This week so far has been a little roller coaster with an up day followed by a down day, which was followed by an up day.

The moves have been fairly contained during this Holiday shortened week, and I would not read too much into these market swings.

Since the Wall Street mavens support a quarter to quarter mentality, it’s not surprising to see the focus on the S&P;’s +15.2% gain during the past 90 days. This, of course, does not tell the entire story.

Year-to-date, the index is up a scant +1.81%. All of the gains for the past quarter resulted from left over momentum from the March low rebound and happened within the first 5 weeks. Since May 6, the market in essence vacillated aimlessly and gained absolutely nothing.

In other words, the quarter started out with a bang and ended with a whimper, which makes me question the sustainability of the move.

While the rebound was strong enough to generate buy signals for our international and domestic Trend Tracking Indexes (TTIs), there has not been much follow through to the upside, which means we have not gone anywhere with our positions. As I have repeatedly said, a new catalyst is needed to provide the impetus for further gains.

Today, a day earlier than usual, the employment report will be published with a June loss of 498,000 jobs to be expected. Anything substantially less will very likely be greeted with a rally, while a worse figure could cause the markets to sell off.

With the international markets having come off their highs, after racing out of the gate following our Buy signal on May 11, 2009, many readers have been stopped out of their positions and are looking for a new entry point.

Reader Dave had this to say:

I thoroughly enjoy reading your daily blog. I am convinced that your method is far superior to buy and hold but seem to have stumbled out of the gate and would appreciate some help in a couple of areas.

I am 54, have suffered through the buy and hold of the early 2000s and 2008.

Dave brings up some good points that are worthy of further examination.

First, let me make it clear that, once a sell stop has been executed, you will find yourself in no-man’s-land. If the markets head further south, you’ll feel like a hero in that you made the right decision. If, on the other hand, the markets remain stable, or start to move back up, you may question the wisdom of your choice.

No matter what you do, you need to simply accept the fact that there is no perfect solution to this dilemma. You made the right decision by controlling the downside risk, and you now can either stay on the sidelines or try to find a new entry point.

You are not alone; this happened to me in my advisor practice as well. However, jumping back in, just because the markets moved a couple of percent, may not be the right choice.

While there are probably several options, let me share with you what my process of re-entering consists of. Before establishing a new position, I want to make sure that whatever trend is in place is sustainable.

Say I bought an ETF at $40 and it made a high of $44, before retreating and stopping me out at around $40.50. That leaves me with a slight gain. The markets bob and weave, and this ETF now hovers around the $41.50 level. Should I buy in or not?

Personally, that is not enough confirmation for me to believe that the trend has continued. If I like this particular ETF, and want to reinvest in it, I want to see the old high of $44 taken out before pulling the trigger and establishing a new position.

While this goes against conventional wisdom, I am more comfortable jumping aboard once momentum is accelerating and that means a break out to the upside.

Keep in mind that this is in no way an exact science but merely my way of trying to avoid another whip-saw by letting the market show me the way. If this ETF makes new highs, that to me confirms a resumption of the uptrend. If it doesn’t, I am glad I stayed on the sidelines.

One reader had the following questions in regards to controlling emotions when making investment decisions:

How long did it take you to be disciplined to follow your trend change in the contexts of all your emotions that a market may be just “”too high”” when it turns positive to reinvest?

Is that a big advantage of a fee based service to invest others’ funds?

Being an engineer by training, I never liked any approach to solving a problem that did not have a clear projection of several possible outcomes along with potential solutions as to how to deal with them.

I guess the need to have some means of control translated into an investment strategy that at offered me an opportunity to try to make unemotional decisions, because I already had decided that I could live with the possible outcomes (via a sell stop discipline).

It’s simple but not easy. No matter how long you’ve been involved with investing, there is always some emotion involved; you just learn how to deal with. Again, if you can live with the projected worse case scenario, then that should limit your emotional involvement.

Most investors have a hard time with it, so for some it’s simply easier to have someone else make the decisions for them. That assumes, of course, that the investor is in agreement with the methodology being employed, especially with the exit strategy.

In some ways, it’s almost easier to handle other people’s money, because you’re not emotionally attached, although you are responsible for it. I try to educate people in advance so that there are no surprises later on.

Much depends on the client’s attitude as well. There are some, whose life consists of following not only every tick of their holdings, but they also tune into every silly investment show on TV. That’s usually counter productive to any investment approach.

