Using The Benefit Of Hindsight

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Our International Trend Tracking Index (TTI) signaled a buy on 5/11/09, which was followed by the Domestic TTI’s move into buy mode effective 6/3/09.

As is often the case, just because long-term trend lines are crossed to the upside, it does not mean all is smooth sailing from there. The markets had a 4-week sell off before resuming their respective up trends. Many sell stops were triggered as the major indexes retreated and then recovered.

Yes, that constitutes a whip-saw signal, which is the price we pay from time to time in order not to go down with the masses when the markets head south. It appears that, at least for the time being, the uptrend is back intact. With that comes the potential decision as to whether you want to jump back in or simply keep those positions that were not affected by the sell stop.

There is no right or wrong, it simply depends on your personal preference along with your risk tolerance. I added some positions earlier in the week by selecting funds/ETFs that have held up well during the recent sell off.

How?

Now that I have the benefit of hindsight, I went back to the beginning of the domestic Buy cycle date and analyzed which funds/ETFs were not affected by the recent pullback. The tool I use is my own indicator, which is referred to in the StatSheet Glossary of Terms as MaxDD% (Maximum DrawDown percentage)

Here’s the definition:

If you were to go the beginning of a buy cycle and measure DD% (shown in the StatSheet table) for a given fund every trading day, and then select the worst (largest) DrawDown number, you would have the information that I call MaxDD% (Maximum DrawDown Percentage).

This allows me to look back at anytime and see which funds have held up best and never hit our 7% sell stop. Those are the ones with a low MaxDD% (low volatility) number and may be among my primary selections for the next Buy cycle.

To be clear, this does not guarantee that, during the next downturn, these funds will not trigger their sell stops. However, I believe that my chances are enhanced, by using funds with a little less volatility, to possibly avoid another whipsaw.

The list below features those domestic ETFs, whose sell stop point of 7% never got triggered during the recent market downturn:



In the following table, I have mixed in mutual funds and ETFs with a MaxDD% of less than 7% since 6/3/09:

[Click on tables to enlarge]

As I have noticed in the past, and recent market behavior confirmed this again, there are far more mutual funds than ETFs that that have better resisted market corrections such as the last one. My guess is that sometimes active management does pay off.

No Load Fund/ETF Tracker updated through 7/23/2009

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

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

Decent earnings kept the rally going with all major indexes gaining over 4% for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +4.79% 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 +14.09%. 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.

What Recovery?

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I have always liked contrarian thinking, especially if it goes against the usual sound bites dispensed by the government or even Wall Street.

Forbes had this to say in “What recovery? This Bond Investor Says It’s A Hoax:”

The markets may be saying a recovery is imminent but a famed bond investor with a record of prescient calls thinks that’s bunk–and is sticking with a big bet the slump is here to stay.

A sort of gunslinger of the fixed-income set, Van R. Hoisington of Austin, Texas, says he won’t budge from his risky strategy of letting nearly half of the $4 billion he manages ride on long-dated, zero-coupon government bonds. Those can tank on even a whiff of recovery.

It’s a bet that has worked out wonderfully for his eponymous money management firm–until recently. In the last three years a mutual fund run by Hoisington Investment Management has returned 10% annually vs. 6.4% for the broad bond market. But the fund has fallen 19% so far this year as signs emerge the economy may be bottoming.

On Friday came more bad news, so to speak, for the 68-year-old investor.

The Commerce Department reported that housing starts unexpectedly rose 3.6% in June. Investors saw that as yet another sign the economy is reviving and dumped Treasuries, including Hoisington’s zeroes, in favor of other assets. That in turn pushed the yield on the benchmark 10-year note to 3.64%, the highest in nearly a month.

Ever the contrarian, Hoisington, along with his partner, Lacy H. Hunt, believe the market’s got it wrong. The yield will shift direction and fall, they say, eventually hitting 1.5% or so.

Now that’s low. Even during the depths of the credit crisis, when many investors feared capitalism itself was in peril, the 10-year yield never sunk that far–hitting 2.06% after Lehman Brothers failed.
…

In the summer of 2007, when economists from Goldman Sachs and Merrill Lynch were pulling back from their forecast of a slowing economy, Hoisington predicted a recession in a year and a 10-year yield of 3.5% within two. He turned out right on both counts.

Now the markets are suggesting the economy is on the mend again and inflation, that scourge of fixed-income investors, is around the corner.

Hoisington advice? Forget what most investors think and focus on the only two things that matter for inflation: demand and supply. And right now, he says, there’s too little demand and too much supply for prices to rise.

In fact he thinks inflation’s opposite will prevail–deflation, or a sustained fall in prices. He points to a litany of depressing figures of late, including factories running at their lowest levels in six decades, unemployment broadly defined at all-time highs and people lucky enough to have jobs working the fewest hours per week on record.

