price point, on a closing basis, of 9.30 or thereabouts.

You now have 3 options:

1. You can replace this fund with another one that is currently in an uptrend

2. If you are conservative, you can repurchase this fund once it takes out its old high of $10. That presumably would tell you that the uptrend has resumed, but, depending on market activity, it can be a long way back to reach that point.

3. If you are more aggressive and want to re-enter sooner, pick a price that is 2% above the 9.30 level you got stopped out of. That will get you in the market sooner, but it also can set you up for another whipsaw if this trend reversal does not hold.

As I said, there is no perfect way, and you can use any other percentage that you are more comfortable with. The only thing I recommend is that, once you have decided on that re-entry number be consistent with it.

Sunday Musings: Clarification On Sell Stops And Distributions

2011-01-30T05:58:00.000-08:00

Whenever markets correct and sell stops get triggered, there seems to be some confusion as whether the intended sell stop kicked in at the right time.

Reader Paul was wondering about that with regards to the last Friday’s sell of BRF. He wanted to know why I waited until the fund had dropped 18% off its high before selling it.

Did I really wait too long or did Paul not look at all the numbers? Here’s his matrix on the purchases and sales:

[double click to enlarge]

As you can see, Paul bought BRF on 9/14/10, after which it made a high of 63.73 and it was sold on 1/28/11 at 51.70 for a loss of -6.51%.

These are Paul’s figures, but are they correct?

No, because he forgot the most important part, which is that BRF had a huge distribution of $3.575 o 12/23/10. As I have posted many times, the high price needs to be adjusted down to correctly establish a new high point; in this case the new high would be 60.16.

Just as important is the fact that distributions affect the return as well. Here’s the updated matrix:

[double click to enlarge]

As you can see, this transaction just about broke even since the capital loss was just about offset by the distribution.

BRF corrected sharply and had come off its high by about 14% before we were able to liquidate it. That happens sometimes when markets get very volatile as we saw last week.

However, it is important to remember to always adjust for dividends/distributions if they occurred during the period you owned a fund/ETF; otherwise your numbers may be way off base and won’t give you an accurate picture of what happened.

As an aside, just glancing at returns provided by your brokerage firm statements will also not give you a completed view, since distributions are not included.

Looking At The Wrong Numbers

2011-01-29T05:20:00.000-08:00

A few days ago, I ran into an old friend who enthusiastically greeted me with “Wow, did you see the Dow crossing the 12,000 level? My portfolio is now within 5% of what it was 3 years ago!”

That seems to be theme of the news media these days as you’re being bombarded with statements like the S&P 500 has risen 92% from the March 9, 2009 lows.

As if you are supposed to have bought stocks on that infamous date while feeling like a loser if you didn’t make 92%. All this rebound has done is bailed out the buy and hold crowd.

Remember the simple math fact that states that if you lose 50% of your portfolio value, you have to make 100% just to get to the breakeven point? This is exactly what happened in 2008; most investors saw their portfolios drop some 50% and they are now getting close to a breakeven point, just as my friend Mike mentioned above.

Mike’s quick reference matches my numbers as well. You may remember that our domestic sell signal kicked in effective June 23, 2008 with the S&P 500 being at the 1,318 level. It’s currently just below the 1,300 mark and needs to gain another 1.65% just to get to the 2008 level we sold at.

In other words, simply looking at the rebound after the market crash is not seeing the big picture. You need to factor in what happened before March 9, 2009, in order to see that the last 2 years did not really produce any portfolio gains; it was simply time spent making up losses.

It’s hard to believe but, if you had sold along with us on June 23, 2008 and never reentered the market again, you’d be still ahead of those claiming of having made 92% off the March 09 lows.

No Load Fund/ETF Tracker updated through 1/27/2011

2011-01-28T17:00:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The Egyptian crises pulled major indexes sharply lower today. However, for the week, the losses were modest.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.71% (last week +4.58%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.64% (last week +8.37%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Flirting With Milestones

2011-01-27T05:47:00.000-08:00

The S&P 500 bounced against its 1,300 level before selling off yesterday, while the Dow actually broke through its 12,000 milestone, which it briefly held before profit taking pulled it back below.

The cause for this continued bullishness came from the Fed, as it was announced that the current policy with zero interest rates will be continued.

In its statement the Fed said that “the economy continued to be constrained by high unemployment, modest income growth, depressed home prices and tight credit. The central bank conceded that commodity prices are rising.

But core inflation is still trending downward, and that's why it left its target on its key federal funds rate at 0% to 0.25%. And because it has mandates to control inflation and foster maximum employment, the Fed is continuing its plan to buy in $600 billion in Treasury securities by the end of June.”

It was not as much what the Fed said but, more importantly, that rates will remain low, which is what Wall Street had anticipated despite concerns over globally increasing prices, especially in the food arena.

While the respective 1,300 and 12,000 levels by themselves are meaningless, they do have psychological value in that they confirm that the current upward trend remains intact. Barring any unforeseen news, I would expect these milestones to be conquered in the near future.

On the other hand, the Fed’s announcement is also a clear sign that all is not well, and that the economy continues to sputter along at best, especially when it comes to housing and unemployment.

These are major domestic issues that can have a profound impact on market direction if they are not being resolved or improved upon at some point in the future. Just because the Dow may break the 12,000 barrier does not mean all is smooth sailing from heron forward.

Unexpected headwinds can surface at anytime. You don’t have to anxiously look for them, but simply be prepared and have a plan of action when they appear.

Overcoming Crummy News

2011-01-26T05:49:00.000-08:00

There was not much good news yesterday, and the markets meandered south shortly after the opening. Some earnings disappointments kept a limit on any rebound attempts while slumping home prices added to negative sentiment.

The metals headed south again as it appeared that hedge funds had lightened their holdings. Oil slipped as well as did commodities in general. Not helping matters was a crummy report on Britain’s economy as it was reported that the GDP dropped 0.5% during the last quarter.

So what caused the turnaround?

After all the bad news was out, and the commodities markets had closed, the focus remained on the only positive of the day, which was a rise in U.S. consumer confidence that was more than forecast indicating that the jobs outlook had improved.

That was all it took; the markets turned and raced out of the basement to close around the unchanged level. Not bad considering that this day could have ended up very poorly for the major indexes.

At this moment, global economic uncertainty has not been a news factor. While the U.S. recovery has been slower than hoped for, no serious adverse reports have surfaced to cause anxiety. I believe that complacency and overall market optimism have been a factor as well to push the metals off their lofty levels.

I believe that precious metals along with commodities should be a part of anyone’s portfolio, as long as these asset classes remain in an uptrend and don’t violate their respective trailing sell stops.

We are living in a volatile world. While all appears calm right now, uncertainty can appear in no time at all, which can push the metals back in other direction. Remember, nothing matters until it does.

Heading Towards Dow 12,000

2011-01-25T05:33:00.000-08:00

Yesterday, decent earnings reports, along with the technology sector finally showing some leadership after several days of losses, pushed the Dow within striking distance of breaking through its 12,000 level.

Some headwinds, as a result of not very exciting report cards from American Express and Texas instruments, may delay a break through that milestone today, unless other positives outweigh those two negatives. Last time the Dow hovered above the 12,000 level was on June 19, 2008, only four days prior to our domestic sell signal being issued.

Crude oil and interest rates were lower, and the dollar fell as the European Central bank signaled that inflation pressures must be watched carefully, which was interpreted that odds of an interest rate hike have increased. Inflationary pressures are certainly not an issue at this point here in the U.S., and the Fed is expected to hold rates steady.

Reader Q & A: Taking Profits

2011-01-24T05:25:00.000-08:00

Reader David had the following thoughts on taking profits:

I do not recall you writing about taking profits. We have all heard the old slogan of "cut your losses and let your profits run". It seems to me that there must be circumstances where you might want to sell part (or all) of a very successful position to lock in some profit before 7% or 10% of it was given back by your stop.

One case would be if you wanted to rebalance your allocations. Another might be because you felt that its price (or the over-all market prices), had reached unsustainably elevated levels.... for example, if it was 30% or 50% or 70% above its 50 day moving average, or if it moved into a flat trading range after a long steady ascent, and the general market had become rather volatile.

I do not expect you to give any precise numerical rules; it's obviously partly a matter of personal temperament, zeitgeist, and context. Please give us the benefit of your experience.

Let’s recap. The use of the trailing sell stops fulfills two purposes:

1. It limits our losses in case the trade goes against us, and
2. It locks in our profits, if prices continue to rise

This means, short of needing cash from my investments, I let the duration of the trend be my guide as to when to exit a position.

If you don’t, you are just making a wild guess as to when to take profits. In your example above, you might consider taking them when a position has risen 30% above its 50-day M/A, but that is just an arbitrary number that has no resemblance as to any momentum changes.

Since we get whipsawed occasionally, which may result in a loss, we absolutely have to make up for that shortcoming by letting profitable positions run until the end, when the trend bends, reverses and stops us out.

I have not found any other way to identify an exit point with better reliability and consistency. Along the same line, you want to keep it simple by having a clear plan that does not rely on a bunch of indicators no one will use.

The goal here is to have an exit strategy in place designed to take the emotions out of the decision making process. If you can do that, you will be better off more often than not, according to my experience.

Traveling

2011-01-22T05:24:00.000-08:00

I’ll be out this entire weekend and will not have a chance to write any articles. Regular posting will resume on Monday morning.

No Load Fund/ETF Tracker updated through 1/20/2011

2011-01-21T16:53:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A minor pullback pulled the Nasdaq and the S&P 500 lower by moderate percentages. However, the markets have not been able to overcome overhead resistance.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.58 % (last week +5.60%) and remains in bullish mode.

The international index has broken above its long-term trend line by +8.37% (last week +9.25%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Losing Steam

2011-01-20T06:01:00.000-08:00

So far, the 1,300 level of the S&P 500 has been a formidable opponent for the bullish crowd, as the markets sold off yesterday after coming within striking distance of breaking through that milestone.

