MarketWatch featured “Buy and hold gets old,” as the aimless meandering of the markets is maddening for many investors along with the ever present memories of the 2008 crash:

Yet while both Stadion and Kenjol’s strategies sidestepped the worst of 2008, they also missed much of the recovery the following year.

Kenjol’s Sector Rotation was up 24.3% in 2009 compared to a 26.5% gain for the S&P; 500, while the Stadion fund gained only 2.7%. Kenjol didn’t provide returns for this year so far, but Stadion’s fund was up 2.5% as of July 15, three percentage points better than the S&P; 500.

Copelin said the securities he owns have a stop-loss order that will automatically sell if they fall by 10%.

[Emphasis added]

I just want to hone in on the highlighted sentence above since that always seems to be the #1 argument by the buy and hold folks against ever moving to cash on the sidelines.

Let’s look at the chart of the S&P; 500:

The upper red arrow represents the point in time of my last sell signal on 6/23/08. The low was made in March 09 (bottom of right arrow) and a rebound rally pulled the S&P; 500 out of the basement. By all measures, the market recovery was substantial.

However, it was not (yet) substantial enough to make up the losses that were caused by the 2008 crash. In fact, as of last Friday, the S&P; still needs to gain another 23.77% just to get to the level of our sell point in 2008.

This makes the argument “if you sell, you will miss most of the subsequent recovery” look downright silly, which it is. It supports my long-held contrary view that if you don’t participate in a major bear market to begin with, you don’t need to worry about missing a rally; you will still be ahead while everyone else scrambles to make up losses.

Since markets go down a lot faster than they go up, making up losses will not only take years of quality investing, but will also need some cooperation by the overall trend remaining positive.

Given the weakening economy and stimulus induced recovery of the past, which seems to be now dying a slow death, it becomes clear that further upside potential maybe be limited thereby further extending the time needed to get to a breakeven point.

While the article points out that ‘buy and hold gets old,’ to me, it’s been dead for a long time.

Most successful businesses, that have been around for awhile, are quite adept of analyzing their operations with the goal of avoiding money losing mistakes.

Think of the company you work for or that you are the owner of. Has it happened in the past that a grave error has cost some serious money or, in the worst case, even a human life?

If so, I am certain that the event was analyzed, new processes were set up and/or procedures put in place to avoid a reoccurrence. It’s sensible, because doing nothing would bring into play Einstein’s definition of insanity: “Doing the same thing over and over again and expecting a different result each time.”

But that is exactly what the majority of investors are doing. Investing is a business as well where money is at stake, whether you make your own decisions or have someone do it for you. Yet investors don’t treat it as such, otherwise, they would not be making the same errors over and over again.

You know where I am going with this. If you participated in your first bear market in 2001, and lost your shirt, from a business point of view, you should have made adjustments subsequently to avoid a repeat disaster from happening.

While that would have been sensible, it is not what most investors did, isn’t it? Memories are short; no different investment methods are employed, and a few years later (2008), the same thing happened again. It’s insanity at its finest.

Of course, when all you ever hear is buy and hold, diversification, non-correlation of asset classes and other terms, it’s no wonder confusion reigns. On the other hand, thanks to the internet, it has never been easier than nowadays to research and find other investment approaches that attempt bear market avoidance.

A few days ago, I spoke with a new potential client who has portions of his (substantial) portfolio managed by 3 different advisors—all following slightly different approaches to trend tracking and all avoided the brunt of the bear market of 2008. To be clear, this does not mean, he will never experience losses, it merely means that procedures and processes are in place to avoid the big market drops.

He is looking to add another advisor advocating trend tracking to his stable—how is that for the ultimate in diversification and portfolio safety?

Reader Ralph had the following question regarding a topic, which I have discussed some time ago, but which is worth repeating:

I am becoming familiar with your website, blog, etc. After looking closer, I am aware that your actual buying/selling is based on such things as “sell stops”, buying back into a market after certain criteria are met, etc.

However, your TTI graph identifies very specific BUY and SELL times. If I, in fact, follow only the specific BUY/SELL indicators, how much different can I expect my returns to be when compared to your actual buying/selling method (following sell stops, meeting buy in criteria, etc.)?

