Things looked pretty dicey during the first half of the trading session yesterday as the major indexes headed straight south. A steady mid-day recovery effort got us almost back to the unchanged line with the Nasdaq displaying the most upward momentum.

A couple events caused some severe swings in the market. The first one was a typical case of the dog catching the car—now what? I am talking about the Irish debt saga that had traders breathe a sigh of relief on Friday as it appeared that the Irish would agree to a rescue package.

Now that it is in process of being finalized, doubts keep coming up that it might not be a great long term solution (it won’t) and that it might prolong the pain and duration of a recovery (it will).

At the same time, fears prevailed that the problem may spread to those countries in the on-deck circle, namely Portugal and Spain. In other words, the European debt crisis is in full swing and there will be more to come for sure. Stay tuned!

Adding to market uncertainty was a sudden FBI raid on a couple Hedge fund offices said to be part of a string of possible insider trading networks. Ah yes, it’s about time another major while collar crime hits the news wires. It’s been a while since Bernie Madoff…

Given all that, it’s amazing that the markets managed such a solid comeback. I would expect volume to taper off as we get closer to Thanksgiving, so any market moves may be exaggerated until we return to normal next Monday.

The Greek debt saga is being followed by the Irish debt saga, which will be followed by the—you fill in the blanks—debt saga.

In a never ending twist, country after country will be overloaded with debt that can never be repaid, all in the name of bailing out the current bond holders and kicking the reality can down the road.

Alen Mattich of Dow Jones Newswire is right on with this short and succinct analysis:

http://s.marketwatch.com/media/swf/main.swf

Sooner or later, an indebted country will step up and refuse to get sucked further into the bailout cesspool. Once the first default occurs, it may very well have a domino effect, with others to follow.

While that will have initially grave consequences on the financial markets, it will be also the first step of a long road to recovery, which includes getting rid of indebtedness of such magnitude that it otherwise would have burdened and negatively affected generations to come.

Recently, MarketWatch featured several negative stories about gold as an investment. Here are some positive thoughts in “King gold keeps a steely grip over its subjects:”

Gold has a place in anyone’s financial plan. It’s a proven insurance policy, and nowadays could even be a lucrative speculation.

“A small position is a hedge against everything hitting the fan,” Bernstein said about gold in a 2007 MarketWatch interview. “Nothing else quite serves that purpose as well.”

I never thought much of gold as an investment during the inflationary 80s and 90s when its price essentially went nowhere. The brief exception was late in 1987 when it peaked at $500, a level which it did not reach again until 2005. Take a look at this historic chart, which was too large to reproduce on the blog.

During the past decade, gold has been in a strong uptrend interrupted by sharp corrections, which at times reached 25%. Investors have historically connected gold with a hedge against inflation, which certainly has not turned out that way.

To me, gold is a hedge against uncertainty, which is why it has performed so well during the past year. Currently, I don’t use it as a speculative tool, but as part of a portfolio. As such, it can balance out market fluctuations similar to the effects that bonds have.

Case in point is the drubbing the markets took during the May/June 2010 period when the S&P; 500 lost -13.14%.

During the same time, a portfolio, including my currently preferred mix of bonds, equities, gold and country ETFs, declined by less than 2%. While this certainly will not happen every time the market sneezes, I believe it will reduce volatility and add stability especially during these uncertain economic times.

Whether you buy gold as an outright position via GLD, or more indirectly via a fund like PRPFX, it can at times keep your portfolio in better balance when the markets correct.

This improved stability is very important if you are using trend tracking as your investment methodology and are working with trailing sell stops, as it can avoid a whipsaw signal here and there.

Whipsaws are a necessary evil of using any exit strategy. If, with proper allocation, we can just avoid one here and there, this will have been a worthwhile and money saving effort.

Disclosure: Holdings in PRPFX and GLD

Lately, I have received several emails from readers being concerned about the state of the economy, domestically and globally, and the effect of policies clearly designed to lower the value of the dollar.

Larry’s comment/question is very typical:

I’ve been doing OK using your strategy, but I’m getting pretty scared with all the dollar devaluation talk I’ve been seeing.

What do you suggest we do to preserve our assets? Maybe it’s timely for you to devote a column to the subject–thanks so much for your comments.

