Chart courtesy of YahooFinance

With interest rates near zero, income investors have been pouring money into junk bonds at an alarming rate.

JNK, see above chart, is one of the more popular ETFs and has grown to over $5 billion in assets. With an average daily trading volume of almost $90 million, it’s a snap to get into or out of the market with lightening speed.

The current juicy annual 10.8% yield makes this a tempting proposition. Given the fact that the Fed is lurking in the background with its QE-2 gun cocked and ready to fire, low interest rates are indeed here to stay for a while, at least until the comatose economy starts to show signs of life.

This should bode well for prices of junk bonds for the time being. However, do not become complacent and prepare yourself now for an eventual exit. This may be some time down the road, but it only takes a few minutes a day to set up and track your trailing sell stops. Once interest rates start to head higher, and bond prices head south, you will thank me for having a plan in place to deal with a sudden change in trends.

The use of Sell Stops was a hot topic on this blog last year. In case you missed the Q & As, I have compiled them in a free e-book, which you can download here.

Disclosure: No holdings

I am leaving Germany this morning and will be heading back to California, so I won’t have a chance to write Sunday’s musings. Regular posting will continue on Monday.

Reader Roger had these comments regarding an article he submitted with the title “Is the market ready to roll over?”

The above article makes a pretty strong case indicating the market is about to reverse direction based on a large number of technical indicators.

The above link is very technical in nature, so I will hone in on only a couple of points. One of them that was made in the S&P; 500 chart is that the recent uptrend has been “extreme,” which means the angle of ascent has been much steeper than normal.

I have observed the same thing when reviewing my Domestic Trend Tracking Index (TTI), which has risen just as steeply over the past few weeks. As a long-time chart watcher, I can say that extreme up moves not supported by volume are floating on hot air and can be subject to fast and furious corrections; the question is, when?

While markets can remain irrational for a long time, there are other factors to consider. The article mentions developments like Eurozone debt issues, currency wars and the foreclosure mortgage crisis.

I would like to add the main driver of this rally to the above list, which is the Fed and its promise not to let the economy slip back into a recession by lending an assist via QE-2 (Quantitative Easing) when necessary.

While in my view no amount of intervention by the Fed can avoid another recession from occurring, given current circumstances, it has at least appeased Wall Street via the assumption that QE-2 will be good for the markets. It will be for a while, if the economy in fact will recover (slim chance) on its own thanks to the initial boost of QE-2.

If QE-2 fails, as it will in my opinion, the market will roll over and collapse like a piñata, since it has been only propped up based on false hope and premises. I have been pounding the lack of economic recovery theme for over a year. Obviously, the economy is like the Titanic; it moves very slowly and it takes a while to turn it around or affect it in any way; much longer than I had anticipated.

If and when QE-2 gets implemented, other factors can still play a role in derailing the current market up trend. To me, it’s very likely that an outside event, such as a European debt default, or the bursting of the Chinese or Canadian real estate bubble, will affect market direction and reverse the current trend.

This may coincide with technical analysis, or not, but there is no certain way of telling when a trend comes to an end. The only way you can have some control is if any of your holdings in your portfolio reverse and trigger your trailing sell stop. That is as close as you can come in determining that this rally may be over.

You can never forecast these events, you have to wait and let the market tell you when it’s time to get out. Anything else is simply guesswork.

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

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

Selloffs and rallies were the name of the game, but the major indexes closed up slightly.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved above its trend line (red) by +6.52% (last week +6.62%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.21% (last week +7.56%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

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

Whenever you witness a sharp selloff, such as we’ve seen on Tuesday, the question pops up as to whether this will be the beginning of a trend reversal or simply a shock reaction to a certain event.

Judging by yesterday’s rebound, it appears to be the latter, as the major indexes found some footing and almost wiped out the previous day’s losses.

Just as a combination of events provoked Tuesday’s downturn, a different combination caused Wednesday’s rebound. Some of the contributors to the upswing were strong earnings, a falling dollar and rising commodity prices.

The Fed’s Beige Book report still stuck to its mantra of “modest growth.” I suppose that as long as any words are uttered that contain “growth,” the market will take that as a positive and rally on, no matter whether it seems to the rest of us that way or not.

The dollar took a big dive and fell 1.6% against the euro, while gold and crude oil rallied. The futures are pointing to a stronger opening as am writing this in Germany at 2 am PST.

A variety of news events combined forces yesterday to pull the major indexes off their lofty levels.

In the mortgage fiasco arena, Bank of America was sued by a consortium of investment firms and the New York Fed to force the bank to buy back mortgage backed securities worth some $47 billion.

This will be just the beginning in an effort to ascertain whether proper due diligence was applied when packaging these securities. Allegations have surfaced that a large percentage of mortgages in those pools should have never been included due to lack of “quality.”
Next, China applied some shock and awe on global markets by announcing that it had raised interest rates. That took the starch out of any remaining upward momentum as the dollar rallied, gold and oil dropped, stocks headed south and bonds rallied higher.

China’s interest hike should not have come as a surprise as their real estate market is in a gigantic bubble, with the economy growing too fast and inflation pressures continuing. Higher rates are now a concern to global economies as Chinese economic growth may now be less as had been anticipated, which in turn will affect global demand for raw materials, construction and equipment.

The good news about the day was that the major averages closed off the lows by a decent margin. Futures indicate that the opening on Wednesday may be to the upside. Time will tell if yesterday was only a one-day correction or if this spells the end of the current uptrend.

The chart above is courtesy of MarketWatch. Please note that the readings for gold, oil and the Global Dow are incorrect due to me accessing this chart at a delayed time from Europe.