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

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

Hugging the unchanged line was the mantra of the week, as the 1,100 level of the S&P; 500 still provided fierce resistance.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.80% keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken above its long-term trend line by +10.69%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

In a follow up to yesterday’s post, reader Mark had this to say:

When you use ultra funds or ETFs, what % trailing stop loss do you use to reduce the inevitable whipsaws? 12%, 14% or do you just stick with 7% despite the whipsaws?

For me, it’s not much of a problem since I don’t use ultra funds at all in my advisory business. The volatility is simply too high for investors with a moderate risk tolerance, which is the category many fall into.

Sure, you can use the 7% rule, but chances are that you get stopped out quickly. If you are very aggressive, you can double the trailing sell stop to 14%.

Personally, as have posted about before, some of these ultra funds did not always live up their expectations in terms of accomplishing their stated performance objective. Some have underperformed, which means that you took on more risk without the corresponding potential reward.

I think that these types of leveraged ETFs satisfy the gambling instinct some investors possess. As more of these products are being introduced with 3 times and 4 times leverage, or even more, it makes it difficult to apply simple trend tracking rules. Instead, they’re promoting nothing but a casino like atmosphere.

It’s been almost a month that the S&P; 500 has hovered around the 1,100 mark, which has become a major point of resistance. Any attempts to clearly pierce through this level have been rebuffed so far.

This resistance has coincided with our Domestic Trend Tracking Index (TTI) finally closing its gaps as I alluded to in “How High Can We Go?”

Here’s an updated chart of the TTI:



As you can see, the exhaustion gaps, indentified by the large red arrows on the left, have been closed. This means the rebound in prices, since the lows in March 09, has passed the starting point of the first gap just above the upper red arrow.

Technically speaking, this could mean that major trend reversal is in the making. While these patterns are not always a reliable timing indicator, they have increased the odds that directional changes are a distinct possibility.

Recent market activity has confirmed the difficulty of the major averages to clearly pierce these levels. Should upward momentum resume, and this current glass ceiling gets shattered, we may be off to the races again with higher prices ahead.

Right now, I would not hold my breath for that to happen given how far the market has come and the still weak economic fundamentals. I am watching all sell stops closely and will execute them as they get triggered. I suggest you do the same.

Reader Pat had this recent experience:

Look forward to your weekly e-mails.

Knowing that the rise is inexorable, what ETFs can be used to capitalize on the rise in rates? I bought TBT with the head fake in rates this last June and LOST big. What is a more prudent way of capitalizing on the inevitable??

First, even if you entered the trade back in June, your loss should have been within reason if you used my recommended sell stop discipline. If you did, you simply experienced a whip saw signal, which nobody likes, but which is part of trend tracking.

Second, whenever you use an ETF on steroids (any ETF with an “ultra” designation) you may have potentially a greater reward but, if you’re wrong, your losses will be magnified.

Third, the direction of interest rates is the big unknown. With the economy being what it is, we won’t see higher rates for some time to come, unless an unforeseen event causes a sudden change.

You did everything correct by reading the TBT’s break above its long-term trend line. Sometimes trends get started and simply fizzle out as you just experienced. There is nothing you can do other than to look for the next opportunity. Just be sure, to keep your losses small via the sell stop discipline.

I have found that breakouts above trend lines, especially in sectors, tend to be fickle and can lead to head fakes occasionally, which means you may have to attempt a purchase several times before you catch the main direction.

As is the case with all investing endeavors, it takes patience, consistency and unemotional decision making to come out ahead in the long term.

It’s a well known fact that ETFs offer certain tax advantages over mutual funds. How do they come about? For more details please read “The ETF Creation and Redemption Process Explained:”

Exchange traded funds (ETFs) are truly unique products with a number of advantages. One of the “pros” of ETFs is their tax efficiency, which is a direct result of how ETF shares are created and redeemed.

ETFs minimize tax liabilities by paying large redemptions with shares of stock and the shares with the lowest cost basis in the trust are given to the redeemer. The result is an increase in the cost basis of the ETFs overall holdings but a reduction in capital gains. The low turnover means that capital gains in ETFs are relatively rare as a result of the creation/redemption process.

While minimizing tax liabilities is a unique benefit of ETFs, it does not mean that you should forget about mutual funds altogether.

To me, it’s all about selecting the most appropriate investment at the time you are planning to deploy money in the market. In terms of trend tracking this means that a mutual fund that steadily goes with the trend without too much volatility is preferable to a tax advantaged ETF that bounces around like super ball in a trampoline factory.

This is exactly what happened during this current buy cycle, especially in the international arena, where more mutual funds than ETFs remained below their 7% sell stop limit. I touched on that in “When Less Is More” and “Using The Benefit Of Hindsight.”

Some have readers have pointed to Paul Farrell’s recent story titled “Obama’s ‘predictably irrational’ economic policies.” In case you missed it, here are some highlights:

First: Kiss the rally good-bye, says Jeremy Grantham, legendary CEO of the $101 billion GMO money-management firm.

A year ago America came dangerously close to the Great Depression 2. We “learned nothing.” When psychologist Daniel Kahneman won the 2002 Nobel Prize in Economic Science for his work on irrationality in 2002, the sense was that behavioral economics would help Main Street become “less irrational,” that behavioral sciences would make us all better investors, better consumers, better citizens.

[Emphasis added]

From my point of view, Jeremy Grantham is right on with his observations. I have in the past pointed to charts by Dough Short showing some of the similarities of past bear markets and bear market rallies leading to similar conclusions.

However, while forecasts such as Grantham’s may have merit, they are a terrible timing indicator. This is where trend tracking can come to the rescue by getting you out of equities and to the sidelines before real damage occurs.

I have found over the past 20 some years that long-term trends don’t change all of a sudden. There is what you could call a “leading up to” period, where the markets pull off their recent highs, rally again and slowly move into retreat mode, which eventually accelerates to the downside.

If you work with sell stops, you have plenty of time to get out of harm’s way. Articles such as the above should not prompt you to exit the market right now because you can never be sure if there is more upside potential.

Let the trend runs its course until the end when it bends and triggers your stop loss points. That is your best indication that a reversal maybe in the making with the added benefit that it totally eliminates emotional decision making and guesswork on your part.