Reader Joe is trying to use some of the finance.yahoo.com features to make it easier to track his sell stops. He had this to say:

I have a related question. I too am familiar with finance.yahoo.com. In a blog post a few weeks ago, you stated the user could download information into a spreadsheet and make adjustments from there. I note finance.yahoo.com allows the user to set alerts.

Yahoo also maintains daily price history for several years. Wouldn’t it be easier, and just as effective, to determine the high price during the user’s holding period, determine the stop limit, 6% / 7%, etc. and then set an alert in finance.yahoo.com? Apparently the program sends alerts to the user’s email address.

This can work for you as long as you are aware of a few shortcomings with this approach:

1. When you set the alert price, you need to adjust it whenever the market rallies and your old high price gets taken out. Remember, this is a trailing stop loss point and not a static one.

2. In the case of ETFs, Yahoo’s alert will get triggered whenever your alert price is hit, even on an intraday basis. I use only day-ending prices as a basis for my stops.

3. When distributions occur, your trigger prices need to be adjusted to reflect this distribution as I wrote in Honing In On Bond Funds And Sell Stops.

If you are aware of these shortcomings and can live with them, by all means, use these Yahoo features. While technology is wonderful, it is not perfect, which means you can’t count 100% on receiving you email alerts on time.

Last Monday, I talked about a reader’s question regarding the use of DCA (Dollar Cost Averaging) with trend tracking. GH had an interesting comment on the subject:

I am not a user of DCA nor would I recommend it. However, one should have all his facts straight before coming to any conclusions.

Just another angle to consider.

While that indeed is interesting it is also a very similar argument that the buy-and-hold crowd makes in that if you held on to your investments for x number of years, your compounded annual return would be x percent.

And that presents a problem. No one I know of does these exact things over such a long period of time. In 2001, as the bear market was in full swing, I received a call from an investor who had seen his $1.2 million nest egg sliced in half.

Since he was getting ready to retire, his financial life had been changed forever. No argument could convince this man that over the next 30 years or so, he would be making up his losses, based on historical returns.

That’s why the long-term arguments for buying and holding an investment are flawed. They look at things with the benefit of hindsight and don’t consider the ill effects of a bear market on an individual portfolio when the individual is least prepared for it. In other words, life does not issue margin calls at your convenience.

2008 was another good example of how those entering their retirement years, and did not sell out before the crash, will now have to get by on less. Even if you have many years to go before leaving the job market, you will have to spend a lot of time making up investment losses.

Sure, the rebound rally has many pounding their chest that the S&P; 500 may end up in plus territory by 20% for this year. But that is not the entire story. Last year’s losses were so severe that it’ll take a while longer to get back to the breakeven point.

I have mentioned this before, but when our sell signal kicked in on 6/23/08, the S&P; 500 stood at 1,318; it closed last Friday at 1,091. That means another rally of +20.75% is needed just to get back to the point of where we sidestepped disaster.

Maybe we will get there, maybe we won’t. Given the rally we have seen this year, it seems like a long hard road ahead to squeeze another 20% out of a market supported by very questionable economic conditions.

It’s no secret that for this decade the S&P; 500 has lost 26%, most of it thanks to last year’s market crash. If it had not been for that debacle, we may have ended up the decade with at least a zero gain, but not a loss.

I looked back and found that the dividend adjusted value for the S&P; 500 was 1,469 on 12/31/1999 and had reached 1,481 on 11/30/2007. From that point on it dropped 26% as of last Friday, while via trend tracking we’re down 7% in clients’ accounts for the same period.

The bottom line is that bear markets not only destroy portfolios but also subsequently require you spending an inordinate amount of time making up losses. To me, as a trend follower, the better way is to minimize any losses (you can never avoid them altogether) in order to climb out of the hole faster.

Finally, for many investors the entire process will repeat itself when the next sharp downturn will wipe out this year’s accumulated profits because they do not have the foresight to use any exist strategy to lock in gains. Continuing to ride the Wall Street roller coaster without a plan or disciplined approach will make you realize that making up is indeed hard to do.

Using sell stops with dividend paying bond funds works the same as with any other equity mutual fund/ETF. Reader Joe had this to say:

My question today deals with setting stops on junk bond and short term bond funds.

Any thoughts on this?

As I mentioned before, whenever a fund/ETF distribution occurs, you need to reduce the high price of your sell stop by the amount of the dividend. As in your example, if your high price is $10.00, and a divided of, say, 0.11 is paid, your new high price becomes 9.89 from which to calculate the 7% trailing stop loss point.

That is not only important for dividend paying bond funds, but also for equity funds, which will all declare their yearend distributions within the next 30 days. To be accurate with your trailing sell stops, you need to reduce your high price by this amount, no matter whether it consists of dividends or capital gains.

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

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

Today’s sell off caused by the Dubai debt debacle left the major indexes unchanged for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +8.35% 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 +11.14%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

Hat tip to Mish at Global Economics for pointing to “Geography Of A Recession.” It’s an interactive chart, which displays the changes in unemployment rates by month and county from January 2007 to September 2009. Fascinating and depressing at the same time…

Thanksgiving in our family will be on the quiet side this year, which I don’t mind at all. I’ll get in a couple hours of work early in the morning and, since I could not get a tennis game set up, will go through my alternative exercise routine.

Since the weather forecast in Southern California calls for a balmy day in the mid 70s, my wife and I will head for the beach for a lunch picnic and a lot of reading. With our 13-year old son joining us (if he can interrupt his surfing), it promises to be a nice relaxing day.

We will have turkey dinner in the early evening at a restaurant overlooking the ocean at the Huntington Beach pier to close out a day of stress free R&R.;

Happy Thanksgiving to you and your family!

Our buy and sell signals are based on our Trend Tracking Indexes (TTIs) crossing their respective trend lines (39-week Simple Moving Average). Reader VR posed an interesting thought about it:

Thanks for your response to my question about trend tracking on Saturday (11/16). I understand no strategy works all the time and so you have adapted to more volatile reality of the market in the last few years. I have a related question.

In general, we want our new invisible ‘trading’ trend line to follow the chart steepness of a particular security as closely as possible while we still have our long term ‘zoning’ trend line of 200 Day MA as our guide.

The idea is not to buy and sell more often. Our buy signals are generated based on the Trend Tracking Indexes (TTIs) crossing their long-term trend line (39 week SMA). To me, that would be quite different from buying and selling based on a 50-day moving average trend line, which would definitely increase the frequency of your signals.

While the trailing sell stop is based on a fixed percentage, I don’t think that really shortens the trend line we’re following. The idea is to simply control downside risk as much as we can without waiting for the TTI to pierce its actual 39-week MA.

As I posted before, waiting for the long-term trend line to be pierced to the downside will only work to your advantage if your price line is within close proximity of the trend line. If it’s not (right now it’s +8.83% above it), and you wait for it to happen, you are guaranteed to turn a potential profit into a loss, since the TTI drops at a much slower rate than the price of the security your tracking.

If it seems to you that we are following a new “invisible trading trend line,” that’s fine, as long as you follow its signals and protect your portfolio when this rally comes to an end.