One of the most frequent requests has been the automation of tracking sell stops. While I use my data base and a customized spreadsheet to do that, some readers are not always near their computers and are looking for an alternative solution.
I have found another site called SmartStops.net that provides this type of service. I have not tried it myself so I can’t vouch for the integrity, but they offer a 14-day trial period. Take a look and see if their set up will do the job for you.
Economist Irwin Kellner had some interesting thoughts in “No such thing as a free lunch:”
The budget that is now being put together for the coming fiscal year calls for the federal government to spend far more than it expects to take in. Last year’s budget deficit was the biggest in history in nominal terms and this year’s figures to be even larger.
As you might expect, the administration is trying to determine how best to finance this humongous shortfall. It goes without saying that the manner in which Washington pays for this deficit will affect the outlook for 2010 and beyond.
When you or I spend more than we make, our first thought is to tap our savings account to make up the difference. Unfortunately, the government has no savings from which it can draw upon to pay its bills.
It did ten years ago, when the federal budget was in surplus, but having run deficits in each of the years following, that well has run dry. As a consequence, Washington will have to raise the funds needed to close its budget gap.
In case you did not realize it, there are only two ways in which the federal government can obtain money to spend. One is through taxing, the other is by borrowing.
There is no other way. There is no such thing as a free lunch.
Together, taxing and borrowing make up the true burden that Washington imposes on our economy, for they add up to total government spending. One way or another, you and I have to give up something to the politicians in Washington so they can satisfy their needs du jour.
…
Raising funds by hiking taxes is out of the question in this economy. It drains buying power just when the private sector needs it to cope with depressed incomes, depleted wealth and difficulty in borrowing.
Even in good times, raising taxes is not popular. This is because it is a highly visible means of confiscating from the haves and giving it to the have-nots.
That said, borrowing is the only option left.
If Washington borrows from the private sector, it will cause interest rates to rise as the supply of loanable funds declines. This will make it tougher for people to buy homes, cars and other big-ticket items, and for business to invest in new plants and equipment, especially the technology needed to compete in today’s global marketplace.
Borrowing also saddles both current and future generations with a legacy of debt.
Of course, Washington could borrow from abroad. However this, too, will produce higher interest rates in order to attract foreign funds. This approach also raises the value of the dollar, thus hurting those companies that export and/or compete with goods that come from other countries.
It also lowers earnings from abroad, produces fewer jobs — and leads to lectures from foreign governments on fiscal profligacy.
And should the government choose to borrow from the Federal Reserve, it would have the effect of adding to the money supply thus setting the stage for a new round of inflation. Besides debasing our currency, this hurts retirees and others on fixed incomes.
If Washington can’t live within its means, it must either raise taxes or borrow.
There is no other way. There is no such thing as a free lunch.
Sad but true. What the story does not address is the fact that surplus money made during good times is never set aside to cover shortfalls during bad times. Kind of like any normal person would/should do within his own personal budget.
As a consequence, this lack of financial prudence will now play itself out in various serious scenarios ranging from municipalities to cities, states and the federal government along with problems in sovereign entities.
In regards to the markets, we will continue to see a wide range as sudden optimism pushes the major indexes to higher levels only to be followed by sharp pullbacks as economic reality sets in.
The result will be slipping into and out of recessions for years to come with the markets essentially moving in a broad sideways pattern as discussed in “Going Sideways for 5 years.”
Be alert and prepared to use my recommended exit strategy and don’t even think for a moment that there is any investment that you can simply buy and hold without principal losses. If you try, chances are that Wall Street will teach you a very expensive lesson.
I was reading “Dow could plunge to 8,000,” which supports another view of the potential downside market risk. Here are some highlights:
Dozens of companies this past month posted blow-out earnings but instead of being thankful, investors stomped their feet and sold. The result: The Dow Jones industrial average fell 3.5 percent in January, the worst month for stocks since the depths of the bear market last year.
Investors want more, and they want it now.
One explanation for this surprising ingratitude is that they already had bid up stocks to a level that assumed very good profits. So when those expectations were met this past month, well, investors were less than impressed and decided to cash out.
Or maybe fear is driving the selling, too. Debt levels are simply too high for strong economic growth and big stock returns, according to the latest investor letters from two respected moneymen — Bill Gross, managing director of bond giant Pimco, and Jeremy Grantham, founder of Boston asset manager GMO.
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Avi Tiomkin, chief investment officer of Tigris Financial Group, says that as businesses and families have struggled to pay off debt and cut spending, only the Federal Reserve and fiscal stimulus programs have kept the economy afloat.
And that means big trouble when those supports are withdrawn.
