In my last two posts, I talked about investment choices and the importance of using a sell stop discipline.

When you work with a trailing sell stop, you have to accept the fact that an occasional whip-saw signal will become part of your investment life whether you like it or not.

Taxxcpa had this comment:

A whipsaw possibility is like the cost of insurance. The cost of a couple of whipsaw losses is not too big a price to pay and you should recoup those losses when the trend does not end with a whipsaw and keeps moving up.

Even if this is a bear market rally, there is room for profit if the rally continues until the next sell signal is at a higher level than when the buy signal occurred.

That’s exactly my point. In most areas of your life, you have insurance in place to cover catastrophic events. You pay for this peace of mind whether these events occur or not.

The equivalent in investing is the small cost associated with an occasional whip-saw. However, this requires two things on your part:

1. Have a disciplined investment strategy in place with clearly defined entry and exit points.

2. Check your ego at the door by admitting that an investment decision may have been wrong (or too early) and execute your sell strategy before a small loss turns into a big one.

Millions of investors could have avoided portfolio disaster year, if they had acted on these two simple ideas.

History tends to repeat itself. If you did not heed these warnings last year and paid the price for ignorance, make sure that you are better prepared next time the bear makes an appearance.

[Click chart to enlarge]

Hat tip to Doug Short for providing this updated chart (through 5/8/09) showing the “four bad bears.” I added the red arrow to indicate where we are currently at to show how this current market rebound compares historically.

The S&P; 500 closed the week at a new rally high 37.4% above the March 9th low. Are we in a new bull market, or is this a bear market rally?
…
We continue to be fascinated with the saga of the Four Bad Bears. In nominal terms, the latest rally puts the S&P; 500 well above the Dow Crash of 1929 over the equivalent time frame.

As you can see from the chart, the S&P; 500 has rallied 37.4% from its lows on March 9, but is still down 40.6% since the beginning of this bear market. My belief is that this is still a bear market rally, which is about to turn bullish according to my domestic Trend Tracking Index (TTI).

That’s why I keep singing the same old song that, if you participate in this uptrend, you must work with an exit strategy. If you don’t, take a look at the above chart again and watch what happened to the gray line representing the crash of 1929. Despite many up turns, the bear market resumed until all buy and hold investors were wiped out with total losses from top to bottom of -89.2%.

I am not predicting that we may facing the same scenario, I am simply saying that, if you learned anything from last year’s debacle, it should be that the masses of investors along with their advisors will likely be wrong again when the bear returns.

With the international Trend Tracking Index (TTI) having crossed above its long-term trend line by +2.94%, after recalculation yesterday, a Buy signal has been generated effective Monday, May 11, 2009.

The domestic TTI has also moved to within striking distance (-0.49%) of crossing its own long-term trend line to the upside, which may happen next week.

If the domestic Buy signal comes to pass as well, you have a variety of choices as to how to participate:

International Buy Signal

1. If you have a 401k account that is currently sitting in cash, you could allocate a percentage to the international area. Usually, I start with 1/3 of portfolio value and use a 7% trailing stop loss in case this move turns out to be a head fake.

2. If you are not comfortable, you can sit this buy signal out or allocate a smaller percentage. Nobody says that you have to participate.

Potential Domestic Buy Signal

Here you have definitely more choices especially if you followed and set up the SimpleHedge as per my free e-book:

1. Keep your SimpleHedge position as is or increase it to 100% of portfolio value

2. If your hedge is already at 100% of portfolio value, sell the short position and become net long with 50% of your portfolio. If the trend starts to look shaky, you can add the short position back in.

3. If you’ve been out of the market and waiting for this Buy signal, you could allocate 1/3 or more of portfolio value to some of the top ranked funds/ETFs from the most current StatSheet. Remember, the higher the ranking, the higher the volatility; if you’re conservative, drop down a few ranking points on the table.

4. Allocate 1/3 to each the international and domestic arena. Add to those positions if the market moves your way, after you have gained 5% until you eventually become fully invested.

5. Allocate 1/3 each internationally and domestically and fill the balance with small exposure to those sector and country ETFs that are showing strong upward momentum.

6. Use a combination of the above to best suit your risk profile. The goal here is to be onboard those areas with strong upward momentum.

Never ever do any of the above without having an exit strategy in place and actually executing it when the time comes. I personally use a 7% trailing stop domestically and internationally and 10% for sector and country ETFs.

I still believe that the current market rebound is in total disconnect with economic reality. Record unemployment numbers and continuous revisions of job losses do not paint a rosy picture. All this exuberance is simply based on hope that we will be turning the corner in a few months economically speaking and that banks are now on solid footing.

While that is my opinion, it has absolutely nothing to do with my investment decisions. They are based on trends and not on what I think about the fundamentals or the state of the economy.

However, I will use a cautious approach by keeping most of my hedges intact, adding others, but I may use some outright long positions as well.

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

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

Up, up and away with no worries was the motto this week as the major indexes gained strongly.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -0.49% thereby confirming the current bear market trend.



The international index has broken above its long-term trend line by +2.94% triggering a Buy signal for that area. The effective date will be Monday, May 11, 2009.



[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.

So far, nothing has been able to kill this current market rebound and yesterday was no exception. Despite some leakage about tomorrow’s results of the stress tests, the major indexes moved higher with the Dow closing above the 8,500 level.

By the time you read this on Thursday, you will most likely know if the stress test results will be fueling this rally or bringing it to a screeching halt—or anything in between.

Hat tip goes to Dr. Housing Bubble this week, for the following story on the Pecora hearings and Bill Moyers’ interview:

Mr. Pecora had an uncanny ability to put together complicated Wall Street jargon into a tangible and understandable argument. Not only did he have this ability, but he understood what the public would be furious about. We need to remember that at this time, it had already been over 3 years since the Crash of 1929.

Bill Moyers has an excellent talk which came out last week regarding the Pecora hearings:

http://www.pbs.org/moyers/journal/04242009/watch.html

There’s a new name for a glorified version of buying and holding I had not heard before as featured in “Stop, look and listen:”

Whenever investors roiled by the market’s downturn declare that as an investment strategy “buy-and-hold is dead,” Leonard “Pat” Goodall, editor of the No-Load Portfolios newsletter, thinks about how mistaken they are.

“Most people ought to have a foundation portfolio, a core of investments they believe in, and then trade around that,” Goodall said. “Asset allocation is still fundamental, and it may sound like you then buy and hold — and both asset-allocation and buy-and-hold haven’t worked well in this market. So it sounds old-fashioned, but it will work in time.”

[Emphasis added]

Read that highlighted section again. It opens up more questions than it provides answers. Sure, we all need to monitor and examine our holdings, but I don’t see any useful suggestion as to when and how to determine to protect gains or conclude that a fund has lost its edge.

This is nothing more but putting a different lipstick on the same old buy-and-hold pig. Why do you have to have a foundation portfolio to trade around? I would like to see how that foundation held up last year or in any prior bear market.

To my way of thinking, articles like this one mislead investors by offering the carrot that buy-and-hold over time will work fine without pointing to the pitfalls (translation: sharp portfolio draw downs) that accompany such a blind approach.