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.

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.

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.

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.

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.

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.