If you look at yesterday’s chart of the Dow (thanks to MarketWatch), the word cliff diving comes to mind. Good thing that there was some type of recovery, or it could have been a real ugly day.

When all was said and done, the widely followed S&P; 500 closed at its lowest point since July 2006. It is obvious that confusion reigns, with heavy selling focused on the financials. There seems to be some panic in that sector and one analyst was quotes as saying that “the CEOs and financial officers in that industry aren’t lying when insisting that the worst is over, but they don’t understand the depths of the problem.”

I agree with that and an article from a German newspaper seems to support a similar view.

Translated, the article says that, according to a study, the crisis in the financial community is to be far worse that expected. Bridgewater Associates, the second largest hedge fund in the world and advisor to many top banks, estimates losses of $1,600 billion vs. the $400 billion which so far have been realized.

If that comes to pass, it will spell trouble for many financial institutions. However, since we don’t control that outcome, we remain in trend following mode. As of yesterday, here’s how our Trend Tracking Indexes (TTIs) stand:

Domestic TTI: -3.10%
International TTI: -11.68%

These numbers confirm that we are in a bear market, which means that we have most of our assets safely in money market (U.S. Treasury) on the sidelines as well as some small holdings in a fully hedged position.

In the past, I have poked some fun at those making outlandish predictions, since in most cases the results are more or less based on nothing but luck. However, sometimes an individual can accurately analyze present economic conditions, especially if they are totally out of whack with reality, and come to logical conclusions as to what the likely outcome will be.

This was the case with Peter Schiff, the owner of an investment company, who made some dire real estate predictions back in Dec. 2006. He actually walked the talk by selling his home in Orange County, California, relocating to another area and becoming a renter.

It appears that Peter was right on with his at the time heavily criticized and laughed at viewpoints.

Calculated Risk featured 2 video clips with Peter. One shows him on CNBC where he reiterates his opinion, which is spot on. It’s worth listening to.

The other video clip features him back in 2006 in a discussion with several so called experts making housing predictions. It’s pretty funny when you see some of these jokers making the case for a continued housing boom vs. Peter’s straight forward analysis.

Whenever stock prices correct, or the major indexes slide into bear market territory, a number of predictions are bound to follow as to its duration. Random Roger wrote a tongue in cheek piece on that subject titled “The shortest bear market in history:”

Wall Street traders and strategists alike are breathing a huge sigh of relief now that the bear market of 2008 is now over.

Ahem. AHEM.

Any trend, whether bullish or bearish, has to run it course before a turnaround can occur. Most investors, however, don’t have the patience to wait but instead follow the urge to take a stab at buying on dips, which may work in bull markets but has proven disastrous during bear scenarios. Of course, this course of action of buying early is supported by the brokerage industry for nothing but selfish reasons.

If you are following trends, you will know when the bears have run out gas and the time arrives to be bullish again. You will not buy at the exact bottom, since we need to see its formation before we can measure and identify it, but somewhere within 10% of it. While that will lessen your potential profits on the upside, it will at the same time avoid a bunch of whip-saws or portfolio losses caused by jumping in too early.

Prior to the last buy cycle coming to an end, I have addressed the fact that we have held on to two of our domestic mutual fund positions and hedged them against further downturns rather than selling them. Reader Tom had this comment:

Thanks to you, I have been sitting comfortably on the sidelines after I lost my initial 7% when the downslide first started. I also decided to sit out your most recent buy signal based upon the dire predictions of some of the references you had been quoting.

I certainly respect your advice as my portfolio took a drubbing in the 2001-2003 declines, but I managed a wry smile today when the market dipped 20% below the October 07 high.

If you search Google on the topic of hedging, you’ll find millions of answers. Most of them may not be worthwhile for you and some involve incredibly complicated computations. I think that the majority of these offerings are not for the every day investor.

I have not found a site which addresses simple hedging strategies that any investor can use along with his mutual funds and ETFs. So I designed my own. I have done some extensive research and testing with impressive results. My plan is to put these findings in an e-booklet of maybe some 20 pages and distribute it for free.

Before you ask when that will be available, I am not sure yet. Time always gets the better of me, but I hope to get something done within the next 60 days. Once I have something definitive, I’ll make the announcement on this blog and in the weekly update.

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

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

More downside action had the major indexes close lower for the third week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains decisively below its trend line (red) by -2.84% thereby confirming the current bear market trend.



The international index dropped as well and now remains -11.29% below its own trend line, keeping us on the sidelines.

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

If you look at the table on the left, you’ll see that this year has been anything but kind to investors. From my viewpoint, we’ve been in a bear market and May’s rally attempt, which caused us a domestic whip-saw signal, looks more and more like a dead cat bounce.

Even by Wall Street’s definition, we have moved one step closer towards official bear territory when the Dow’s drop yesterday pulled it down by 20.8% from its all-time high last October. While the other major indexes have not passed the 20% threshold yet, they are getting close. The widely followed S&P; 500 has come 19.4% off its high.

If you look through my StatSheet, you’ll notice that this year’s sharp downturn has taken no prisoners. You see more red than green numbers, which supports my view that once a bear market strikes, being in money market on the sidelines is the safest course of action.

For a synopsis of where we are and where we might be going, I suggest your read Todd Harrison’s piece on that subject.