Despite the positive earnings from IBM and Apple on Tuesday, it was a reversal on Wednesday as the financials and technology shares were a drag on the markets.

Housing starts in 2010 were absolutely atrocious and came in as the second lowest number since record keeping started in 1959. It just simply is a confirmation that housing is still in the doldrums and will not improve until prices will have found a level that not only creates genuine demand but also is in line with median incomes for any given area. You can stimulate all you want but nothing permanent will come from it until these two conditions are met.

Oh yes, and it would help to have a major improvement in the employment picture; after all, most home owners make their home purchases with monies received from earned income.

Talk has increased that the markets have become increasingly ripe for a pullback. While yesterday’s 1% retraction in the S&P was fairly mild, it pays to be prepared should this turn into more than just a temporary bearish phase.

While the major domestic and international trends remain up, there is always the possibility of more short term reversals. There is nothing to do at this point except knowing where your potential exit points should be.

Nibbling At The 1,300 Level

2011-01-19T05:41:00.000-08:00

Resiliency was the word of the day, as disappointing earnings from Citigroup and concerns about Apple were offset by upbeat manufacturing data.

As we have seen so often lately, even a sliver of a silver lining gets the bulls going, and yesterday was no exception. The Dow lead the way higher and dragged the S&P 500 and Nasdaq slightly above their respective unchanged lines.

Nevertheless, momentum was not sufficient enough to pierce the S&P’s 1,300 level, but after hours impressive earnings from Apple and IBM may provide the markets with the impetus needed to break through that milestone.

Despite a busy economic calendar, corporate earnings will share the center stage, and we have to wait and see if the bulls can continue their current dominance.

Muni Issues

2011-01-17T05:23:00.000-08:00

I have been opposed to municipal fund investing for a couple of years now ever since the market crash of 2008. Initially, my reasons were only fundamental in nature but in November 2010, the technical aspects turned bearish as well.

Let’s first look at The WSJ’s updated report in “New Hit To Strapped States:”

With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress.

The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.

"We believe that this delay is prudent given the high level of volatility in the municipal bond market," said Rebecca Katz, spokeswoman for the nation's biggest fund company.

The market has fallen every day this week, and investors have been net sellers of their holdings in municipal-bond mutual funds for nine straight weeks, according to fund tracker Lipper FMI.

Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, reflecting a spike in perceived risk, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009, during the financial crisis.

Amid the selloff, public borrowers such as states and utilities face a wave of refinancing stemming from deals cut mostly during the crisis. The deals involved letters of credit from banks that were designed to keep financing costs down for government entities in need of cash.

Though the financing deals can be meant to last decades, the letters of credit underpinning them are expiring sooner. That could force the borrowers in many cases to pay higher interest rates or seek guarantees at higher costs. For the weakest borrowers, new guarantees may not be available and refinancing too costly. There are about $109 billion worth of letters of credit and similar backstops expiring this year, according to Bank of America Merrill Lynch. Some $53 billion in letters of credit alone is expiring this year, according to Thomson Reuters.

"Municipalities may be hard-pressed to come up with this money or refinance this debt," said Eric Friedland, a municipal analyst at Fitch Ratings. The ratings firm is scouring to identify risks among weaker municipalities that are seeking to renew these deals, and says it could downgrade some.
...

The short-term squeeze is unusual in the $2.9 trillion municipal bond market. Most debt is paid back over decades. And state and local governments generally don't need to borrow money to fund their daily operations. The long-term nature of the market is a key reason why most experts don't see the problems with state and local government debt spiraling into another financial crisis. Analysts say that many large states and cities with good credit ratings have been able to roll over deals well ahead of their expiration.

But there are parts of the market where short-term cash crunches could emerge, leading municipalities to potentially default on their debts. The risks could spill over to banks that backed bonds with the letters of credit.
...

The biggest concerns, analysts say, are smaller muni borrowers such as hospitals and schools that have subpar credit.

Municipalities borrowed $122 billion of variable-rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before, according to Thomson Reuters.

Rollover crunches were a major part of the financial crisis, as banks that had relied on short-term debt couldn't borrow and became insolvent. More recently, rollover issues contributed to Greece's financial crisis.

Banks are reluctant to renew the letters of credit in part because of impending rules that restrict the amount of risk they can take.

Besides banks, one provider of muni letters of credit is the giant California pension fund, the California Public Employees' Retirement System, which has back-stopped $2.5 billion of adjustable-rate bonds.

Calpers' chief investment officer, Joe Dear, said in an interview that the pension fund partly uses the letters to make it easier for local California entities to borrow money, but it has no plans to ramp up its involvement in such deals.

"We, like a lot of people, are watching the muni market, and it is not getting any healthier," said Mr. Dear.

While there is a lot of analysis being done and forecasts abound as to the magnitude of the muni problem, there is an easy way to see where the muni market is at. I am, of course, talking about simply look at the trend.

The 2-year chart above shows PZA, which tracks the Long-Term Core Plus Municipal Securities Index, which normally invests 80% of its assets in insured muni securities.

As you can see, the trend line was broken to the upside in April of 2009, generating a buy, and did not drop below it until November 2010. That break below coincided with PZA coming off its high by 5%, which triggered our trailing sell stop. While we only had limited holdings, we liquidated them at that time.

Since then, it’s been straight down into bear market territory. If you like investing in munis, I suggest you wait until the price breaks the trend line to the upside again until establishing positions.

Don’t try to be a hero by attempting to bottom fish now; it’s very easy to do something very stupid as no one can tell when we really have hit bottom.

With the markets being closed on Monday, I will return on Wednesday morning with Tuesday’s market report.

Sunday Musings: Predictions For The ETF Industry

2011-01-16T06:00:00.000-08:00

Seeking Alpha featured some interesting thoughts and upcoming changes for the ETF industry. Let’s listen in to “11 Predictions for the ETF Industry in 2011:”

Last year was a very interesting one for the ETF industry, a stretch filled with both ups and downs. The industry suffered from numerous attacks that concerned investors about the possibility of an ETF collapsing and the role that these securities played in the Flash Crash. Yet many dismissed these claims as fear-mongering, and shrewd investors continued to pile into ETFs as a way to reduce expenses, achieve more diversified exposure, and enhance the overall tax efficiency of their portfolios. In fact, ETF assets recently surged to the $1 trillion level, while the number of fund choices continued to expand as well, hitting the 1,100 mark.

The past year was no doubt one of the most important in the industry’s short history, as the products continued to gain market share in new markets around the world. With 2011 well underway, the new year figures to be full of exciting developments for the industry as well. Below, we highlight several predictions for the ETF industry in 2011, our thoughts on what headlines might shape the next phase of the ETF boom.

1. VWO Surpasses EEM in Assets Under Management (AUM)

Okay, so this is an easy one. The two most popular emerging market investments continue to thoroughly dominate the Emerging Market ETFdb category, combining to account for more than $90 billion of the $110 billion or so in total. Both of the funds track the MSCI Emerging Markets Index, and as a result are largely similar in terms of composition and individual weightings. The most significant difference between the funds – besides the issuer name – is that VWO charges an expense ratio that is roughly one-third that of EEM. As a result, cost conscious investors have been piling into Vanguard’s VWO instead of iShares’ EEM...

This development will underscore the importance of low fees to ETF investors, and perhaps inspire other firms to slash their expense ratios in an effort to gain market share. There are several match-ups where cost differentials could be critical to future growth, including the head-to-head gold ETF match-up as well as a variety of country-specific ETFs.

2. New Country ETFs Debut

This past year saw the release of several country ETFs targeting once hard-to-reach international markets; countries that are now available in ETF form include the Philippines (EPHE), New Zealand (ENZL), and Egypt (EGPT), just to name a few. Moreover, a number of additional products appeared in other markets such as India and Brazil, targeting unique aspects of their respective economies...

3. Volatility ETNs – But Not the Traditional VIX

Last year saw a surge in the number of products offering exposure to volatility, an asset class that was previously beyond the reach of many investors. While all of the VIX ETPs currently on the market are linked to indexes based on the volatility of the S&P 500, there seems to be an opportunity in harnessing the volatility of other equity benchmarks and even other asset classes. Currently, there are VIX levels for oil, gold, and a variety of other commodities and indexes as well. Given the popularity of the current crop of VIX ETNs, it is rather odd that no one has thought of this yet, especially considering the often significant volatility of gold and oil...

4. Small-Cap Europe ETFs

IndexIQ, the firm perhaps best known for its hedge fund replication ETFs, has been one of the few firms to offer investors quality exposure to small caps in foreign markets. Their four core small cap funds, which target the small cap securities in Australia (KROO), Canada (CNDA), Taiwan (TWON), and South Korea (SKOR), have been slow to build assets despite the fact that they arguably offer more “pure play” exposure to the local economies and tend to not be as prone to heavy exposure in oil and banking firms as their large-cap peers...

5. At Least 50 ETFs Close

While there will almost certainly be a net gain of funds in the ETF world this year, it is undeniable that many ETFs are money losers for their issuers. More than 450 ETFs finished 2010 with less than $50 million in assets, a common rule-of-thumb breakeven point in the ETF industry. Although many of these funds are relatively new products that are still hitting the sweet spot on their growth curve, many of them have been around for quite a while and are unlikely to suddenly see a surge in assets. As issuers look to cut the fat from their product lineups, look for at least 50 ETFs to close down this year.

6. 2011: Year Of the Non-BRIC Emerging Market ETF

If 2010 was the year of the commodity ETF, 2011 will be the year of the non-BRIC Emerging Market ETF. After billions of dollars flowed into BRIC-focused ETFs last year, expect investors to look towards smaller or lesser-known emerging markets in 2011 as an option to move away from U.S. exposure and identify markets poised to deliver solid long-term results...