Tiomkin says a big rise in stocks such as we experienced in 2009 is not unusual after such a deep fall, and that those advances often lead to deep declines — and will again this time.
“We could see 8,000 on the Dow, easily,” Tiomkin says.
Dennis Delafield, co-manager of the $700 million Delafield Fund, says investors are finally realizing what everyone else has already figured out: The recovery won’t be strong. This supports the tune I have been singing since the middle of last year in that the recovery is floating on nothing but air bubbles based on stimulus packages. While I am not sure whether Dow 8,000 is a reasonable downside target, a severe correction is all but guaranteed; I am just not sure when it will happen. However, given the strength of last year’s rebound, we may be closer than we think. All it takes to unravel this market is a major economic event, externally or internally, or simply realization that the recovery is showing signs of a slowdown and not turning out to be as strong as was priced in by the market. Stimulus programs can’t be enacted forever. However, I could envision them coming back with another vengeance after the next market drop. This will result in another rally followed by another downturn. As I posted in “
[My emphasis]
Of course, this is just my guess, but it does not really matter whether it turns out exactly like I envision, or whether we see a scenario unfolding with a slightly different outcome.
The key is that you need to control the downside risk at all costs, and that means to never ever invest in anything without an exit strategy.
My latest No Load Fund/ETF Tracker has been posted at:
http://www.successful-investment.com/newsletter-archive.php
Euro land worries and not a great jobs report gave the bears the ammunition to pull the major indexes lower. However, a sharp rebound on Friday prevented a third down day in the markets.
Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +2.59% keeping the current buy signal intact. The effective date was June 3, 2009.
The international index has now broken above its long-term trend line by +0.84%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss. 
[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.
Reader Jim posed an interesting question:
Just read this article on Morningstar about the likelihood of a sideways market over the next 5+ years. Basically, the author, a senior vice-president at Legg Mason (fancy title for being a “chief salesman”) think we’ll likely be in a sideways stock market where momentum investing won’t work very well and value stock picking will.
Isn’t your system basically a momentum style of investing? In a sideways market wouldn’t your system keep invested in instruments that didn’t go up (due to sideways market) and didn’t go down more than the 7% sell point as opposed to looking for investment managers who were value stock pickers?
My view is somewhat different. While I agree that we’ll be in some sort of a sideways market, my definition is not as narrow as yours. As I have posted before, I think the market pattern will be more “w” like as we move into and out of recessions once the stimulus programs exhaust themselves.
I believe that the sideways pattern will be much wider than bouncing around the unchanged line by a few percentage points. I think it is far more likely that we will see sharp rebound rallies followed by mind numbing drops; but when all is said and done, the buy and holder will end up very likely with not much to show for.
And that includes value investors as well. After all, value investing is nothing more than an attempt to buy stocks at lower levels and hope for a rally. If the bear strikes, value investors will get clobbered just as anyone else with market exposure. Remember 2008? Only cash was king.
However, if the sideways pattern turns out to be as narrow as you suggest, that will offer a great opportunity to invest in income producing funds/ETFs, because the lack of volatility will keep your principal intact. Personally, I’d like that scenario as well, because I could invest in a high yielding fund like JNK and simply collect the 12% dividend without much downside risk.
Chances are that we will end up with a scenario that is in between. However, I am convinced that somewhere within the next few years (maybe even in 2010) another heavy hit to the downside will occur. That’s the moment where it pays to have insurance via a trend tracking safety net along with a strict exit strategy.
Disclosure: We currently have positions in the funds discussed above.
Some readers were still having trouble about the proper implementation of the sell stop discipline during the recent market pullback:
In my government thrift fund, I can chose from S&P; 500, small cap, international, bond and treasuries. The international fund dropped to just over 7% of its 1/14 high today but your international fund trend line is still in positive territory.
This is where I get frozen in a decision. It has broken the 7% line but it really is not a mutual fund but a broad index which should be closer to your international trend tracker. Shall I wait for you to ignite a sell on the international tracker or trade based on the 7% rule?
Here’s another one:
Has there been a sell stop triggered for international mutual funds? I see in your Friday blog that the international index trend line is still +2.97%. Would appreciate the clarification. Thanks!
Execution of the trailing sell stop takes precedent in the event that either of the Trend Tracking Indexes (TTIs) are still positioned above their long term trend lines.
The TTIs are slow moving indicators. Depending on when a market pullback occurs, waiting all the way for the trend line to be broken to the downside can wipe out your profits or increase your losses to an unacceptable level.
In the case of the international TTI, whether you’re using indexes or mutual funds, the sell stop has priority. If you got stopped out, and now are watching the market resume its upward trend, you have experienced a whip-saw as discussed in the past and need to look for a new entry point.