I have some clients who simply have no interest in the financial markets at all. They live busy lives and just want to be assured that there is a plan in place to protect their assets in case disaster strikes. They look at the big picture and spend no more than a few minutes a month reviewing their statements.

Even when following a pretty straight forward approach such as trend tracking, there are still subjective decisions to be made. They are not necessarily emotional in nature but require “user input” so to speak. That usually happens at major inflection points when buy or sell signals get generated.

To avoid potential whip-saw signals, I let the Trend Tracking Index (TTI) clearly pierce its long-term trend line before pulling the trigger. That is what I consider “user input” and is designed to simply avoid unnecessary trading signals whenever possible. Sometimes, we have benefitted by such a decision and sometimes it did not matter.

The key is to systemize an investment approach as much as possible, but I don’t think you can expect that effort to reach the 100% level.

Reader Peter had these comments recently:

I always enjoy your daily Blog and I do follow some of your investment principles. Keep up the good work.

A point that I think is important is to not just compare figures with the S&P; 500, but also Europe and Emerging Markets. Any Buy & Holder with “brain in gear” can be expected to be diversified across the global markets.

There is not much research necessary to evaluate how diversification across the globe has fared during last year’s market collapse. Let’s take a look at a chart comparing the S&P; 500, with Europe (IEV) and the emerging markets (EEM) over the past 2 years:



[Click chart to enlarge]

As is the case most of the time, a picture is worth a thousand words. All equity markets declined with utter abandon, and that is no surprise. Equities will benefit only in a bullish environment to varying degrees and will collapse when the market turns bearish.

This is simply common sense and not rocket science. And nothing is more uncommon than common sense when it comes to investing.

Many investment professionals either don’t have a clue how to indentify a turn in market direction or, if they do, they may not want to take any action as explained in “The Naked Truth.”

Several clients of mine have been involved with 529 college savings plans. The love affair with these instruments came to an end last year when many realized the severe limitations of getting out of invested positions within the plan guide lines.

Reader Chris summed it up this way:

What would you do about funds in a 529? I feel helpless since you can only change the allocation once a year!

Let me first say that I am not expert on these plans. However, ever since they were introduced, my view has been negative. Not because of what the plans were meant to accomplish, but because of the limitations on the investment side. To be able to only change an allocation once a year is totally unacceptable to me.

While this worked fine during bull markets, last year’s market crash provided a reality check for those invested in 529 plans. Some of my clients simply opted out, paid whatever taxes were due, and transferred the proceeds to a custodial account.

Saving taxes to provide funds for college is a wonderful thing, but not if it comes at the expense of making wise investment decisions. If you have been involved with such a 529 plan, I like to hear your experiences so other readers can benefit as well.

A few days ago, Mish at Global Economics wrote a nice piece called “Long Term Buy and Hold Is Still Bad Advice.” I want to hone in on a few paragraphs outlining well known pitfalls when investing that are very important; however, most investors are either not aware of them or don’t pay attention:

Why Is Bad Advice So Common?

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet “Stay The Course”.

There you have it. Nothing has changed since the last bear market in 2001 as I wrote back then in “The Conflict of Interest Game,” “The Demise of Buy and Hold” and “Your Worst Enemy to Successful Investing.” These articles are 8 years old, and I am sorry to say they are just as true nowadays as they were back then.

A Look Ahead

Buy and hold is no more likely to be a good choice for the next 5 years than it was for the last 20.

Yes, no one knows how the next few years will play out, but a similar scenario, as Japan has experienced, is a distinct possibility.

From this point forward, we may see rally attempts followed by sharp drops into bear market territory or vice versa. So far, this century has not been kind to the buy-and-hold crowd with the S&P; 500 being down 37% since 12/31/1999.

I believe that there are several steps you can take to guard against the unknown:

1. Never ever listen to anyone with a biased opinion, such as a commissioned sales person. The closest you can get to receiving unbiased advice is from a fee only advisor.

2. Never take any investment advice from the media.

3. Follow the trends in the market place and be disciplined by establishing an exit point at the time you make your initial investment.

4. Take a little time to explore my SimpleHedge Strategy. I believe it has great potential to successfully deal with the uncertain market conditions we will be facing over the next few years by greatly reducing market risk while offering good profit potential.