Domestic Buy Signal Generated

Ulli Uncategorized Contact



Given this week’s run-up, the markets held up well today and pushed our domestic Trend Tracking Index (TTI) clearly above its long-term trend line by +1.30%.

This is where the rubber meets the road, which means that a Buy Signal for broadly diversified domestic equity funds/ETFs has been generated. For tracking purposes, the effective date will be tomorrow, June 3, 2009.

We will now increase our domestic exposure via hedged and outright long positions. If you follow along, I suggest an initial allocation of 33% of portfolio value to this arena.

Our exit point at this moment will not be the crossing of the trend line to the downside, since that could happen quickly, but it will be based on each individual holding’s 7% trailing stop loss.

Again, following a Buy signal immediately is not as crucial as executing a sell signal promptly. If you’d rather wait a few days until Friday’s employment numbers have been digested, that is fine. If the rally continues, you merely lose a few points on the upside, while missing a sell signal could have very negative effects on your portfolio.

The old adage “it’s easier to live with lost opportunity than with lost money” still holds true today.

Almost There

Ulli Uncategorized Contact

Today’s market activity pushed the major indexes higher and with it our Trend Tracking Indexes (TTI). The domestic TTI has now crossed its long-term trend line by +0.97%.

I will wait another day to see if this was just a one day pop followed by a drop on Tuesday before declaring this a new Buy signal. The domestic TTI only crossed above the line last Friday, and I usually like to see either a 1% move above or 3 trading days in bullish territory before establishing outright long positions.

However, I will move ahead with setting up further hedges regardless of the outcome. Nevertheless, this is crunch time for me, and my posts will be short and succinct for a few days.

Sell Stops Revisited

Ulli Uncategorized Contact

Trailing sells stops are an important part of trend tracking in order to protect capital by guarding against vicious long-term trend changes such as we’ve seen last year.

Common sense would dictate that any investment approach should incorporate some kind of an exit strategy but, unfortunately, most investors and advisors have not caught on to that simple bit of investment wisdom.

From time to time, readers email me with comments on the implementation of sell stops. Let’s take a look at what Paul had to say:

I’d appreciate (and perhaps other readers as well) your expanding on the use of stops. I currently put them in place on any position with an ETF or stock since I cannot watch the market. Have you done any testing (like with your hedging strategy) that indicates using end-of-day close and some type of exit the following day is better than keeping a stop order on the books?

The idea is to follow the signals as they occur. I treat ETFs the same way as I do mutual funds in that I base my sell decisions on day-ending closing prices only. Intraday volatility can otherwise stop you out prematurely. This is not an exact science, nor a matter of right or wrong, but simply one of preference.

When a closing price hovers around a sell stop point, I may give it another day to see if the trend moves back up or if it clearly pierces my intended stop point to the downside. In other words, I am introducing a little bit of subjectivity to avoid a possible whip-saw.

Another reader commented as follows:

I appreciate your thoughts on exit strategies. Being at work during market hours, I’ve often relied on sell stops, which I reset based on closing prices. Granted, they’ve sometimes thrown me out of positions at inopportune times, but they’ve also saved some profits and limited some losses.

If I switched to alerts and submitted market sell orders before the next opening bell, the opening volatility could hurt since I couldn’t be sure what price my shares would bring. It’s too bad that I can’t delay submitting morning trades until the market has opened and settled down.

Again, when a sell stop has clearly been triggered, the goal is to follow it and get out of the market. It does not matter whether there is opening price volatility or not; there is no need for you to attempt to do some scalping in order to save a few dollars.

Keep the big picture in mind, which is to follow long-term trends until they end. When markets reverse direction, you’ll never know ahead of time whether that reversal can turn into a disaster with lightening speed such as it did last year.

On the other hand, a whip-saw signal is always a possibility. However, I consider such an event as simply cheap insurance to guard against major portfolio destruction such as we’ve seen in 2008.

Sunday Musings: Too Good To Be True?

Ulli Uncategorized Contact

Especially in the investment arena, you are bombarded with opportunities that many times sound too good to be true. Even sophisticated investors can fall prey to the likes of Bernie Madoff, who squandered some $50 billion of clients’ money.

Pyramid schemes will continue to work most of the time, because they are focused on investor greed and/or ignorance along with the fact based on the old adage that “there is a sucker born every minute.”

I was reminded of that when an elderly client of mine recently fell for something that, to my way of thinking, sounds too good to be true. It involved the questionable world of annuities.

I am not saying this to put down annuity investments, but my negative view has been shaped by 25 years of experience in never having met anyone who was satisfied with his annuity features. It’s a matter of fact, I have spent more time having helped to get people out of an unwanted annuity than supporting their purchase.

