I am out for most of the day and will not have a chance to post. However, I will resume tomorrow with Sunday Musings.

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

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

Tuesday’s strong up move held, and the major indexes not only gained for the week, but also stayed above their 200-day moving averages.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains above its trend line (red) by +2.46% (last week +1.38%) keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken below its long-term trend line by -0.49% (last week -2.83%). A Sell Signal was triggered effective May 7, 2010. We are no longer holding any positions in that arena.

The best thing that can be said about yesterday’s market activity is that the solid gains from Tuesday held as you can see from the above chart (courtesy of MarketWatch.com).

There were no additional catalysts to speak of so volume was fairly light, but the important event was that the S&P; 500 closed the day above its 200-day moving average for the second day in a row confirming investor confidence.

Since a selloff did not happen, I committed about 1/3 of portfolio value (depending on client risk tolerance) to broad domestic indexes as mentioned yesterday. I consider the downside risk fairly small at a level of about 4%.

Here’s how I arrived at that number.

Our domestic Trend Tracking Index (TTI) is currently positioned +2.27% above its long term trend line. If the major indexes head south from here, it would take a drop of only about 4% of the broad market to pierce the trend line to the downside generating an all-out sell signal.

Because of our proximity to the trend line, this would happen prior to our conventional 7% trailing sell stop being triggered—hence the reduced risk.

After Monday’s failed attempt, the major indexes managed to pierce through strong overhead resistance levels on Tuesday supported by positive economic news on a day where nobody seemed to care about Europe’s problems.

As the chart above (courtesy of MarketWatch.com) shows, there was no hesitation nor any reversal attempts, and the bulls remained in charge all the way into the close. As I mentioned yesterday, if there is a breakout and 200-day moving averages are conquered, more buying and subsequently further upside momentum may develop.

While that up move could very well be ephemeral in nature, as some columnists forecasted in “One More Rally,” topping at around 1,200 with the S&P; 500, you can never be certain.

Our domestic Trend Tracking Index (TTI) improved and has now moved above its trend line by +2.12%, while the international TTI rallied as well but still remains -0.67% below its respective trend line.

Establishing new positions at these levels reduces the risk quite a bit.

How?

We’re only +2.12% above the trend line, which means that, if a trend reversal occurs again—after you have bought back in—there is a good chance of the domestic TTI dropping below its long term trend line before your 7% trailing sell stop gets triggered. That would cause an all out sell signal prior to the sell stop becoming effective thereby reducing potential losses.

Barring any huge sell off in the morning, I will begin to nibble on some long positions; however, I will only use ETFs and not any 401k accounts limited to no load mutual funds due to short term trading restrictions.

I simply can’t see right now that last year’s bull market will resume with full force, so my approach will be conservative in nature and involve only a portion of our portfolios. If I am proven wrong, I can always add to my holdings.

Two factors were at play yesterday as a nice morning rally was derailed, which we’ve witnessed many times in the recent past.

One, the S&P; 500 came within two points of its 200-day moving average of 1,108 which, if it should get decisively pierced, can set off more buying and a new rally.

However, yesterday, computerized selling set in as we got close, which disappointed the bullish crowd. With a lower close today, the S&P; 500 has not managed to string together more than two winning days in a row since the middle of April.

Two, Moody’s downgrade of Greek debt to junk did not help matters and contributed to the selloff.

It was another day in the market with unanswered questions about any emerging trend, which means that a break can still occur to either side.

If you are eager to deploy some assets in domestic equities, at the very least wait until the 200-day moving average of the S&P; 500 has been clearly pierced to the upside, before making any new commitments. That would give some assurance, at least for the time being, that momentum has shifted from sideways to up.

Our domestic Trend Tracking Index (TTI) moved only slightly from Friday’s position and remains above its long-term trend line by +1.28%.

Reader RW had the following comments in regards to re-entering the market given the close proximity of the domestic TTI (Trend Tracking Index) to bear market territory:

Could you clarify something for me? The domestic trend is still a little positive but you are out of all domestic ETF/Mutual Funds. Is that because each that you were invested in has already lost their 7% to exit and your trend line merely tells you whether you can invest in others. That distinction is a bit unclear.

In other words there is no cow bell when to get back in. This to me is the real weakness in this strategy if a person was really attempting to go it alone. Perhaps a daily blog could be used on the subject in general/or examples/or particulars.

There were many discussions about this topic during a variety of blog posts along with reader Q&As; last year. A good reference is the 70-page PDF file that covers the sell stop topics and more. If you missed it, you can download a free copy here.

While we were, during last year’s discussion, not within striking distance of heading into bear market territory, the principles discussed nevertheless did not change.

In “Deploying Stopped Out Money” I said:

Depending on your risk aversion, you could wait until the funds/ETFs, you’ve been stopped out of, take out their old highs before re-entering.

To be clear, whenever markets go through a directional shift accompanied by huge volatility, and you get stopped out, you will always find yourselves a little bit in no man’s land. You have to realize that no investment approach will always give you a perfect answer to any scenario allowing you to simply wait for the cow bells to alert you to your next move.

The overriding purpose for using stop losses is to limit downside risk should the markets head south in a big time a la 2008. While the jury is still out as to whether that will happen or not, you will now have to wait for the markets to resume their primary trend (up or down).

Over the past couple of trading days, we have bounced successfully off the trend line. If you are an aggressive investor, you could jump in now realizing that, if you get whipsawed again, your downside risk may only be some 3% or less before the trend line gets broken and an all-out sell signal is being generated.

Personally, I prefer to wait for a clearer signal and better upward momentum before making a new commitment.

Let’s take a look at some real numbers using the widely held SPY as an example. Here’s how it played out for one client, who came aboard in March 2010:

We purchased SPY on 3/16/10 for 116.41; the high price occurred in April at 121.81, after which the markets slid with the sell stop being triggered and executed on 5/19/10 at 112.08 for a loss of -3.72%.

Last Friday, after a strong 2-day rally, SPY closed at 109.68, which is -2.14% below our sales price of 112.08.

Not only that, SPY is still showing weakness by having moved below its own long-term trend line by -1.35% with all momentum numbers being negative across the board (4-wk, 8-wk, 12-wk, YTD).

A purchase of SPY now given these circumstances would amount to nothing more than bottom fishing. While you may get lucky, the numbers are not in your favor. You want to pick a spot at which time SPY has risen sufficiently to put the odds of continued upward momentum on your side.

While there are never any guarantees, I have found that once the old high (in this example 121.81) has been taken out again, that price level would represent the clearest sign that bullish momentum has returned. That’s a long way to go, however, and investors on balance are not a patient bunch.

An earlier entry point that I have tested, would be a percentage above your stopped out price, which in this case was 112.08. I have had good success in back tests using a re-entry point of 3% above that level, which would be around 115.44.

As I have pointed out, volatility is the greatest during transitional periods from bullish to bearish as opposing forces seem to be in a constant tug-of-war at that period in time.

My view therefore is that I’d rather be a little bit late with re-entering by possibly avoiding another whip-saw signal.

After all, being late to a bullish party will merely reduce your potential profits while being late when the bear strikes could cut deeply into your principal. Remember the losses of the last decade?