7. More Online Brokerages Jump on the ETF Bandwagon (I’m Looking at You, E-Trade)

As further evidence of the growing importance and recognition of ETFs, numerous brokerage houses announced plans to offer many ETFs commission-free to their clients, a development that may accelerate the shift from mutual funds to ETFs among individual investors. With the recent proposal of a revived FocusShares, it appears that Scottrade will likely join the growing chorus of online brokerages to offer commission-free trading on a number of products to their clients...

8. India ETFs Catch Up to China ETFs

While China may still be an emerging market, its ETF lineup is highly developed; currently over 150 ETFs offer at least some exposure to the country, with 16 putting a majority of their assets in Chinese stocks. This number increases even more if investors add in auxiliary China exposure in the form of Hong Kong securities or those from Taiwan. This is in sharp contrast to the situation in India, where just 43 funds offer exposure to the country and just five have more than half of their assets in the sub-continent. In fact, more funds offer exposure to either Peru or South Africa than India, the world’s most populous democracy...

9. Active ETF Push Continues

With ETF assets hitting $1 trillion in late December, the vast majority of assets continue to be in "plain-vanilla" funds tracking standard indexes such as the S&P 500 or the Russell 2000. Active ETFs, once billed as the “next big thing” in the industry, have been slow to catch on with investors. Grail, the San Francisco firm behind one of the first true active ETFs, recently indicated in an SEC filing that it is on the verge of a sale or liquidation. While a handful of active PIMCO bond funds have had some success, assets in active ETFs have generally been disappointing...

10. More Funds in the Underdeveloped Currency and RE Categories

Despite the massive markets that exist in both the foreign currency and real estate worlds, the number of ETF products in these two categories leaves much to be desired. Just 14 funds track the real estate market in the U.S., while just 11 exist in the Global Real Estate ETFdb Category. While the currency ETP lineup is comparatively more robust with 30 funds, it is pretty small when one considers that over $2 trillion trades hands every day in the currency market, suggesting that far more potential exists in this slice of the market as well...

11. VIX ETPs Contraction

The end of 2010 saw the launch of numerous funds targeting the suddenly-popular volatility play in the market. However, these funds are largely similar, tracking various stretches of the S&P 500 volatility index curve, and are best suited for sophisticated investors making short-term trades or hedges. As a result, we predict that some VIX ETNs will close and that issuers will come to see that this is probably an oversaturated market in its current form...

Interestingly enough, I used to use EEM in my advisor practice, but switched to VWO a long time ago (we currently have positions in it). With performance roughly being equal, the far lower cost made this an easy decision.

Lower costs overall will be the continued benefit for the investing public as the major ETF players juggle for position.

While we sure don’t need another ETF tracking the S&P 500, new additions of specific country ETFs will be very useful when structuring a portfolio to hopefully include those areas that zig when the domestic market zags.

Any newcomers will have to prove themselves first, as I mentioned in yesterday’s post. At the very minimum, a 9 months price history is essential in order to determine fund direction and changes in momentum over time.

An All-World ETF

2011-01-15T05:51:00.000-08:00

Would it not be nice to be able to invest in one ETF that covers the entire world? Now you can, as IndexUniverse suggests in “Rydex launches All-World ETF:”

Rydex, the Rockville, Md.-based fund sponsor known for its flagship equal-weight S&P 500 ETF, has launched a new equally weighted fund designed to measure the equity market performance of both developed and emerging economies.

The Rydex MSCI All Country World Equal Weight ETF (NYSEArca: EWAC) tracks the equal-weighted MSCI All County World Index, which comprises more than 2,400 stocks from 24 developed and 21 emerging market countries, according to the company’s fact sheet. The fund’s components are rebalanced quarterly to maintain the equal weighting.

EWAC’s focus is on large-cap firms; the median market capitalization of companies in the MSCI ACWI Equal Weighted Index is $11.3 billion.

Equal weighting—as opposed to weighting by market capitalization—is an alternative approach to indexing that’s increasingly attracting the attention of both investors and fund sponsors. As of late October, the Rydex S&P Equal Weight ETF’s (NYSEArca: RSP) year-to-date returns were more than twice as much as its market cap-weighted counterpart, the SPDR S&P 500 ETF (NYSEArca: SPY).

According to Rydex portfolio strategist Tony Davidow, the quarterly rebalancing provides a quasi-active component to his firm’s equal weighted funds and may be part of the secret of their relative outperformance.

“We’re essentially selling the winners high and buying the underperformers low,” said Davidow.

In addition, Rydex believes equal weighting helps reduce risk.
...

EWAC has an expense ratio of 0.60 percent. The fund began trading Jan. 12 on the New York Stock Exchange’s Arca platform with a relatively large bid-ask spread of around $0.27. Buyers were prepared to pay $40.12 a share, while sellers were at $40.39, according to data posted on Yahoo finance.

While I like the idea of having the option of investing in an all-world ETF, EWAC is too new to be considered investment material.

As always, I like to first see 9 months of price data to be able to chart a trend, substantial volume increase and much improved bid/ask spreads before I would even consider this new arrival. Nevertheless, it’s a step in the right direction, and I will report on the progress this ETF has made in a few months.

No Load Fund/ETF Tracker updated through 1/13/2011

2011-01-14T16:44:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The major indexes slowly but surely moved higher again pushing the S&P 500 within less than 1% of recapturing its 1,300 level.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.60% (last week +4.82%) and remains in bullish mode.

The international index has broken above its long-term trend line by +9.25% (last week +6.90%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Picking Up Steam

2011-01-13T06:13:00.000-08:00

As a result of high demand for Portuguese bonds, the European debt crisis eased for the time being and got the market in rally mode early yesterday morning. The latest talk now is that Portugal may not need a bailout after all.

The Fed’s beige book confirmed that the economy was growing at a moderate pace with pockets of strength being present in consumer spending and manufacturing. Loan demand was still mixed with real estate continuing to be weak.

Bonds dropped slightly as interest rates rose, while gold, crude oil, energy and commodities headed higher. All in all, it was a nice rally with no news events providing any headwinds.

Good Start—Mediocre Ending

2011-01-12T05:41:00.000-08:00

After a solid attempt to move to higher ground, the markets ran into unknown resistance yesterday, sold off, but managed to close on the positive side of the unchanged line.

The drivers for yesterday’s action turned out to be higher commodity, energy and metals prices. Crude oil pushed through $91/barrel while gold rallied some $10. Interest rates were higher while the dollar was mixed against the Euro.

The early rally attempt was not enough to reverse the slide of one our country ETF holdings (IDX), which was sold in accordance with our trailing sell stop rules.

Today, the market will take a look at Portugal, Spain and Italy and their results of the intended bond sales. Domestically, the focus will be on the auction of some $21 billion in 10-year U.S. Treasury notes.

Also on the menu is the Fed’s beige book report, which will be analyzed very much in detail as it represents a narrative look at the economy. Any surprises will definitively affect market direction.

European Debt Worries

2011-01-11T06:14:00.000-08:00

Over the weekend, I talked about European debt concerns, which again moved to the front page yesterday and pushed the markets lower at the opening.

At issue were worries as to whether Portugal and Spain, and to some degree Italy, may need to be bailed out and if they were able to fund their borrowing needs later on this week. The dollar rallied and the Euro dropped taking the markets along.

A late rebound in the Euro reversed the early trend, and the major indexes slowly recovered but ended up short of the unchanged line. My theme from yesterday “Dollar Strength Equals Equity Weakness” still stands and has the potential for a whole new meaning not if but when the European crisis worsens.

What that means is that Europe is definitely the elephant in the room. Any default by a member country, which I consider a real possibility, will send the dollar soaring and equities tanking. The timing of it is the big unknown.

Again, the S&P 500 held at its major resistance point of 1,260, which has repeatedly served as a springboard. The picture was very murky in the emerging arena as most country ETFs headed south, but to varying degrees. One of them clearly pierced its long term trend line and will be sold, unless a huge rally emerges by mid-day.

Dollar Strength Equals Equity Weakness

2011-01-10T05:27:00.000-08:00

The dollar and the domestic stock market have been moving in opposite directions over the past couple of years. This relationship is clearly visible in the above 1-year chart.

However, lately there seems to have been some decoupling as the WSJ reports in “Dollar To Stocks: You Can Go Your Own Way?”

For much of the fall, after Fed chairman Ben Bernanke announced QE2, stocks rallied as the dollar sank in what felt like tit-for-tat mirror-image fashion, baffling a number of analysts and technicians. (We wrote about it here.)

Well, it’s over, some say.

More than one analyst has landed in our inbox, arguing that the autumnal dance between the U.S. dollar and the stock market has broken down with the wintry chills. As QE2 has receded into the back of investors’ minds, the dollar (DXY, the Dollar Index) and stocks (S&P 500) have begun charting independent paths, with the negative correlation reverting to nearly zero, these analysts say.

The explanation, according to Macro Risk Advisors’ Dean Curnutt: the domestic economic recovery has strengthened, which helps both the dollar and stocks. And even though all signs seem to point to Chairman Bernanke following through on QE2 — further diluting the dollar’s strength — almost all of these expectations had been baked into the dollar’s price since the official $600 billion announcement in early November. “The fact that the SPX is able to ‘power through’ this decoupling seems pretty constructive,” he wrote.
...

Indeed, no sooner were we ready to shoot off this post than Mark Arbeter, S&P’s technical analyst, crashed into our inbox, arguing that — nope! — the correlation hasn’t broken down at all, and any continued strength in the USD could hamstring the current stock-market rally. Here’s more from Mr. Arbeter:

"Over the last year or two, the stock market and the dollar have been linked very closely. Although, sometimes an early reversal to the upside by the dollar will be ignored by stocks, and with it, an outpouring of media attention that the link is no longer valid, it has been our experience that eventually dollar strength equals equity weakness."

