In This Rally We Trust

Ulli Uncategorized Contact

The recent market rebound has shown a lot of legs ever since the S&P; 500 made a 12-year low on March 9th. This prompted many readers to ask whether this is still a bear market bounce or possibly the beginning of a new bull market.

Reader Mel had this comment:

As I’ve said before, I appreciate very much your sharing your opinions, including your passing on of the writings and videos of others. But for those of us who have been following your advice to stay on the sidelines (with the exception of the new hedge strategy) during the past few weeks, it would be very helpful if you could include a few lines in your daily blog just stating that you don’t trust this rally, even as the market continues to move higher 🙂

Thank you again for sharing your knowledge and opinions.

I pointed out in Bear Market Rallies that rebounds off new lows can be fierce and lengthy in duration. Of course, a subsequent correction can be just as violent as we’ve seen during the first couple of months of 2009.

To me, this is not a matter of trusting this rally. While I believe that this bear market is far from being over, it does not mean that we won’t get a prolonged period of rising prices even to a point where our domestic TTI signals an outright buy. If that happens, I will follow the trend; however, my hands will be placed firmly around the trigger for our exit points.

The line between bullish and bearish territory is clearly drawn in the sand, so there is never any question as to where long-term market direction is at. I’ve seen many newsletter writers being labeled over years to be either perennial bulls or bears.

I am neither.

If the market crosses the major trend line into bullish territory, I am bullish. If it heads south and crosses below the line, I am bearish. It’s as simple as that. I have no bias either way and let the market tell me what position to take.

Sometimes, when a period, such as this bear market, goes on for some time, a few readers have commented that I am too negative. That is incorrect; I simply go with the trend and my views at the time support the current reality and not some wishful thinking.

This allows me to treat events in the market place without too much emotion and simply focus on what’s most important, which is to be onboard when a major trend develops.

No Load Fund/ETF Tracker updated through 4/2/2009

Ulli Uncategorized Contact

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

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

Despite a sharp sell off on Monday, the major averages recovered and closed higher for the 4th week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -4.08% thereby confirming the current bear market trend.



The international index now remains -8.14% below its own trend line, keeping us on the sidelines.

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

The Stimulus Bill

Ulli Uncategorized Contact

Stimulating the economy at all costs has been the mantra of the past few months. Even the current G-20 meeting London will have its main focus on how to improve economic conditions worldwide.

Personally, I don’t expect anything in terms of a tangible action plan since some participants are not convinced that reckless stimulation will bring the desired results.

Reader Tom sent in this humorous description of not only how a stimulus bill works but also what the likely result will be:

Shortly after class, an economics student approaches his economics professor and says,
“I don’t understand this stimulus bill. Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?”

The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”

The Geithner Plan Explained

Ulli Uncategorized Contact

Some readers have asked how a private/public partnership to remove toxic assets from banks’ balance sheets would actually work. Much has been written about it, although not always in understandable terms.

Hat tip goes to Mish at Global Economics for pointing to the following video, which attempts to clarify the details of its implementation. You will probably be as surprised as I was to find out who would potentially invest in such a scheme.
Take a look. The video is about 12 minutes long, but well worth the time to better understand the concept:

[youtube=http://www.youtube.com/watch?v=n-arbfLTCtI]

Taking Charge

Ulli Uncategorized Contact

To me, it seemed like the government finally took charge of the auto industry by putting the pedal to the metal and in no uncertain terms announced as to what action is acceptable and what is not.

GM received a 60-day grace period from the government task force and Chrysler is looking to get engaged to Fiat in a hurry.

If those two auto makers don’t redo their business plan quickly, they may be facing possible bankruptcy. I think that public outcry over the propping up of AIG and senseless dumping of taxpayer’s funds into basically insolvent enterprises was finally heard loud and clear in Washington, hence this action along with the request of CEO Wagoner to step aside.

Apparently, the task force also confirmed what many had been suspecting for a while that GM is burning more cash than it earns, which does not bode well for those holding stocks or bonds.

Since the rally of the past 3 weeks was not based on sound fundamentals or an improving economy, but represented merely a rebound in a bear market, the auto news was all I took to put the bears back in charge.

This was only day 1 in a week that could serve up many more surprises in terms of economic reports. Consumer confidence, the Home Price Index and the all important and widely anticipated jobs report on Friday can all contribute to make this five explosive trading days.

ETF Liquidity

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Forbes featured an article titled “Mutual Fund or ETF: Which Is Right For You?” While most of the information posted is well known, I want to hone in on one segment addressing the liquidity of ETFs. Here are some highlights:

Liquidity is usually measured by the daily trade volume, which is generally expressed as the number of shares traded per day. Thinly traded securities are illiquid and have higher spreads and volatility. When there is little interest and low trading volume, the spread increases, causing the buyer to pay a price premium and forcing the seller into a price discount in order to get the security sold. ETFs, for the most part, are immune to this. ETF liquidity is not related to its daily trading volume, but rather to the liquidity of the stocks included in the index.

Broad-based index ETFs with significant assets and trading volume have liquidity. Narrow ETF categories and even country-specific products have relatively small amounts of assets and are thinly traded. ETF liquidity could dry up in severe market conditions, so you may wish to steer clear of ETFs that track thinly traded markets or have very few underlying securities or small market caps in the respective index.

ETFs have exploded onto the investment arena over the past few years with now over 700 of them being available, of which 447 are currently featured in my weekly StatSheet. I have recently removed some and will continue to do so while adding others.

Just because a huge variety of ETFs specializing in many sectors is offered does not mean that they are suitable for investment. Some have trading volume of only a few hundred shares per day, which makes me wonder if they can even survive.

Remember, one of the reasons many investors select an ETF over a mutual fund is that it can be traded during the day allowing faster portfolio adjustments due to market conditions. This also means that you want to be able to get in or out quickly, which only works if liquidity is not an issue.

When choosing an ETF, be sure to make liquidity one of your selection criteria so that you don’t get stuck giving back too much in profits or unnecessarily increasing losses due to low volume not being able to accommodate your order efficiently.

For me personally it means that I want to see at least 3 times the average trading volume of the order I am planning to place.

For example, using SH for our hedge strategy, I was able to fill a $2 million limit order in about 20 seconds. Of course, SH trades on average 2 million shares a day, which amounts to trading volume of some $150 million; that made my order insignificant and helped me to get a speedy execution.