I attribute this to the fact that most investors do no go out researching and purchasing a suitable annuity, but that they “have been sold annuity products,” most of which subsequently did not live up to the owner’s expectations.

My client decided on his own to enter into an agreement, of which he shared only that he bought an annuity in XYZ Company paying a 12% bonus and 8% guaranteed.

In other words, if he invested $100k, his annuity would be worth $112k right away with an 8% guaranteed return. I don’t know for how long.

If this sounds too good to be true, it probably is. I consulted a friend who used to own an insurance company and sold these products, and he was dumbfounded at the terms. He could understand the bonus part, but the return.

I am not making any accusations, since I don’t have all the facts, but it makes me wonder if this insurance company is raising assets at all costs.

After all, what can go wrong? If you are a big name company, and you make deadly financial mistakes, there will be TARP, GARP or a host of other programs available (at taxpayer’s expense) designed to bail you out.

It’s the moral hazard environment we have become accustomed to live in. If you have any thoughts as to how an insurance company could offer such a product, please share them with me.

I really would like to be wrong of the suspicion that this could end up eventually being another bailout scheme.

Trouble In Bond Paradise?

Ulli Uncategorized Contact

Interest rates have been going up and have affected not only mortgage rates but U.S. Treasuries and bond funds as well.

Reader Eric was concerned about his bond index fund holdings in his 401k as he read Kiplinger’s “A Tipping Point In Bonds:”

A 27-year-long bull market in bonds is over and a brutal bear market is under way, says Tom Atteberry, co-manager of FPA New Income (symbol FPNIX). That’s bad news for bond investors, particularly those holding Treasuries and municipal IOUs.

Atteberry, who spoke with us at the annual Morningstar Investment Conference in Chicago, says there’s good reason to believe that the run-up in Treasury yields that began late last year will continue. Between December 18 and May 28, the yield on the ten-year Treasury has zoomed from 2.04% to 3.67%. That has led to big losses for holders of Treasury bonds because bond prices move inversely with yields. Year-to-date through May 28, the Barclays Capital US Treasury 10-Year Term index has lost 7.9%; an index of Treasuries with maturities of 20 years and longer has plunged 22.2%

The arguments for the sell-off in bonds are well known. The U.S. is issuing an enormous amount of debt — Pimco bond guru Bill Gross estimates that gross issuance in 2009 will total $3 trillion. And eventually, once the deflationary undertow of unemployment and slack capacity in the U.S. weakens, inflation will move front and center in the minds of investors.

Atteberry’s thesis spells trouble for municipal bonds, which analysts have been pointing to for months as attractive alternatives to Treasuries. Interest from muni bonds is free from federal taxes, and the sector historically has seen extremely low default rates. Thanks to those benefits, munis have historically offered about 80% of the yield of Treasuries.

As munis were pummeled during the panic of 2008, they at one point offered twice the yield of Treasuries, making them even more attractive than usual. As long as munis offered a substantial yield cushion over Treasuries, they didn’t necessarily stand to suffer from a rise in government-bond yields.

But as bond investors regained their appetite for risk in 2009, they pushed up muni prices — and pushed down their yields — to the point where that cushion has essentially disappeared. As of May 22, the yield on ten-year triple-A-rated municipal bonds had fallen to 81% of the yield on the ten-year Treasury.

Nobody knows for sure how this bond debacle will play out. Some of my clients have been holding VBTSX, and the change in price has been negligible.

From my vantage point, the solution to deal with a potential drop in fund prices due to higher yields is the same as if you were invested in equities. There is no need to guess or panic but simply track the trend.

How?

You use the same sell stop discipline as you would if you were invested in an equity mutual fund/ETF. Find out the price you paid for the bond fund you are holding and apply a trailing sell stop of 5% or 7% or whatever fits your risk profile best.

If the long-term rally in the bond market eventually comes to an end due to higher yields, the trend will reverse and trigger your trailing sell stop point. If you owned this bond fund for a long time, chances are that you will be locking in profits. If you have just established the position, the trailing sell stop will limit your losses.

The investment methodology applied with trend tracking does not change because you are invested in bond funds vs. equity funds. It is designed to keep you in the market while prices are going your way and out of it with minimum losses before disaster strikes and annihilates your portfolio.

No Load Fund/ETF Tracker updated through 5/28/2009

Ulli Uncategorized Contact

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

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

A last hour charge propelled the major indexes to another weekly gain.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by a scant +0.69%%. We will watch for a couple of days to be sure upside momentum can be maintained before issuing a domestic Buy signal.



The international index has now broken above its long-term trend line by +7.90%. 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.