The dollar’s rally can easily continue, especially once the European debt crisis shifts into high gear meaning that one of the Euro zone countries goes into default. It may take some time for this to happen but, once it does, everyone will want to own dollars, which may then very well seal the fate of equities. Only time will tell, but I will revisit that thought once we get there.

In the meantime, let the trends be your guide to any new investment decisions you are trying to make.

Sunday Musings: A Scary World

2011-01-09T06:16:00.000-08:00

Reader Mark has some justified concerns as to where we’re going economically and how we can prepare ourselves investment wise for an uncertain future. Here’s what he wrote:

I want to ask you about something that is beginning to worry me as it relates to the markets domestically and to a lesser degree internationally. Much of the world is pinned to the value of the dollar and transactions (such as oil) are based on the dollar.

There is a growing sentiment out there that the only thing that allows the U.S. to manage its overwhelming debt burden is its ability to print money - which it can only do because most of the world accepts the dollar as the pinning currency.

However, countries are starting to pull back on the dollar as the "benchmark" currency against which transactions are pinned. China for example is not going to base as many things on the dollar value and meetings between Japan, China, and others seem to indicate the dollar may not be able to hold its international currency strength. You probably heard Geithner saying that he will not devalue the dollar but he may not have a choice.

So I am concerned about what it means for investments in general going forward. Should there be a start to more investment in gold and silver?

What is going to happen when commodities start to go on an upward tear (like gasoline, precious metals, milk, etc.)?

I am interested in your thoughts. Some stories out there indicate that the time is now to prepare for what may be a looming, major financial crisis because of a dollar that will not have clout. I read that the U.S. debt burden could not be met even if every American was taxed 100%.

Pretty scary!

I have always referred to the dollar as being the world’s favorite whipping boy. There was much talk some six months ago for the dollar era coming to an end along with another currency to become the new benchmark, especially when it came to the pricing of crude oil. The obvious contender and number 1 pick for the job was the Euro.

Well, how fast things can change. The European debt crisis, far from being over, will have far reaching unintended and unknown consequences in the future with one being the much discussed question as to whether the Euro can even survive. Let’s wait and see what happens once the first country of the Euro zone reneges on their debt obligation. I believe that this is not a matter of if but when.

Those factors have pretty much sealed the dollar’s position as the remaining reserve currency. The dollar has rallied over the past few months, much to the chagrin of Geithner and company. Their official position is a strong dollar; but in reality they prefer a weaker one to gain export advantages. In fact, all industrialized nations want their currencies to be weaker for the same reason.

Looking around the global scene, we have real estate bubbles in Canada, Australia and China with the Chinese economy needing to be reined in because of inflationary concerns. Japan is continuing to have its own debt problems resulting from their real estate bust some 20 years ago and their futile attempts to fight deflationary forces with stimulus programs.

No matter where you look, things don’t look pretty, and a major financial crisis could develop anywhere. Rather than trying to make a wild guess as to where the first domino might fall, just focus on the long-term trends of various asset classes.

Precious metals, commodities, energy and stock markets in general are trending up. If a crisis erupts, precious metals will very likely be the primary beneficiary. If global economic expansion continues, or shortages arise, energy, oil and commodities will rally higher.

That’s why I have rebalanced our portfolios over the past few months to include the above asset classes since they appear to be firmly entrenched above their respective long-term trend lines.

While you can own precious metals outright via various ETFs, my preference has been to hold them in a more conservative way via PRPFX. It makes those $50 drops in the price of gold easier to handle, although for some clients we hold positions in GLD outright.

The chart above shows some of the other holdings we currently have exposure in covering the entire domestic stock market (VTI), the commodity index (DBC), energy (VDE) and gold (GLD). As you can see, after the market meltdown during May/June 09, all have resumed their previous uptrends.

No one knows what the future holds, but I believe that these asset classes are an important part of our portfolios to counteract whatever crisis might develop. Of course, this is my view right now, and I will change it not only when the facts change but when there is a clear directional trend reversal as well.

Uncertainty is here to stay with us, and it pays to be prepared should a black swan event develop in 2011, the likelihood of which seems to have increased quite a bit over the past year.

Little Volume—Big Returns

2011-01-08T05:38:00.000-08:00

Reader David pointed to a link titled “ETFs With Little Volume but Big Returns, Revisited” and commented as follows:

This article discusses "wide-spread confusions" re the significance of an ETF's average daily volume, or per-minute dollar amount traded.

I am one of those confused, and I would appreciate your discussion of this article. I recall you writing that you avoid ETFs with low daily volume, such as TF (vs. THD) or TKF (vs. TUR), even though they are included in the weekly stat sheets.

The article is quite lengthy, so I will hone in only on the following:

All of this being said, there still exist “screening metrics” that appear from time to time in the ETF media or are simply part of an institution’s or an advisory firm’s “rules of thumb” that “require” that ETFs/ETN’s trade a) 100,000 shares on an average daily volume basis b) Have a certain level of AUM within the fund, i.e. $100 million and c) Have to adhere to a specific width between the published bid/ask quotes. We at Street One Financial find that because there is such a bevy of ETF/ETN products in the universe (equity, fixed income, commodity, actively managed, currency, long/short, etc.) that rules of thumb such as those above are not consistent with reality and often limit the strategies available to the ultimate end user of the ETF/ETN.

In essence, these “rules” address ETFs and ETNs as if they were individual small cap stocks from a feasibility of trading standpoint and largely this practice of installing such screens is akin to investing with “blinders” on. And in a world of increasing ETF usage, limiting your strategies due to embedded misconceptions regarding “trading volume and liquidity” simply handcuffs your overall performance and competitive ability because in order to keep pace with peers, one must often venture into new strategies as they become available or at least have the capacity to be nimble where necessary...

It’s hard to understand how someone could consider common sense screening as “investing with blinders on.” While some of the screens maybe a little farfetched, investing in ETFs without basic consideration to volume and bid/ask spreads is simply being ignorant.

Here’s my take on it. If you are an investor with small amounts of money to deploy, there is nothing wrong with selecting ETFs with a small asset base and or low trading volume. That’s one of the reasons while my weekly StatSheet includes those types of ETFs as well.

However, if you are a large investor or, as in my case, manage other people’s money in the 10s of millions of dollars, you better use some kind of screening mechanism to assure you can get into and out of the market without too much slippage.

As an example, you do not ever want to get caught trying to trade out of an ETF with an average daily volume of 100,000 shares when you are trying to liquidate 500,000 shares. You will move the market and will not get efficient execution and may take more of a haircut than you like.

On the other side of the spectrum, there is SPY. It has an average daily volume of over 162 million shares (over $1 billion), which accommodates just about any size of investor.

Personally, in my advisor practice, my screening rules are fairly simple. I do not invest in any ETF that does not have an average daily volume of $10 million. Having used that rule for a while, I have always been able to get in and out of a position very effectively.

How many ETFs exist that sport this kind of volume? Out of the 500 I track, I have identified 87. That is enough to pretty much cover any asset class you need or want to have exposure in.

No Load Fund/ETF Tracker updated through 1/6/2011

2011-01-07T16:42:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The first trading day of the year made the week, and the S&P 500 added 0.8%.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +4.82% (last week +5.09%) and remains in bullish mode.

The international index has broken above its long-term trend line by +6.90% (last week +7.02%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Heading To Higher Ground

2011-01-06T05:55:00.000-08:00

Sometimes, Wall Street simply chooses to ignore good news. That was the case yesterday as the ADP National Employment Report estimated that 297,000 jobs were created, which was nearly triple of expectations. Another report showed that non-manufacturing expanded rapidly and at the fastest clip since 2006.

The markets sold off early but clawed back and managed a modest but steady climb above the unchanged line.

While the ADP report is a precursor to Friday’s unemployment and payroll numbers, it does not always translate into an exact match. Maybe that’s why the market reaction was more or less muted. Other reasons could have been the stronger dollar, and lagging energy and precious metals. More importantly, stocks are getting pricey with the S&P now having moved some 11% above its 200-day average, which begs the question as to how much higher we can go without a meaningful correction.

As much as the Fed’s QE-2 program was cheered as a plan to stimulate the economy, fears are now surfacing that this program may we cut back if it appears that its need is no longer as crucial as it appeared a few months ago.

Right now, all eyes are on Friday’s jobs report which offers hope that job gains may have fared better than previously anticipated. Of course, with the major indexes hovering at these lofty levels, perfect jobs numbers may already have been priced in.

Pausing

2011-01-05T05:48:00.000-08:00

While equities sold off early morning yesterday, the damage was very much contained as the afternoon session brought in renewed buying and kept losses at a minimum as the chart above shows.

Commodity prices were pressured with gold and silver taking the brunt of the hit. Gold dropped below the 1,400 level while crude oil traded below the $90/barrel mark. Profit taking played a big role as commodities have been on a strong upward path.

The explanation for gold’s decline was improved expectations for a global recovery, which presumably reduces uncertainty and causes investors to prefer equities over hard assets. Let’s see what happens not if but when new signs of economic headwinds surface unexpectedly again. Additionally, beginning of the year portfolio rebalancing could have played a role as well.

Today we’ll be looking at non-manufacturing data and the ADP employment number, which is the precursor of the all important jobs report due out on Friday. Any positive surprises can easily move the markets towards their all-important 1,300 level of the S&P 500.

Disappointment with any of these numbers could make investors question as to whether these lofty levels of the major indexes are actually justifiable.

Starting 2011 On A High

2011-01-04T06:06:00.000-08:00

Picking up on the positive momentum from 2010, the markets welcomed 2011 yesterday with their biggest rally in nearly a month. For most of the day, it looked like a triple-digit pop in the Dow, but a last hour fade took back nearly a third of the gains.

