With the Olympic Games being upon us, I was reminded of a reader’s comment last year. China’s ETF (FXI) had come off its high by 10% causing us to liquidate our positions. This reader wrote in to say that he would hang on to FXI until after the Olympics and then get out.

I have heard this argument before that investors tie their financial decision to some future event that most of the time has nothing to do with actual market behavior. Let’s take a look at 2-year chart of FXI:



The decision to hang on proved to be a costly one, since FXI has come off its high by over 40% and has shown tremendous volatility this year. Despite wishful thinking, and the fact that Olympic events at times can light the fire for an economic rebound, this is usually only a short-lived phenomenon and should not be used as an investment opportunity.

Trends don’t lie, they simply state facts as they are right now, and the fact is that FXI is in bear territory. Until it solidly breaks back above its long-term trend line, I would not even consider it.

The bulls partied and enjoyed a swig from the punch bowl after oil prices broke below $120/barrel and the Fed, as expected, left interest rates unchanged. Bargain hunters stepped in doing some buying while short-covering helped the bullish cause.

It’s not secret that the Fed is stuck between a rock and a hard place. Yesterday, they chose boosting the economy by not touching interest rates as opposed to raising rates to contain inflationary pressures from higher energy and food costs as well as support the ever sagging dollar.

While the rally seemed impressive, it did not change the underlying fact the trend is still stuck in bear market mode. Our Trend Tracking Indexes (TTIs) are now positioned as follows:

Domestic TTI: -2.51%
International TTI: -7.32%

It was definitely a feel good day for the bullish crowd and several newsletter readers emailed telling me that they had taken the up day to unload some mutual fund positions they neglected to sell when our last signal was generated on 6/23/08.

We need to see a lot more upside movement and a break above the long-term trend line before we can declare this to be a new bull market. Until then, this is nothing more than a bear market bounce.

Seeking Alpha featured a story titled “REITs Pop While Commodities Flop,” showed a summarized table showing various assets class returns of various time periods. Let’s take a look:




While commodities were the hot item for most of this year, the trend has clearly reversed as the sharp 1-monht drop of DJP shows.

REITs, as represented by VNQ, have shown a nice pop to the upside, but are they worthy investment at this time? We’ve owned VNQ over a year ago before the real estate bubble burst, so let’s take a look at a 2-year chart again:

A chart is worth a thousand words. It’s is obvious that the long-term trend is still down, although back in May, this ETF showed signs of life. As is the case so often in bear markets, counter-trend rallies can be fast and furious, but they usually have no staying power.

It pays to be cautious, especially with real estate, residential and commercial, not having seen the end of the down trend. One day, VNQ may provide us with good upside potential again, but right now is not the time to be a gambling fool.

Based on reader email, I know that there are many investors out there itching to try to pick a bottom in the severely beaten up financial sector. It’s beyond my understanding why the desire to gamble is so prevalent in that area.

The Big Picture had some enlightening comments on the subject. Here are some excerpts:

Just when you think there is a glimmer of hope that some of these ne’er do well, lying, cheating, sniveling, cowardly bank CEOs might finally be forced to step up to the confessional and tell all, this comes along: FASB Postpones Off-Balance-Sheet Rule for a Year.

Investment Thesis: Ritholtz Rule #1: Know what you own.

Whoever buys Financials under these circumstances loses the right to whine down the road about companies not forthcoming. If you own them, don’t complain when you get what you deserve.

While this article focuses on the fundamentals, the technical aspects are equally disconcerting. The ETF IXG represents the Global Financial sector. Take a look at this 2-year chart:




If you follow trends, there is absolutely no compelling reason to make any commitment to this sector. As I said before, until all skeletons are out of the closet, any rebound will be to short lived, such as happened in May 08, before the bears started feasting on this carcass again.

MarketWatch featured and article titled “Choose fund managers who stay ahead of the curve,” in which the editor of the No-Load Fund Investor newsletter (Mark Salzinger) states that you should avoid managers who believe “the market is wrong and they are right.”

Here’s a snippet:

In a radio interview, Salzinger defined that type of manager as one who is unwilling to bend, losing objectivity about what is happening in the market, and falling in love with investments in their portfolio. Accordingly, Salzinger said he would sell Bill Miller’s Legg Mason Value Trust (LMVTX).

I can agree with that in general, since many investors in the past have fallen in love with their mutual funds or a certain fund manager and subsequently lost all objectivity as to the wisdom of that choice.

As far as LMVTX is concerned, maybe that was the case as this fund has hit the skids big time. Take a look at a 2-year chart:




It’s obvious that the trend reversed sharply late last year. My simple 7% sell stop rule would have gotten you out around September. Since then that fund has done far worse in this down market than the S&P; 500 by losing an astonishing 42% and 30% YTD.

While recommending that this fund should be sold now is stating the obvious, but it’s way too late. Huge losses have already occurred. A Buy and Hold investor now needs to make a gain of over 50% just to get back to even, which is not an easy task in this market environment.

The fact is that we are in a bear market, and those not paying attention will see this type of scenario repeated many times.

One way to evaluate if an ETF or mutual fund still has long-term upward momentum is to look at the %M/A column in my weekly StatSheet, which simply shows if a fund is above or below its trend line and by what percentage.

Many once hot sectors like energy and commodities, along with most country funds, have dropped severely and in many cases moved below their trend line into bear market territory. Some may still be hovering above it, but if you look at the DD% figures, you’ll notice a sharp drop off their highs.

Some of the Health and Biotechnology ETFs have been bucking the trend, but many are tiny in size with low volume and high spreads, and I have removed several of them from my data base. As I previously posted, you want to be in ETFs with high volume so that you can get out even if the exit doors get crowded.

Some ETFs, like BBH, are having their own bull market right now, but having moved 18% above its trend line makes it too late to enter safely. Sometimes you have to accept that you simply missed the beginning of a trend. Take a look at BBH:



Of course, in this case, it would have taken several entries and whip-saws before you would have caught the real break-out, which many investors would not have had the stomach to do.

Look through this week’s StatSheet and notice that most momentum tables are mired in red numbers. There is a lesson in this. Don’t try to be a hero by thinking that you can pick a bottom.

We are in a bear market until the long-term trend proves otherwise. When you witness some of the rebound rallies keep in mind that “being on the sidelines and wishing you were in is preferable to being in and wishing you were out.”