In last Saturday’s post, I talked about the current bear market rally, which struck a hot button with several readers. Ray left an excellent and detailed comment, which I will use as a basis for today’s post since it covers an important area of investing. Here’s a portion of what he said:

Patience is a virtue that has tripped up many an investor, including the author of this note over the years. As you look at monthly charts and see a rally since March 9, all of us wish we were invested to catch some of the explosive upside. Unfortunately, you might as well double down in Vegas, because (as you have written) there is no way of seeing the bottom until it is in and replaced by a solid trend reversal.

Ulli, your work allows us to do exactly that. I have recently checked some of the mutual funds I sold on your last sell signal in June and was not surprise to see some of them down as much as 60% from that sell signal, even with this rally—-you can only imagine how glad I am to miss this past rally for the opportunity to have saved my portfolio. All I need to do is figure how much of a return I would need to break even (if I had not sold them) to keep my hands off the BUY KEY—-But I am still as anxious and impatient as I have even been. I have found that over the years I have been able to make far more money by not loosing it in the bears, and I must give you the credit for allowing me to keep my emotions in check.

This brings up an interesting point. When investing, we all like to maximize our gains and minimize our losses. However, since this can rarely be done on purpose, the question remains whether one could be more important than the other? In other words, over a period of time, is it more critical to maximize your gains or to minimize your losses?

Reader Ray has found that not loosing it during a bear market has made a big difference to him, and I agree with that. To look at some real numbers, let’s review again a table I posted in my free e-book “The SimpleHedge Strategy:”

It shows the annual returns of the S&P; 500 for this century vs. a hedged buy-and-hold strategy, which I don’t advocate but which I have used in this example. As I have mentioned before, when comparing any kind of returns, especially the ones the buy-and-hold crowd publishes, you need to always include a bearish period. Otherwise, you might be misled to conclude that a certain mutual fund or ETF only heads for the skies.

This table clearly shows the good, the bad and the ugly when it comes to returns. If you are trying to maximize your gains, you have to be invested all the time, which will result in your portfolio receiving severe haircuts when the bear strikes. Of course, during years like 2003 and 2006, you’ll be running around pounding your chest by seeing your assets perform so well.

On the other hand, a strategy minimizing your losses clearly has merits when the bear hits hard and you are safely on the sidelines or in a hedged position.

It all comes down to the time frame you use for your evaluation. For example, looking at only one year to evaluate anything is short-sighted and does not give you enough data to base a decision on.

My experience has shown that a conservative strategy, such as trend tracking, which does not necessarily give you the highest returns possible during good times, but avoids the pitfalls of a bear market during sharp corrections, will be far superior over time. The above table, while representing only one period in history, clearly supports that view.

This goes along with a general theme in life in that it’s not how much money you earn, it’s what you keep that matters. It’s the same with investing.

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

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

An early sell off was reversed and the major indexes closed higher again. Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -3.84% thereby confirming the current bear market trend.

The international index now remains -7.23% below its own trend line, keeping us on the sidelines.

It is not often that anyone, let alone a politician, says things as they are without sugarcoating and/or distorting facts to ensure that no one is offended. Such is unfortunately the ridiculous world of political correctness we are living in.

So it its surprising and unusual when a politician calls a spade a spade as this US senator did in the following short video clip as he commented on the AIG bonuses:

[youtube=http://www.youtube.com/watch?v=iCsbva1eCNI]

The following was brought to us from England where one representative dressed down the Prime Minister in no uncertain terms about the state of the economy.

[youtube=http://www.youtube.com/watch?v=94lW6Y4tBXs]

Straight talk like this is rare in today’s society, but I personally appreciate it when people have the guts to say it as it is, especially in light of the current world wide economic crisis with its many questionable bailout attempts.

The markets continued to stall yesterday as many investors wondered if the March rally had finally run its course.

Contributing to the weakness was famous speculator George Soros when he chimed in with his view that the rally was pretty much done.

Additionally, investor Mark Faber added fuel to the downside move by saying that that the S&P; 500 could drop as much as 10% to around 750, because the market had moved up too quickly.

As I pointed out yesterday, economic prospects do not look very inviting at this time, which means sudden moves to the downside remain a distinct possibility. Mish at Global Economics minced no words when he commented on the signs of the alleged recovery:

These “signs of recovery” that cheerleaders have been seeing are mostly nonsense. The stock market has been rallying because Treasury Secretary Geithner and President Obama are willing to screw taxpayers out of trillions of dollars for the benefit of banks. Such action will not reduce defaults, restore lending, or do a damn thing for cash strapped consumers out of a job with no job prospects.

I couldn’t have said it better myself.

Last week’s rally ran into brick wall yesterday as worry about the upcoming earnings season surfaced.

While the major indexes closed to the downside, a recovery rally during the last couple of hours reduced the damage considerably.

The current question is as to whether the “earnings bar” has been set low enough. In other words, worse reports than the already low expectations could bring this current bear market rebound to an end in a hurry. Slightly better results, along with improved future guidance, will undoubtedly support the bulls and may provide more fuel to the upside based on the (erroneous) view that the economy has turned the corner and happy days are here again.

While I don’t always agree with Bill Fleckenstein’s view, he had this to say in “A bear rally in bull’s clothing?”

There is also another possible reason for the celebration: the copious amounts of money being created from thin air by the world’s central banks (not least of which being the early stages of quantitative easing, the conversion of government debt into money). Money printing plus imagination are potent forces that can’t solve our problems but can affect the stock market in such a way as to make it appear that the worst has passed.

It must be remembered that some of the best rallies occur in bear markets. For instance, in the first half of 1930, the market jumped 40% — twice what Bubblevision defines as a bull market — and it certainly didn’t end very well. (Part of the reason for that big rally was a belief that the recession, which became the Great Depression, was already over.)

I have touched on the fact before that not only sudden but also the most violent rallies occur in bear markets. Personally, until proven wrong, I can’t see that reckless monetary expansion over 30 years along with the destruction of assets and employment of historic proportions will be resolved with government stimulation packages and an ephemeral bear market.

Yesterday, I talked about the flattening of the trend line and its potential effect on a buy signal. Today, let’s look at a historical chart of the domestic Trend Tracking Index (TTI) to determine if a rising trend line should you keep you in the market, even though our trading rules signal a ‘Sell.’

Take a look a the graph below, which shows the price action along with our ‘Buy’ and ‘Sell’ signals over the past 6 years:




[Click chart to enlarge]

There were 4 sell signals identified by the large red arrows. You can look at each one of them and note that the trend line was still rising when the ‘Sell’ occurred. The first 3 ended up to be whip-saws as the markets subsequently resumed their long-term upward trend.

Here’s where percentages can get you into trouble. If you were to conclude that 75% of the time a rising trend line renders a sell signal invalid, then you would be right—until you’re wrong. This is where the magnitude factor kicks in. Had you made the decision to stay in the market and ignore the ‘Sell’ on 6/23/08 as well, your portfolio would be in the same shape as that of the buy-and-hold crowd.

Three times you would have been right over 6 years by avoiding a whip-saw, but the fourth time you would have gotten clobbered.

My experience from following these trends for over 20 years simply tells me that you can never be sure. I have learned that it is better to live with an occasional whip-saw than to arbitrarily use rising or falling trend lines to fine tune my decisions.

The simplicity of following all buy and sell signals regardless of outcome is what will keep you consistently on the right side of the long-term trend; even though at the time it may not always seem that way.

If you adopt the long-term view, as I tried to by using these occurrences over a 6-year period, you may find these whip-saws to be nothing more than a necessary evil on your way to safely avoiding bear market disasters.