Nevertheless, the rally was broad with most sectors participating. Commodities moved higher along with Crude oil, which topped $92/barrel for the first time since late 2008. Gold slipped slightly, the dollar was flat, and interest rates inched up causing bonds to slip just a bit.

Asia and Europe led the markets, and the domestic indexes followed along right after the opening bell as the chart above (courtesy of MarketWatch.com) shows.

Some economic reports, while not earth shattering, helped the bullish cause. Manufacturing strengthened in December, and better-than-expected construction spending in November cheered traders on Wall Street.

While this was a good start to a new year, we’ll have to wait and see if this upward momentum can be sustained once some of last year’s issues move back to the front page again. The market indexes are hovering around very lofty levels and have moved substantially above their respective long term trend lines.

Let’s hope that this picture does not end up in the “pop and drop” syndrome, which can be frequently observed once markets have moved up too far and too long without any correction.

Right now, however, we’re off to a good start, so let’s enjoy it for the time being.

Goldman Sachs Guru Forecast

2011-01-03T05:24:00.000-08:00

Hat tip goes to reader Mal for pointing to this article “This Goldman Sachs Guru Sees 2011 as ‘the Year of the USA:’”

Jim O'Neill shot to fame by predicting the staggering rise of emerging-market economies. Now the head of Goldman Sachs (GS) Asset Management, O'Neill recommended investors buy into so called BRIC economies of Brazil, Russia, India and China a decade ago.

Few economic trends have been more consequential since, and O'Neill deserves plenty of credit for spotting it early on. Investors following his advice would have made handsome profits even as the developed world struggled. Indeed, O'Neill's recommendation is often seen as the call of the decade.

So, what economy is he predicting will shine in the coming year? The U.S.

In a note to clients earlier this week, O'Neill wrote that he recently found himself "dubbing 2011 as the likely 'year of the USA' following a spate of stronger-than-expected economic data.

Even Employment Could Pick Up

O'Neill anticipates strong stock market gains of 20% in the year ahead. And while the jobs picture has continued to struggle even as the market surprised to the upside, that could change as well. "The growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease," he wrote.

Bonds would get hit as yields rise in anticipation of growth, and the dollar could rally substantially, he predicted.

Of course, the U.S. economy continues to face problems like indebted consumers, low personal savings rates and big current account deficits. But 2011 "will be the beginning of a new phase in which the U.S. has strong GDP growth," O'Neill wrote, led by exports an investments.

From "New Normal" to "Normal"

Bearish holdouts for much of the year, economists at Goldman Sachs recently threw in the towel and are now forecasting strong growth for the U.S. in the years ahead. While government statistics released Wednesday revised third-quarter growth up to an annualized 2.6% from the initial 2.5% estimate, Goldman now predicts a growth rate of 3.4% for 2011 and 3.8% for 2012.

During 2010, however, many in the U.S. worried about the prospects of a double-dip recession, while many emerging market juggernauts found themselves coping with strong growth. China and India raised interests rates to keep inflation in check, even as the Fed embarked on a second round of quantitative easing to try stimulating the economy and to avoid deflation.

Sour sentiment in the U.S. as high-profile investors predicted a long period of subpar growth under a "new normal" scenario weighed on financial markets. Investors huddled into safe assets like bonds despite meager yields even as corporate earnings boomed.

But brightening sentiment could change investor preferences and give stocks a boost. "All of this will result in a mood that the U.S. is returning to 'normal,' which will have predictable consequences for financial markets," O'Neill wrote.

O'Neill's predictions may seem farfetched to U.S. investors mired in years of pessimism following the financial crisis. But they should recall that his prescient call on the BRIC economies at a time when most investors were still focused on the aftermath of the dot-com bubble's bursting seemed even less likely. You may not want to ignore him again.

There you have it—one man’s opinion. While I agree that the U.S. market may have more upside potential, it’s not because things are so hunky dory here, it’s because very likely they will be worse elsewhere.

Domestically, we certainly will have to deal with a host of issues. Real Estate is still tanking with no end in sight; unemployment is not showing any signs of improvement and gains in one area, like private payrolls, may be offset by losses in other areas, such as workforce reductions on all levels of government.

Budget shortfalls and red numbers wherever you look may result in a host of cities and municipalities filing bankruptcy in order to reduce debt and reorganize.

Nevertheless, as dire as that sounds, things may very well be worse in other parts of the world. Europe has its own debt issue to deal with, and it’s just a matter of time until one overburdened and debt ridden country is no longer willing to play musical chairs and ends up defaulting. It’s no question in my mind that a domino effect will be the consequence.

Other major global players are mired in their own real estate and debt bubbles, which could burst at some time during 2011. China, Canada and Australia come to mind with India’s economy reaching a critical boiling point.

In the end, when and if some of these issues turn into problems, the U.S. may not be such a bad place to invest after all. There’s a good chance that the dollar will be resuming its uptrend, especially if bad news from Europe prevails this year.

A good way to track the dollar’s progress, or lack thereof, is via the ETF UUP. While it’s still hovering below its long term trend line, watch for a break above, whenever that may occur.

Again, my theme for this year will be to look for changes in trend direction via our Trend Tracking Indicators (TTIs) and by watching individual ETFs break above or below their respective trend lines. Using that in combination with our trailing sell stop points, should put you in a position of better controlling your downside risk.

After all, just because some predictions are rosy does not mean the market can’t fool the majority of investors again just as it did in 2008. It pays to always be prepared.

Disclosure: No holdings in UUP

Happy New Year

2011-01-01T06:00:00.000-08:00

I hope you are enjoying the Holiday season, and I like to wish you a Happy New Year, good health and much success.

Ending an old year and starting a new one should always include some time of reflection. As I was thinking about that, I came across Todd Harrison’s article on Minyanville titled “Things I’ve learned.” It contains some great thoughts to ponder. Take a look.

Regular posting will resume on Monday.

No Load Fund/ETF Tracker updated through 12/30/2010

2010-12-31T16:46:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The major indexes meandered and closed around the unchanged line on very low volume.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.09% (last week +5.25%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.02% (last week +7.17%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Early Rally—Late Fade

2010-12-30T05:39:00.000-08:00

In a reversal from Tuesday, the markets rallied early on yesterday then faded into the close, but managed to stay above the unchanged line.

Still, we closed higher, which keeps the S&P on track for its best December since 2003. Volume was extremely light, and trading activity was a notch lower than is usual between Christmas and New Year due to the East Coast blizzard.

Energy was the driver of the day as it is assumed that global economies in general will remain on a growth path in 2011. Additionally, the OPECers have been hinting that they have no problem at this time with crude oil hitting the $100/barrel level.

Somewhat of a pleasant surprise was the sudden up move of several country ETFs we have positions in. As I posted before, since the Fed’s Quantities Easing program was enacted in early November, most of these funds had stalled and drifted off their highs, but without actually triggering their trailing sell stops.

Maybe there is more upside potential in the emerging world after all. I am sure we’ll find out more as 2011 gets underway.

Early Selling—Late Rebound

2010-12-29T05:43:00.000-08:00

Even poor economic reports were not able to keep this market subdued for any lengthy period yesterday.

A drop in the Consumer Confidence Index clearly confirms that job security, or insecurity, still contributes to a lack of spending causing this indicator to drop from 54.3 in November to 52.5 in December.

Suspicions that the housing market is still in a major struggle were confirmed by the Case-Shiller 20-city home price index, which fell 1% in October. It was its third monthly decline in a row. Year over year the index is down 0.8%.

To my way of thinking, a bottom in real estate is not even in sight yet since many areas are still priced in bubble territory. The only way we will find a true bottom in this market is when the median income in any given area supports the median price of a home. Anything else is nothing but wishful thinking.

Gold, energy and commodities had their day in the spotlight. Especially gold reacted strongly to the upside as a weak auction of 5-year Treasury notes pushed interest rates higher.

In the end, the markets inched higher again—on fairly poor news. It makes me wonder if the cause was simply low volume or whether all of Wall Street’s optimists are manning the trading computers while the pessimists are still on extended Holiday vacation.

Climbing Back

2010-12-28T05:29:00.000-08:00

China’s sudden interest rate hike caught the markets somewhat of guard early on, and the major indexes headed south. Those Wall Street traders, who made it though the East Coast blizzard, soon forgot about China and buying set in, although on extremely low volume.

A slow climb ensued, and the S&P 500 and Nasdaq managed to close slightly above the unchanged line while the Dow ended up a tad lower.

China’s rate boost is the second one since October, and it is designed to control inflationary pressures caused by rising food prices and ever increasing real estate values. Seems to me that it’s just a matter of time that the bubble will burst and a similar fallout, just as we experienced in 2008, may become a distinct possibility. The timing of this event remains to be the big unknown.

Some economic reports are still on the agenda, but I don’t expect any earthshaking market effects until the New Year is in full swing.

2011 Forecasts

2010-12-27T05:43:00.000-08:00

Hat tip goes to Random Roger for this link to “More Gains in 2011?”

All but two of the major Wall Street firms surveyed by Bloomberg have provided their 2011 S&P 500 price targets. And so far, every single strategist has provided a year-end (2011) price target that is higher than the S&P 500's current level. The consensus year-end estimate currently stands at 1,369.55, which represents a gain of just over 10% from where the S&P is currently trading.

As shown below, Deutsche Bank has the highest 2011 year-end price target at 1,550. At 1,550, the S&P would be just 16 points below its all-time high reached in October 2007. A return to new all-time highs by 2011 would be quite the comeback for the market. Goldman Sachs has the second highest price target at 1,450, which is 100 points below Deutsche Bank's target. A move to 1,450 would be a gain of 17.39% from current levels. JP Morgan, Barclays, and Bank of America all see the S&P rising to 1,400 or higher next year.