And if that isn’t bad enough, Hoisington argues all the new government spending eventually will slow the economy, not speed it up. He says bigger federal outlays mean bigger federal debt, crowding out private investment to devastating effect.

[Emphasis added]

While I don’t necessarily agree with Hoisington’s investment approach, I do agree with him on the state of the economy and the effect of government spending.

Sooner or later, even Wall Street with its infinite wisdom will have to realize that the alleged recovery is not on track as hoped for. Once that happens, you will see the current trend reverse and head the other way. I am not sure when that will happen, but I suggest for you to be prepared to deal with it.

Illusionary Profits

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When I heard of strong earnings released by Goldman Sachs last week, I had to shake my head in disbelief wondering if anybody saw through the charade of bank earnings.

Apparently others saw it too, as the WSJ featured in “The Bank Profits That Weren’t:”

Most investors and analysts saw through the first wave of bank earnings for what they were – pretty poor quarters. Bank of America and Citigroup would have posted billions in losses had they not booked gains from asset sales and Goldman Sachs Group made its trading gains in a market void of real competition.

Tuesday’s Writing on the Wall column in MarketWatch takes a look at the artificial means the financial industry used to make the second quarter look better than it really was.

“It’s hard not to be skeptical after the financial community made the choices it did last week. Rather than come clean with the brutal truth that the banking business stinks and the investment banking business isn’t much better, the biggest firms chose to obfuscate, be dim, mislead and camouflage what in reality was the kind of crummy quarter one would expect in the middle of the worst recession since World War II.”

Here’s how:

“Wall Street’s best client was Uncle Sam. Forget the government-mandated business. Washington continues to keep the financial system afloat with $242 billion in commercial paper guarantees, $1 trillion committed to the Term Asset-Backed Secured Loan Facility, $455 billion committed through the Term Auction Facility and billions more in other programs.

Even with the government greasing the gears, the nation’s two biggest banks, B. of A. and Citi, still would have shown billions in losses had they not sold a combined $16 billion in pre-tax assets, and these are banks that have taken a combined $102 billion in taxpayer cash.”

The column underscores a point made by the WSJ’s Dan Fitzpatrick and David Enrich on Monday that not only was business tough for banks in the second quarter, the chief executives of those firms believe the second half of the year will be worse. One problem, according to a story Monday by Lingling Wei and Maurice Tammen, is commercial loans that are defaulting at the fastest rate in two decades.

There is Wall Street reality and then there is Main Street reality. Sooner or later the two will clash, most likely in favor of Main Street reality. Wall Street will have to adjust its lofty views and come face to face with how things really are.

While you and I will have no control if and when this event is this taking place, there is one thing we all can do: Keep our sell stops in place and act when they are triggered.

Inching Higher

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Follow through bullishness from last week gave the markets another jolt yesterday and all major indexes gained—although on continued low volume, which makes this rally suspect.

Strong earnings reports from Goldman Sachs and Intel last week seemed to keep the bullishness intact for the time being. Technically speaking, the S&P; 500 is now facing an important resistance level at 951. The next few days will be a test to see if there is enough follow through buying to break to the next higher level or if this marks a point where renewed selling will pull prices lower.

Helping the bullish cause today was an announcement from CIT that a deal with bondholders was made to keep the company afloat. At the same time, the U.S. index of leading indicators rose 0.7% in June supporting the view that the recession maybe nearing the end.

I sure won’t hold my breath and will keep my mostly defensive positions in order to be prepared for further volatility. This is not the time to try to be a hero when it comes to taking undue risk.

Clever And Clueless Mutual Funds

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Forbes featured an article titled “Clever/Clueless,” which featured well known funds, which stand out for better or worse:

The market can make anyone look either clever or clueless in the short term, but some fund managers have been skilled enough to post market-beating returns over the last 10 years.

Others have performed dismally in both bull and bear markets. CGM Focus has an annualized 10-year return of 15.9% and an “A” rating in both up and down markets.

This fund has been spectacular at times: in 2001, when the S&P; 500 lost 12%, it gained 48%. In 2007 when the S&P; managed to eke out a total return of only 5%, it returned 80%. One caveat: With a highly concentrated portfolio of only 20 or so stocks, CGM Focus can also be risky. In fact, over the last 12 months the CGM fund had a -58.6% return versus -26.2% for the S&P.;



[Click on chart to enlarge]

There is just no right or wrong answer, although many investors are still looking for the one fund to be held through thick and thin.

CGM Focus, despite its long term stellar performance, turned out to be the worst fund during last year’s meltdown and should not be held regardless of market conditions. Losing over 58% in the past 12 months is just not acceptable and investors that were banking on this fund to protect them from market uncertainties faced a rude awakening.

Simply following long-terms tends, and taking evasive action at critical crossover points, would have avoided at lot of portfolio pain in 2008 just as it did in 2000.