When a buy signal is generated via the domestic TTI (Trend Tracking Index) crossing its long-term trend line to the upside, we use that fact as a buy signal the moment a clear piercing has occurred.

On the sell side, as you mentioned, we follow the 7% trailing sell stop discipline. The use of the sell stop discipline was implemented out of the necessity to better deal with the boom/bust cycles of the economy (and its effect on the markets) that we have seen over the past decade.

If you were to wait with selling your positions until the crossing of the trend line occurs again after a bullish period, you would be giving up too much in unrealized gains and, depending on the duration of the previous rally, could turn a profitable position into a losing one.

Using a trailing sell stop as a means to step aside will lock in profits, if you have them, or limit your losses if the markets head further south. The downside is that from time to time we have to face a whip-saw signal, which means the markets stop us out, reverse course and a new rally resumes.

While that is certainly an inconvenience, it will, however, prevent us from participating in disastrous bear markets such as 2001 and 2008. That sure beats the disadvantages of a whip saw.

If you are the aggressive type, you can stay invested in the markets and use the crossing of the trend lines to the downside as your last safety net to exit and step aside. Just be aware of the shortcomings mentioned above.

As an entry point, the TTIs work well; as an exit point, my preference is to use trailing sell stops to better gain control of the ups and downs within a portfolio.

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

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

A very negative consumer sentiment index today pulled the major indexes off their lofty levels.

Our Trend Tracking Index (TTI) for domestic funds/ETFs held above its trend line (red) by +1.28% (last week +1.34%) and remains in bullish mode.

The international index has now broken below its long-term trend line by -0.93% (last week -0.87%). A Sell Signal was triggered effective May 7, 2010. We are no longer holding any positions in that arena.

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

It wasn’t a straight road, but the Dow managed to stagger to its 7th higher close in a row yesterday, although only by the slightest of margins.

Wall Street seemed to be enamored by and only focused on Intel’s bullishness by totally disregarding other economic news, which indicated anything but a continued recovery in the second half of the year.

First, retail sales for June fell 0.5% igniting concerns that an economic slowdown is a real possibility. Second, this fact was supported by the normally upbeat Federal Reserve cheerleaders, issuing a reduced second half growth forecast. Maybe some reality has set in as the Fed minced no words by stating that it might take as many as six years for the economy to recover fully from the recession:

The long recovery would be the result of “firms’ caution in hiring and spending in light of the considerable uncertainty regarding the economic outlook, by households’ focus on repairing balance sheets weakened by equity and house price declines, and by tight credit conditions for small businesses and households.”

This is about as negative of a Fed statement as I have ever seen. Nevertheless, traders on Wall Street seemed to simply ignore the downbeat Fed announcement and pushed the major indexes off their lows.

The S&P; 500’s early assault on the 1,100 level failed again, but a late day rebound cut losses and moved us back to the unchanged line for the day. Again, the number to watch is around 1,111, which represents the S&P;’s 200-day moving average. Once that point is clearly pierced, more buying and higher volume is likely to materialize.

I found it astounding that the markets ignored the usually closely watched Fed remarks. We have to wait and see if other positive earnings reports can jump start a new bull run in the face of a weakening economy. If so, it may very well be a short-lived one.

Alcoa started the earnings season on Monday and Wall Street seemed to like the better-than-expected report as the rally continued on Tuesday.

After yesterday’s close, Intel’s report card not only exceeded expectations, but 3rd quarter guidance was positive and could provide more upside momentum today.

The S&P; 500 raced towards the 1,100 level, but sold off in the end before reaching it. We may very well see another attempt today, but with major indexes now having completed a six-day winning streak, some pull back is in order.

Mish at Global Economic Trends featured an interesting story and graph showing how the stocks in the S&P; 500 have been tracking the index to the highest degree. Last time these extreme conditions occurred was in October 1987, just prior to the crash.

Sharp rallies on relatively low volume (with indexes below their long-term trend lines) just don’t give me the warm fuzzies.