Credit Suisse currently has the lowest 2011 year-end price target at 1,250, which is just 1.20% higher than where the index is trading now. Citigroup and the Bank of Montreal are both at 1,300, HSBC is at 1,320, and UBS and Oppenheimer are both at 1,325.

At the start of 2010, the consensus year-end price target was 1,224.62 for the S&P 500, which is just 10 points below where the index is currently trading. Barring a big move higher or lower in the last two weeks of the year, the strategists collectively will have been pretty good prognosticators in 2010. Don't hold your breath for a repeat performance, however.

Since no one has the ability to look into the future, forecasting is simply a hit or miss proposition, although on average, the group above did very well for 2010.

While the average forecast for 2011 of +10.87% for the S&P 500 is certainly a possibility, much depends on the unknown events that suddenly could have the markets run into a brick wall and reverse their trends.

Domestic events could include continued budget and underfunded pension problems on every level government and subsequent defaults and bankruptcy filings along with massive layoffs.

Globally, real estate/credit bubbles in China, Australia and Canada may finally play themselves out along the lines of what we’ve seen in 2008. Additionally, China’s overheating economy may be forced into slowdown mode to contain inflation, which will affect global trade for sure and will have an impact on the U.S. as well.

Europe will continue to struggle with the debt issues of its Euro zone member countries, and I would not be surprised to see the first default occurring at some point during the next year. That would likely cause a domino effect.

While any of these possibilities could derail the U.S. market, the question remains as to whether the impact will be only a temporary pullback, or a trend reversal back into bear market territory. It all depends on the magnitude of the event or if several of them are occurring simultaneously.

It pays to be prepared for either outcome by focusing on the direction of my Trend Tracking Indexes (TTIs) along with those of the major indexes. Using these in combination with my recommended exit strategy will give you not only piece of mind but also a plan as to how to deal with market adversity.

Merry Christmas

2010-12-25T05:41:00.000-08:00

I would like to extend my best wishes for a safe and happy Holiday season to you and your family. I will be taking a couple of days off but will be back on the regular posting schedule as of Monday.

No Load Fund/ETF Tracker updated through 12/23/2010

2010-12-24T10:33:00.001-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The major indexes managed to add another 1% to this month’s tally.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.25% (last week +5.26%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.17% (last week +6.46%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Snaking Higher

2010-12-23T05:21:00.000-08:00

Right now, it appears that nothing can seem to end the persistent climbing of the major indexes. Yesterday was no exception as the markets ended up higher by a few points.

Energy and utilities provided a boost along with better-than-expected existing home sales for November. Of course, oil rising above $90/barrel for the first time in 2 years can hardly be a considered a positive. Neither can be an anemic GDP growth of 2.6% annualized for the quarter.

None of this appears to matter to the markets as confidence seems to have increased that 2011 will be a much better year economically speaking, which is expected to support higher stock prices.

The big neutralizer will be the stubbornly high unemployment rate despite stronger numbers in manufacturing along with elevated consumer spending. To me, real estate will continue its downward spiral for the simple reason that we’re stuck with this high unemployment number. After all, last time I checked, people buy houses and make mortgage payments with monies earned from real jobs and not from unemployment benefits.

How these positives and negatives will play out next year is anyone’s guess. Stay on top of the trends so you can easily spot reversals and take evasive action via your sell stops, which will help to protect your portfolio from extreme downside risk.

Holiday Cheers

2010-12-22T05:26:00.000-08:00

Three things got the markets going early on yesterday. For one, there was some sigh of relief that dangers of another Korean shootout were laid to rest, at least for the time being. Second, rumor had it that N. Korea was showing willingness to let the United Nations inspectors monitor its nuclear program.

Third, but not least, in regards to the European debt crisis, Chinese Vice Premier Qishan said that the nation would “back measures aimed at stabilizing European counties struggling with debt.” At least for this moment in time, global issues were not on traders’ minds.

The markets inched higher and never looked back. My plan to liquidate one of our country ETFs did not work out as the emerging markets staged a nice rebound rally after seeming to have stalled for the past few weeks. For the time being, we will hold on to this position subject to our sell stop rules.

All major indexes have climbed to some pretty lofty levels when looking at the percentages they have moved above their respective trend lines. The S&P 500, for example, has now reached a point that is 9.8% above its 200-day moving average. Last time this happened was in late April prior to the market heading sharply south and surrendering some 15% by early July.

I am not suggesting that a repeat is imminent, but I am saying that, based on emails from and phone calls with readers, some investor complacency has definitely set in again. It is for certain that the markets will correct again, we just don’t know the timing and magnitude of it.

Simply be aware and make sure you have your exit strategy planned and in place, so you don’t panic when the next correction strikes.

Leaving Blue Chips Behind

2010-12-21T06:15:00.000-08:00

The Nasdaq quietly made a new 3-year high yesterday, but the Blue Chips were left behind as American Express and Boeing proved to be a drag on the Dow and prevented the index from climbing above the 11,500 level.

Interest rates were up slightly, as were gold and oil. The Euro slumped heavily vs. the Swiss Franc and also lost ground against the dollar as Moody’s downgraded some of the Irish debt.

This week will be a short one as all markets will be closed on Friday. I would expect activity to slow down quite a bit as we closer to Thursday. While I will not initiate any new positions, I will continue to track all exit points. Actually, one of our country fund holdings hit its sell stop right on the money today but failed to break through it.

I’ll look at the opening activity tomorrow and will, barring any sudden upside move, liquidate the position.

Going Separate Ways

2010-12-20T05:30:00.000-08:00

Ever since the Fed implemented the latest round of Quantitative Easing early in November, stocks and bonds have gone in different directions. The 3-months chart above shows the SPY (S&P 500) vs. IEF, the 7-10 Year Treasury ETF.

Both hit their respective tops simultaneously (vertical arrow), after which bonds reversed direction and slid as interest rates rose. The stock market, as represented by the S&P 500, dropped initially as well, but found some support and managed to maintain upward momentum although at a slower pace.

Nevertheless, despite having crept higher, stocks seem to have stalled even as economic numbers improved. The concern now is if interest rates continue to head higher at the pace of the past few weeks, stocks will be affected negatively.

We’ve seen emerging markets not only stall as well but come sharply off their highs made in early November. Some are now within striking distance of their trailing sell stops.

Based on reader emails over the weekend on the topic of sell stop percentages, here are the numbers again as I use them in my advisor practice:

For widely diversified domestic and international mutual funds and ETFs, I apply trailing sell stops of 7%. For more volatile sector and country ETFs, I use 10%—both are soft sell stops. That simply means that they are based on closing prices only and not intra-day market activity.

Sunday Musings: Thoughts On Inflation And Deflation

2010-12-19T06:23:00.000-08:00

The prospect of inflation, along with the destruction of the dollar, seems to be on many readers’ minds. Frank’s question is very typical:

I have been reading your newsletter for over 2 years, and I enjoy your comments. I have one question and it is a big one do you think we are really heading into deflation or will inflation finally kick in?

While I am not an economist, I have some thoughts on the topic. Keep in mind that after the greatest real estate/credit bust the world has ever seen we have moved into unchartered territory.

To me that simply means that any sudden government or Fed action/intervention can have unintended consequences that can change previous assumptions. Case in point is the recent implementation of QE-2 (Quantitative Easing) in early November designed to stimulate the economy and keep interest rates low. Well, that did not work out too well as interest rates have been on a rising trajectory.

Given the current environment, I see more deflationary forces than inflationary ones. This does not mean it might not change in the future, especially with the Fed being hell-bent on producing inflation.

If I look around, I see nothing but red numbers on every level of government. Many states, cities and municipalities are not able to fulfill their obligations including pension plan promises; more layoffs are virtually a guarantee. I expect a host of cities to default and/or go through bankruptcy proceedings in order to reorganize with the purpose of reducing debt and obligations.

Looking over to Europe, the situation looks equally dire, if not worse, with debt problems being the center point of endless government meetings. All of these issues are deflationary in nature.

To be clear, if you follow sound Austrian economic principles, inflation is defined as the expansion of money supply and credit, with deflation being the opposite. Most readers, however, only look at price levels to define these terms. That’s incorrect, as prices are the effect and not the cause.

Talking about prices, there is an interesting play between the dollar and commodities. Most days, they move in opposite direction, as a weaker dollar is considered inflationary. Take a look at the following 2-year chart:

It shows the bullish dollar (UUP) compared to the commodity index (DBC). Their opposite price movements are clearly demonstrated. So, if you are worried about a declining dollar, DBC should be a part of your portfolio.

As I have posted before, the dollar has been the favorite whipping boy of the world for quite some. However, as soon as a crisis develops somewhere, everybody wants to own the dollar—don’t write it off yet.

Some economies are clearly overheating and are experiencing their own not yet admitted real estate/credit bubble. China, Canada and Australia come to mind. They are facing economic circumstances somewhat similar to what we witnessed around 2007. While inflation is an issue in these countries, it may not be once the bubbles burst.

At this time, I see no inflation on the horizon here in the U.S. I believe that we are following the footsteps of Japan, as we are attempting to solve our debt issue in the same manner that they did (stimulus attempts, creation of zombie banks, etc). Nothing was learned from the fact that stimulus programs don’t work in the long run and Japan, 20 years after their real state bust, has clearly proven that.

Disclosure: Holdings in DBC

More Trend Line Talk

2010-12-18T05:47:00.000-08:00

In “Reader Question: More On Sell Stops,” reader Jon responded by saying the following:

If you buy only when the index cuts above the trend line and sell when it cuts below it you will, by definition, realize profits equal to the increase in the trend line between these two moments in time!

While that is correct if in fact the trend lines are sloping up, they sometimes continue to head south before heading higher, especially after a large correction. Reader Richard shared these thoughts:

Regarding today's blog on Sell Stops, there is another reason to not base a Sell Signal on a major trend line. In my experience, when a price curve pierces a major trend line from below, thereby generating a Buy Signal, the trend line almost always still will be sloping downward, and, because the trend line is a relatively long-term moving average, the trend line will continue to slope downward for some time before turning upward.

