If you consider gold an asset to be held during times of economic uncertainty, you would be correct as the metal continued its ascent toward the $1,300 level during yesterday’s session.

Stocks drifted and gold’s rise was a reaction to the Fed’s announcement Tuesday that they were ready to do whatever it took to support the economy. As I posted yesterday, that announcement pushed interest rates and the dollar lower. Confusion still reigns as to what event may trigger the Fed’s move into lending an assist.

Disappointing news on home prices kept the markets meandering with a downside bias. More economic reports are on the agenda today with existing home sales and jobless claims taking center stage. After the close, heavyweight Nike will present its quarterly earnings report.

I think that from here on forward any economic reports will be scrutinized even more to see if on any weakness the Fed can be prompted to step in to attempt to right the ship.

Of course, that event by itself would be a clear sign that things are not well in economic wonderland, which may have some dire consequences on market direction. Unless, of course, you believe that the Fed has indeed the power to avoid a slip into another recession.

The markets slipped slightly during the early trading hours yesterday with all eyes feasted on the outcome of the Fed meeting on interest rates.

Leaving rates unchanged was pretty much a given, but the accompanying statement was the big unknown. After the release, the markets shot up, as the chart (courtesy of marketwatch.com) above shows, then dropped just as sharply, rebounded and faded into the close.

The Fed made it clear that it worries about the slowness of the recovery. They further cited a “substantial resource slack” with high unemployment and modest income gains, but reiterated that they were “prepared to provide additional accommodation if needed to support the economic recovery.”

Some economists expect the Fed to make that next move at its November meeting, which would provide them with more additional data. The Fed further conceded that economic recovery continues to slow, although there are signs of stabilization.

The immediate beneficiaries of this announcement were gold, due to uncertainty, and bonds, due to lower interest rates. The dollar fell along with oil.

In the end, it was a statement with no earth shattering news and certainly not encouraging when it comes to economic prospects in general.

It makes me wonder if Monday’s rally was a blow-off day, to be followed by a trend reversal. Only time will tell, but I believe that the September rally has been way overdone and the markets, as they sometimes tend to do, have gotten way ahead of underlying realities.

After repeatedly banging their heads against the S&P; 500’s 1,130 resistance level, the bulls finally broke through this proverbial glass ceiling yesterday with a bang.

It wasn’t even nip and tuck; it was a clear break out of the trading range, with the major indexes surging to their highest level since May. It was surprising to see the market move higher with this much vengeance the day before the Federal Reserve meeting on interest rates, where usually subdued trading is the theme of the day.

Supporting upward momentum were a number of things with one being Lennar homes, which surprised with better than expected earnings offsetting a weak report on home building conditions.

The other good news was that the recession, which began in December 07, was now officially declared to have ended in June 09, according to the National Bureau of Economics (NBER) that dates these kinds of events.

As a consequence, the much talked about potential double-dip recession is now no longer alive, since any new economic slide will be considered a new recession. I am so glad to hear that we have institutions that clarify those types of things for the rest of us…

All major indexes are now trading above their respective 200-day moving averages by about 2%. The S&P; had been riding the range between 1,010 and 1,130 since the end of May before yesterday’s breakout.

We’re continuing to conservatively participate in this rally knowing that Wall Street is capable of climbing a wall of worry; a quick reversal could occur at the drop of a hat if economic assumptions do not turn out as well as anticipated.

Chart courtesy of MarketWatch.com

Dividend ETFs are an important component in income investors’ portfolios. With the need to generate reliable cash flow in today’s zero-interest-rate-environment comes some complacency in that it is assumed that dividend producing ETFs provide a better buffer against sharp market downturns.

I had this conversation with several readers recently, and it is simply an incorrect assumption. Take a look at the above 5-year chart above (courtesy of YahooFinance) comparing the S&P; 500 (SPY) to the widely held dividend ETFs DVY and DTN.

If you follow the crash of 2008 into early 2009, when the market lows were made, you’ll notice that DVY and DTN showed worse performances than the S&P;—by quite a margin.

What that tells you is that dividend paying ETFs are not exempt from bear markets. Consequently, their trends need to be tracked (and stop losses implemented) just like any other equity fund/ETF, if you want to avoid seeing your portfolio get a serious haircut.

Disclosure: Holdings in DVY

In various past posts, I have mentioned that it is my belief that, economically speaking, we’re heading down a similar path as Japan did over the past 20 years.

Nothing was learned from their burst real estate bubble, and the same policy mistakes (bailing out failed banks, senseless stimulus packages, etc) have been made and are continuously being implemented.

I hope I am wrong, but if I am not, how will an investor deal with a similar scenario and be able to grow his portfolio?

Business Insider featured an excellent chart by Doug Short with the title “Check Out All Of The Huge Rallies Japan Has Seen on Its way Down The Tubes:”



[Double click to enlarge]

A picture is worth a thousand words, and this one is no different.

Notice the stunning market drops of the Nikkei 225 and the subsequent mind boggling recoveries. In the end, after 20 years of zigzagging, you would have ended up on the losing side of the ledger had you simply bought and hold your investments.

This time period shows 6 bear market drops sufficient in size to wipe out all bullish periods and then some. The only way to survive this type of environment is to avoid the bulk of the down market whenever possible. Trend Tracking along with the disciplined use of sell stops will certainly be a better choice to accomplish that goal than mindless buying and holding.

We already have gotten a similar taste of the above as the past decade in the U.S. was a lost one with the S&P; 500 having ended up to the downside. I am not being negative here, but I’m merely trying to point out that bear markets will continue to be with us from time to time, and that they have the awesome power to wipe out your previous investment efforts.

No one can tell what the future will hold, or whether a Japan type scenario will play out here in the U.S., but it is wise to be prepared for these types of very real possibilities as opposed to simply having no plan of action at all.

Reader Frank had the following question:

You say that you sort the stat sheets by the M-index. For funds that have the same M-index are they truly in descending momentum sequence?

For example, there may be 10 or 15 funds with an M-index of 4. Does the 1st #4 fund have a higher momentum than the 2nd or are they just listed randomly within the ranking? Am I better off choosing a fund listed higher within a given ranking?

Let’s say there are 10 ETFs all ranked with an M-Index of 4. That means they have equal weighting, but they are randomly listed within the ranking.

You now need a tiebreaker to decide which one maybe appropriate for you. While there are several approaches, I focus on only two other numbers:

1. The DD% column: It tells me by how much a fund has come off its recent high. The number 0.00% means that it has just made a new high and is in tune with current market momentum.

2. The 4wk column: That too shows more recent strength as opposed to longer term momentum, which is represented in the M-Index itself.

For example, take a look at the chart above (listing of Top 100 funds as of 9/9/10). There are 3 funds listed, which have an M-Index of “6.” Based on the DD% column, DEF would be my choice since it has just made a new high, while the other 2 have come off their highs considerably.

Despite their higher 4wk momentum numbers, my choice would still be DEF. Assume for a moment that all 3 had DD% numbers of 0.00%; then my selection would be FKASX, since it has the highest 4wk momentum number.

Again, as I have posted before on several occasions, if you are selecting ETFs, be sure to use only those with high daily average volume figures due to lower bid/ask spreads and superior liquidity.

Disclosure: No holdings