It seems that the entire world is scrambling to deal with the Fed’s latest quantitative easing program, which originally was intended to lower rates and boost the ailing economy. Well, interest rates have moved higher, and our trading partners around the world see this as nothing more but an attempt to drive the dollar lower in order to support our exports.

Be that as it may, my view has always been that I try not to concern myself too much with things that are out of my control. While I acknowledge these issues and at times write about them, I do not let them affect me personally.

Yes, the dollar may be sliding lower until some serious European debt default pulls the rug out from under the Euro and pushes the dollar higher again. For a change, the Euro may then become the whipping boy of choice for a while until some other worldwide event has the pendulum swinging back the other way.

My preference is to keep my focus on those things that I can control. That is primarily my choice of investments and how to deal with them. While a lower dollar will increase prices for imported goods, that’s just a fact you have to live with. If you travel to Europe, you will feel the lack of dollar purchasing power the first time you pay over $7 for a gallon of gasoline, as I just experienced a few weeks ago.

However, domestically, a lower dollar has not yet had the same effect as for the international traveler. Nevertheless, investors are concerned about preserving and growing the value of their investable assets.

Most investors did not accomplish that during the past decade as two bear markets combined forces to turn that last 10-year span into a losing proposition for the S&P; 500. While the dollar headed south as well during that period, you can hardly blame it for causing stock market losses.

Rather than focusing on dollar devaluation, you are better served to reevaluate how you invest your money. My belief is that investors have lost far more during the past decade due to bear markets destroying portfolios than loss in purchasing power due to a weakening dollar.

If that applies to you, you need to change your investment approach and, if you have been a reader of this blog for a while, you know exactly where I am going with this.

Since we are living in an era of boom and bust, it is obvious to me that severe downside market slides are here to stay and will surprise the investing public every so often.

We have seen firsthand what has happened to Japan after their real estate bubble burst some 20 years ago (see arrow in above chart).

The financial markets rallied sharply after several severe setbacks leaving those hanging on to their investments for dear life with sharp losses in the end, while those following the trends managed to come out ahead. Just look at the above 20-year chart of the Nikkei 225 and tell me how well buying and holding the index would have worked.

That continues to be my theme. Preserve and grow your assets whenever the markets are favorable, but step aside when the brunt of a bear market is about to strike with full force.

While that will not help you with a sliding dollar, it will assist you in staying ahead of the game by avoiding a double whammy: Losing purchasing power due to dollar devaluation and seeing your assets getting pummeled when the markets plunge.

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

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

Sell offs followed by strong rebounds had the major indexes close at the unchanged line.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved above its trend line (red) by +5.80% (last week +6.19%) and remains in bullish mode.



The international index has broken above its long-term trend line by +6.98% (last week +7.06%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.



[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

After the slide of the past couple of weeks, the markets were in dire need of regaining some footing. They managed to accomplish that feat yesterday, as the major averages spent most of the session stuck in a sideways pattern.

In the end, nothing much was gained or lost, which in itself was not a bad thing as some stability was regained—at least for the time being. I held on to my two positions that I had marked to sell, since they were on the upswing and ended up gaining around 1% despite the overall market hugging the flat line.

The good news was the Dow 11,000 milestone held; so did the S&P; 500’s 1,177 level, which currently represents important support. While a lot of focus was on GM’s monstrous IPO, the rest of the world was still concerned about the European debt crisis along with stress in Asian stock markets.

It’s too early to tell if the luck of the Irish will run out, as cross borrowing and lending has everyone looking over their shoulder. Ireland’s government has borrowed large amounts of money to support their banking system, which is where now the game of musical chairs comes into play.

Irish banks are significant lenders to Britain’s housing market, while British banks have lent huge sums to Irish companies as Britain exports more to Ireland than to any other country in the world. Bottom line is that each has a vested interest in keeping the other afloat.

My guess is that most European countries are intertwined in a similar fashion. If just one participant refuses to play along, this whole house of cards may come crumbling down.

Obviously, any fallout in Europe, or Asia for that matter, will affect world markets immediately. It is therefore imperative that you watch the trends in the market place and exit your positions should a reversal occur.