If an equity's price would turn downward during the meantime, and if the equity's price would cross the trend line from above, thereby generating a Sell Signal, the trend line probably will be lower than it was when the Buy signal was generated, thereby resulting in a loss for that trade cycle. Therefore, relying on a major trend line as a Sell Signal would work only when Buy/Sell cycles would be of relatively long durations (which of course cannot be determined in advance).

The market meltdown of 2008, and the subsequent recovery in 2009, is a good example to demonstrate what Richard is talking about. The chart below shows a snapshot in time of the Domestic Trend Tracking Index (TTI) and its buy signal effective 6/3/09:

The trend line (red) was still in correction mode when the price line (green) crossed above it and generated a new Buy. It took about another 4 months before the trend line reversed direction and recovered enough to follow the price line higher.

My experience shows that you need to have at least a 6 months period from a buy to a potential Sell if you are relying on the upward sloping trend line to bail you out.

I have found it much easier and effective to use the upside crossing of the trend line as a Buy point only, while downside protection should be accomplished via your trailing sell stop points.

No Load Fund/ETF Tracker updated through 12/16/2010

2010-12-17T16:43:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Not much volatility, but the S&P 500 managed to eke out a small gain.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.26% (last week +5.12%) and remains in bullish mode.

The international index has broken above its long-term trend line by +6.46% (last week +7.02%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Nothing But Red

2010-12-16T06:04:00.000-08:00

Yesterday, the markets did a repeat of the last few days in that an early rally ran into resistance causing the trend to reverse, and we ended up with slight losses.

Interestingly, there was no place to hide and red numbers dominated the computer screens. Stocks were down along with bonds, gold, oil and most country funds while the dollar headed higher.

Right now we seem to be witnessing a battle between the bulls and the bears, as recent market activity has shown lack of sustainable upward momentum. In other words, we have run into overhead resistance again, which translates to 11,500 on the Dow and 1,250 on the S&P 500.

The pattern of the recent days, with morning rallies fading into the afternoon, is not exactly confidence inspiring. On the other hand, improved economic data might provide the support needed to break out of this pattern.

Today, we’ll be looking at initial jobless claims, housing starts and building permits. Supporting the early morning sprint were a better-than-expected CPI report and strong manufacturing activity. Providing the headwind and helping the afternoon fade was Moody’s announcement that it was putting Spain on review for a possible debt downgrade.

That caused the dollar to rally, and took the starch out of the upward momentum. The major indexes changed direction and slowly but surely slipped into negative territory.

As always, when the markets run into resistance, you never know which way the next breakout will occur; will it be to the upside or the downside?

Since no one can give me the answer with any degree of certainty, I let my trailing sell stops make the decision as to whether I should remain invested or not. I suggest you do the same.

Repeating The Fade

2010-12-15T05:52:00.000-08:00

If you look at yesterday’s chart, and compare it to the one shown above, you will see a virtual mirror image of market activity, reflecting almost the same highs and lows in the S&P 500.

The markets crept higher in the early going, supported by better than expected November retail sales, but sold off after the Fed announcement. There were no earth-shattering news other than that the Fed will continue with its program to boost the economy via Treasury purchases. The official reason is that the pace of the recovery remains so slow that additional stimulus is warranted.

Subsequently, the dollar rose, energy and metals slumped, and the markets headed south, however, the day was saved by a last minute comeback and a close above the unchanged line.

While the Fed conceded that there has been a little improvement in the economy, growth has not been sufficient to bring down unemployment. Nevertheless, business and household spending along with manufacturing and a reviving auto industry are showing small but positive developments.

The Fed reiterated its firm stance that it will employ all tools available to further the recovery and prevent deflation from spreading. Whether that will actually play out this way remains to be seen.

The stock market has already discounted a recovery in the upcoming months, which is reflected in current prices. There is still confusion as to whether the Fed intended for interest rates to rise, or if it’s a sign of failure that the Quantitative Easing program has not been working.

On the other hand, some believe that because of economic improvement, no matter how small, rates have spiked reflecting growing strength.

As usual, there are more questions than answers; so follow the trends, track your stop loss points and try not to figure out all of the fundamentals; it’s impossible to do.

Emerging Market Trends

2010-12-13T05:51:00.000-08:00

While no trend will last forever, emerging markets have been on a tear for most of this year as the 1-year chart above shows. There was a brief interruption in upward momentum when the S&P 500 dropped over 13% during the May/June period.

More recently, since the Fed announced its Quantitative Easing (QE-2) program in early November, emerging market ETFs seem to have hit a brick wall and have retreated from their lofty levels. The 3-month chart clearly demonstrates this pullback:

At the same time, the S&P 500 (represented by SPY in chart), has been moving upward and has made a two-year high in the process.

Bond prices have followed emerging markets down, as interest rates have risen since QE-2, which was probably one of those unintended consequences. With emerging markets and bonds heading south, I have to wonder if they are a leading indicator to a path that stocks eventually will follow.

On the other hand, this could be just a temporary blip in an ongoing bull market. Since no one can be sure about the outcome, simply use your trailing sell stops as a guide to decide when to exit any positions you hold in this arena.

My view is that we will continue to wander through a period of great uncertainty, which makes it absolutely crucial to have a workable plan in place to deal with the unexpected. It is important that you prepare for these eventualities now, so you don’t have to stress out when the market heat is on.

Disclosure: Positions in above ETFs

Sunday Musings: Retirement Thoughts

2010-12-12T06:33:00.000-08:00

Al Thomas, author of the well known book “If It Doesn’t Go Up, Don’t Buy It,” wrote an interesting column a couple weeks ago on the subject of retirement, which offers some food for thought:

PLANNING TO RETIRE

The first question is when? Second question is will I have enough money? And third question is what will I do?

Maybe you are one of the smart ones and you have all those questions answered. Very few folks do.

When might not be up to you. Your company may have a mandatory retirement age and you will get the proverbial gold watch and a pat on the back. The door is over there.

Maybe you have your own business and can decide when to lock the door or sell it (if you can in today’s market). Most people who are self employed don’t want to “retire”. They want to slow down and take an extra long vacation. People in business like what they are doing and don’t want to quit.

I tried quitting once, but 2 years later I formed another company and was back at it again. No more sandy beaches for me. I like the sound of the phone ringing and the computer humming.

That second question is a tough one. Almost 80% of those who reach retirement age have not had the discipline to invest enough for that sandy beach. If their health is good they might be able to reside in one of our South American neighbors.

Panama will allow residency to anyone with an income of $600 per month. And you can live on that down there.

Stock brokers say you need about a million dollars to retire and live comfortably. That’s another thing stockbrokers don’t know. You can do very well on a lot less. Now that you don’t have to report to work every morning what are you going to do with yourself? Golf every day? Too old for mountain climbing. The beach every day?

Here or in Panama. Now you have everything around the house fixed. Gosh, it gets boring. Your spouse isn’t going to be happy with you cluttering up the landscape 24/7. Having money makes it easier to get away.

Most old geezers look for charity work. Volunteering is big with retirees. It isn’t very challenging. But there are many good causes that need help. Some people seek another job. Other folks need it to make their minimums.

Companies today prefer to hire older workers because us old geezers understand the work ethic. Kids (under 25) haven’t learned it yet. This current period of harder times is beginning to make believers of them.

Education doesn’t matter now. There are PhDs flipping hamburgers. A skilled tradesman has a better chance of getting or keeping a job in this competitive market.

If you are planning to retire you better have a plan. Very few approach retirement with any idea what they are going to do or how they will make it financially.

While the financial aspect of retiring is a whole discussion by itself, I want to share some of my observations of “what to do.” As people approach retirement, some seem to only have a very vague idea as to how to keep life interesting by using the extra time while others struggle to find meaning.

The usual answer I get upon asking the “what to do” question is ‘cleaning out the garage,’ or ‘playing golf’ every day. OK. Now fast forward a few months.

You have cleaned out the garage, sorted your tools by purchase date and arranged all nails not only by length but also by weight and degree of rust. You edge your lawn twice a day and check your pool chemicals at least 3 times. You participate in the regular visiting of your grand children and by now could write an essay on how to avoid getting puked on.

Unless, you are fascinated by and deeply interested in a hobby or other subject, life takes on a boring tone. Not helping is your wife, who probably by now has told several times that she married you for better or worse, but not for lunch.

If you’ve been there, you know that I am not making this up. A few years ago, one of the newspapers here in Southern California put together a small fair intended to provide some job opportunities for seniors. The place was flooded by thousands of retirees looking for an opportunity to spend time with work related activity.

Many follow up stories revealed that while some indeed needed the money the majority did not. The overriding theme was that most were looking for meaning in life and/or wanting to contribute.

In the end, work is not all bad, as long as it’s something you enjoy. One of my readers, a 75 year old urologist, called me a couple of weeks ago and said that he was quite distraught about the possibility that he may have to stop working next year.

I have an 87 year old friend, who plays tennis four times a week. Upon my inquiry, he mentioned that he is so busy with his work projects that he is adding space to enlarge his home office. Wow, does he not see the end in sight?

The ultimate reward for being a passionate worker has to go to Richard Russell, who writes the Dow Theory letter. He is in his 90s and has written the newsletter since 1955. Talking about making a contribution…

My point is that being involved in a passionate endeavor, whatever that may represent to you, can provide your life with meaning and give you satisfaction by being able to contribute. Without it, it can be a hard, long and lonely road.

Maybe we should all take a lesson from woman retirees. For the most part, they don’t seem to have the issues most guys do and appear to slide into their new role with much less effort.

I like to hear about your experiences. Click on the comment button below and share your thoughts.

Reader Question: More On Sell Stops

2010-12-11T06:23:00.000-08:00

In “Missing the Point” I talked about the purpose of using sell stops, which is to limit downside risk and not to initiate a short position as one investor intended to do. I also said the following:

If you are a very aggressive investor, you could work without sell stops and only use the crossing of the trend lines as your last line of defense to cash out and head for the sidelines.

However, be aware that, depending on the current positions of the TTIs, it can be a long way down, and you will very likely turn any accumulated profits into losses in the process.

Reader Jon posted the below comment in response:

A great reminder about stop-losses. I am not sure I entirely agree with you that selling at the trend line will "very likely turn any accumulated profit into losses". If you buy only when the index cuts above the trend line and sell when it cuts below it you will, by definition, realize profits equal to the increase in the trend line between these two moments in time!

You are absolutely correct, if you buy and sell exactly at these two points. However, reality is that investors move into the market even after a buy signal has been generated to try to take advantage of upward momentum. Or, new clients come aboard in my advisor practice during mid-cycle and need to have their assets deployed.

That’s where you obviously enter not at an optimal point in time, which is the reason to have sell stops in place to guard against the downside risk.

Another scenario that can cause issues is if you have a sharp rally, after a buy signal has been generated, which is followed by a sharp decline within say less than 3 months, your trend line will have moved up only by a small percentage.

If you happen to have invested in a sharply rising fund/ETF, which now follows the market reversal back down just as quickly, you may witness a 20% gain turn into a 2% profit as the trend line gets crossed to the downside. That’s were implementing a 7% sell stop has its advantages, since it would have locked in a gain of some 13%.

In any event, Jon’s point is well taken; just be aware that there is no perfect solution.

The ultimate goal is to avoid the big disasters like 2001 and 2008 even if you whipsaw a few times along the path. If you can just do that, you will be outperforming over 90% of all money managers and mutual funds.

No Load Fund/ETF Tracker updated through 12/9/2010

2010-12-10T16:38:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Slow and steady was the name of the game as the major indexes gained moderately.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.12% (last week +5.89%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.02% (last week +6.93%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Sputtering Higher

2010-12-09T05:40:00.000-08:00

[chart courtesy of marketwatch.com]

It wasn’t pretty yesterday, but the markets managed to sputter higher in the face of rising interest rates and a subsequent higher dollar.

The bond selloff was a clear result of politicians having favored the Bush tax cuts over spending cuts. While in my view the extension of lower taxes in itself is a good thing, with nothing but red ink in sight, the bond market saw things differently and higher rates caused prices to pull back.

The dollar rally pulled gold off its lofty levels, joined by silver, while copper bucked the trend under the assumption that the tax cut extension may produce more economic growth.

The market’s still look like they are going through a consolidation phase, which may form the base for the next leg up. Again, a new driver is needed to push the major averages to the next level.

As I posted Monday, this is the time to watch for yearend distributions in your holdings; be sure to adjust the high prices downward to be in tune with the correct trailing sell stop points.

Losing Steam

2010-12-08T06:11:00.000-08:00

After briefly hitting a 2-year high yesterday, the S&P 500 lost upward momentum, slipped, recovered but faded into the close ending up nearly unchanged. During the trading day, I was observing some intra-day charts, and the activity was painfully slow; it reminded me of watching grass grow.

Nevertheless, it appeared to be a consolidation day, which is a normal occurrence after the sharp upturn we saw last week.

The initial sprint was a result of President Obama agreeing to extend the Bush era tax cuts while reducing worker payroll taxes and agreeing to continuous jobless benefits for the long-term unemployed.

The dollar ended up higher along with interest rates, while gold and crude oil slumped. No earth shattering news from Europe made this a fairly calm trading day.

None of our sell stops were triggered, and it remains to be seen if the S&P 500 can generate enough strength to break through yesterday’s high again.

Bernanke Fallout

2010-12-07T05:20:00.000-08:00

The markets were not able to gain much traction yesterday as the major indexes meandered without much conviction and ended up closing around the unchanged line.

Investors were still trying to digest Fed chairman Bernanke’s relatively gloomy outlook, which he presented on CBS’s “60 Minutes.” Just the fact that he sees unemployment hovering near record levels for some four to five years took the starch out of any upward momentum.

Additionally, he is entertaining the possibility of more quantitative easing depending on the economy’s reaction to the current efforts. All in all, it represented a pretty somber view as the economy struggles to rebound.

Gold again was the beneficiary of this uncertainty, and promptly hit a new high in the most actively tradedFebruary futures contract. Commodity prices rose as did energy and material stocks.

Eurozone worries remained on the front page news menu as the EU ministers were meeting to decide whether the current rescue package will be sufficient in size. As a result, the Euro slipped and the dollar gained, which may have played a part in keeping a lid on equity prices.

Year End Distributions

2010-12-06T06:05:00.000-08:00

This is the time of the year when mutual funds and ETFs declare their annual distributions.

If you are tracking the sell stops for your positions, it’s imperative that you adjust the “high” numbers.

For example, let’s say that you bought an ETF/mutual fund earlier this year or last, and it reached a high price of $10 since you bought it. This high price becomes the basis from which you calculate your 7% trailing stop loss point.

Let’s say a distribution of $0.25 is declared. Since any distribution reduces the price of the security by the same amount, you will also need to adjust your high price down to $9.75. If you don’t, you will be getting an incorrect signal when your sell stop gets triggered.

In this example, the distribution of $0.25 equaled 2.5% of the current price. If you don’t adjust, you will be suddenly working with a 4.5% trailing sell stop instead of my recommended, or your intended, 7%.

As an aside, many brokerages also don’t account for distributions right away in their YTD performance figures. Simply being aware of that will avoid you having “sticker shock” when suddenly your returns are showing a much smaller number than you’ve seen before the distribution occurred.

No Post

2010-12-05T05:45:00.000-08:00

The best laid plans sometimes don’t work out. Unexpected events kept me from completing Sunday’s article on the subject of retirement, which will appear a week from today.

Regular posting will resume on Monday.

Missing The Point

2010-12-04T06:07:00.000-08:00

Recently, a reader emailed and wanted to know if it was a good idea to go short the market after his 7% trailing sell stop had taken him out of a position.

While the short answer is clearly no, I want to elaborate on that issue. The trailing sell stops fulfill the purpose of controlling the downside risk of your holdings. Sure, you may get lucky, short the market, which subsequently declines, breaks through our long term trend line and changes market direction from bullish to bearish with you riding the trend all the way down.

While that is an ideal scenario, the chances of it happening are slim. More often than not the markets will fluctuate, reverse and head back up after you get stopped out, at which point you are looking for a new entry point as you’ve just experienced a whipsaw signal.

Sell stops are simply a safety measure to guard your portfolio not only from sharp setbacks but, as importantly, protect you from sliding down a bear market slope with long positions intact.

The time to consider a short position is when the prices of our Trend Tracking Indexes (TTIs) actually cross their respective trend lines to the downside. That would be the proverbial line in the sand, which divides bullish from bearish territory.

If you are a very aggressive investor, you could work without sell stops and only use the crossing of the trend lines as your last line of defense to cash out and head for the sidelines. However, be aware that, depending on the current positions of the TTIs, it can be a long way down, and you will very likely turn any accumulated profits into losses in the process.

Use the sell stops only for the purpose they were intended and not as a sign that market direction has moved from bullish to bearish. Only the TTIs can make that determination, since their signals represent major directional changes and not minor ones.

No Load Fund/ETF Tracker updated through 12/2/2010

2010-12-03T16:44:00.000-08:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The bulls went on a rampage this week and pushed the S&P 500 to a 3% gain.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.89% (last week +5.36%) and remains in bullish mode.

The international index has broken above its long-term trend line by +6.93% (last week +4.75%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Riding The Data Train

2010-12-02T06:00:00.000-08:00

Just as I was wondering yesterday as to where the driver to move this market higher might come from, I received the answer load and clear.

ADP’s report, that private employers had added 93,000 jobs in November, which was better than expected, set the tone early on. Other data, such as the ISM, suggested that manufacturing is holding up nicely, while the Fed’s beige book report described an economic environment that is gaining momentum.

That was all it took, and the major indexes never looked back as the chart above shows. The rally was broad and deep with solid volume. Obviously, interest rates were higher with commodities, oil and gold following the up move, while the dollar sagged.

Even news from Europe had a positive twist as speculation increased that the European Central Bank will enact measures to better contain the debt issues of various countries. Whether they actually can agree on something remains to be seen, but for today at least, there were no negative market influencing news to be found.

There is more to come in regards to economic data points with the most important one being Friday’s jobs report. If that supports ADP’s positive data, along with no surprises in the unemployment rate, we might see another move to the upside.

Another Rebound Attempt

2010-12-01T06:02:00.000-08:00

As I have posted from to time, market direction may be more influenced by external circumstances than internal ones. That proved to be true yesterday, as another early morning sell off put the major indexes in a hole again.

A stronger dollar, supported by ongoing European debt problems, put the bears clearly in charge. The bulls staged somewhat of a comeback because of encouraging consumer confidence and manufacturing data. Disappointing was the Case-Shiller Index that showed house prices falling in September.

Getting the attention of the markets was a newly opened antitrust investigation by the European commission alleging that Google has abused its dominant position in online search. That kept a lid on any rally in the technology sector.

Another market worry for financial stocks were reports that WikiLeaks plans to release tens of thousands of documents from a major U.S. bank early next year to expose “an ecosystem of corruption.” Not really a warm and fuzzy feeling for the banking sector.

While today’s rebound attempt fell short, I have to wonder how many more times will bullish forces come to rescue before the bears finally gain the upper hand. The market looks very toppy to me and seems to be in need of a new driver to break through to a higher level.

I am not sure what that could be but, as long as international events (Europe and Korea) dominate the headlines, we may be stuck in a trading range for a while.