Not surprising, although unexpected to many, the consumer confidence reading fell to a 10-months low yesterday taking the starch out of the market with all major indexes giving back some of last week’s gains.

This brings the validity of the current recovery back on the front burner. With unemployment and underemployment at records levels with no end in sight, real estate prices still mired in a downward trend and debt levels at unsustainable levels wherever you look, how is the consumer supposed to feel?

At the same time, we continue to battle some of the technical resistance points that have put up a formidable fight. Namely the 1,100 level on the S&P; has proved to be a barrier for several months now that can’t be cracked for any length of time.

A new driver is indeed needed to push the markets out of their sideways pattern. I just happen to look at some positions we established the middle of last September, from which point the S&P; 500 has gained less than 2.5%.

Despite this lack of upward momentum, the major trend has not been interrupted, and yesterday’s drop merely pushed the TTIs (Trend Tracking Indexes) a little closer to their trend lines. The TTIs are positioned +3.42% (domestic) and +2.67% (international) above their long term trend lines.

We continue to hold on to those positions that were not affected by the recent decline.

No, this discussion is not about a tiebreaker in a tennis match, although with a similarly intended outcome.

Reader David emailed recently and pointed out that in the StatSheet some of the mutual fund/ETF rankings (as per my M-Index) were showing a tie.

What should he use as a tiebreaker? Should the M-Index rankings be shown not only as a whole number but also with decimal points to make a clear distinction as to the pecking order?

Since this is not exact engineering science, decimal points are not needed. If I find several funds/ETFs with the same M-Index, I look at all other momentum figures of the tied funds as well. I compare 4-wk, 8-wk, 12-wk and YTD. Ideally, I want to see positive numbers in all columns.

With the recent market pullback, that may not be possible, so my main focus will be on the 4-wk number. Say, I have 3 funds that are tied with the momentum index, but one shows me a positive 4-wk figure, that would be my preferred choice.

Why?

It tells be that this fund has either survived the recent sell-off intact or has recovered quickly, which would make it preferable over those that are still showing red ink.

The purpose here is to make a selection with as little emotional involvement as possible and to have a clear process for making a selection. As with all investments, this does not guarantee a successful outcome, but it may make it easier for you to break a tie when you encounter one such as David did.

Judging by the emails I have received over the years, selling short when the markets tank has quite some attraction for aggressive investors.

I have commented before that looking at historical price points with the benefit of hindsight and determine that some of our sell signals would have provided a good shorting opportunity, does not tell the entire story. It does not account for the tremendous volatility, which would have stopped you out on several occasions assuming that you used a sell stop in the first place.

Reader Larry took it upon himself to test the shorting theory by using some of my sell signals to enter a short position and exit upon receiving a new buy signal. This is what he found:

I can’t say thanks enough for what you share with us readers in your weekly letter and daily blog.

Using the sell dates on your chart that you publish each Friday and Yahoo Finance historical adjusted prices for splits and dividends I came up with the following results. A $10,000 original investment for example only was used in this back test.

Compounded annual growth rate 2.71% over the approx. 8.65 years.

While some cycles produced good results, others did not. Of course, Larry did not use any sell stop discipline, so it’s unknown if the weaker results might have turned out better or if the better results would have turned out worse.

In other words, he strictly used buy and hold in between the sell and buy dates. As I mentioned above, the results do not show the volatility or the DrawDown your portfolio would have experience to get to some of these gains.

Overall, the losses were fairly small, although three in a row over several years might have discouraged an investor to continue with this strategy. Nevertheless, I found Larry’s test very interesting and the overall positive result surprising.

Thanks for your efforts, Larry.

Jim Jubak wrote an article recently that caught my attention. It’s titled “8 Reasons For Investors To Worry.” Let’s listen in:

Has economic volatility in the US and abroad left you somewhat twitchy? That isn’t necessarily a bad thing. The trick is figuring out how best to expend your anxiety.

The goal is to put together a list that tells you 1) what the chances are that something will go wrong, 2) how bad it might be if something does go wrong and 3) when things might go wrong.

Jim goes on to list 8 major worries that are all valid. Please see the above link for details. While the underlying theme makes sense and can provide hours of discussion, I don’t see a good way how you can use these 8 worries as a tool to manage your portfolio. Some of these events may very likely happen sooner or later, but the timing is the big unknown. This is a perfect example of making a good economic analysis yet not being able to utilize that knowledge to stop worrying about your investments.

To me, using trend tracking is a far easier and effective way of cutting through all the fundamental noise and actually seeing where the direction of the market is headed. Sure, as we’ve seen recently, a whipsaw will be part of the equation but in my mind it sure beats the alternative, which is wading through reams of economic facts and still not knowing when to sell, buy or head for the sidelines.

Bottom line is that while Jim’s article was well written and researched, it does not alleviate the fears or worries many investors have. Only by having a clearly defined plan of action, which includes specific entry and exit points, will you be able to sleep better at night. At least that’s how it works for me.

A couple of weeks ago, MarketWatch featured a story titled “Don’t Just Do Something; Sit There.” Here are some highlights:

You learn in grade school that a correction fixes something that is wrong.

While I don’t know many investment pros who read the tea leaves that way, it’s important to know what to look at and think about if current conditions make you nervous and you suddenly believe that what is “correct” is to give up on what has been working.

Excuse me for asking, but what has been working? Most investors have been faced with a lost decade of buying and holding and are still reeling from the meltdown of 2008. It’s about time that people finally wake up and question old paradigms.

“Corrections are rogue; you don’t know where they are going to wind up and how long they will go on for, and that’s a big reason why they are scary,” said Walter S. Frank, chief investment officer for Moneyletter. “I don’t see what we’re going through right now as a reason to change allocations, but it’s hard for a lot of people to just stand still when they get scared.”

Famous last words! After two devastating bear markets in 10 years, a current rally based on smoke and mirrors, and this chief investment officer does not see a reason for changing allocations. That would be acceptable as long as an exit strategy exists to avoid a repeat disaster, but that is probably a foreign word to Walter Frank.

Indeed, when it comes to making portfolio changes, the underlying reasons to make a move typically can be linked to one or more of three root causes:

“I don’t know that things have gone down to turn this into a buying opportunity, and I won’t be surprised if things go down further before they look better,” said Frank. “But I know I wouldn’t be too worried about a correction when it happens in a bull market that looks like it will continue for awhile.”

Sure, corrections happen all the time; the problem is that you can never be sure whether they turn into something worse, like a move back into bear territory. Given what has happened in the market in 2008 along with a stock market recovery in 2009, odds are increasingly high that the downside will come into play again.

Unlike the recovery in 2003, economic fundamentals are horrible, debt on all levels is unsustainable and unemployment, a lagging indicator, shows no signs of improvement. Actually, unemployment will get worse as states, cities and municipalities struggle with budget shortfalls. Those potential layoffs have not been factored in current unemployment figures.

Be that as it may, the market could very well ignore all bad news and continue to climb a wall of worry. If it does, we will follow the trend until the end when it bends and stops us out of our positions.

To me, not having any exit strategy at all is asking for trouble and simply confirms that nothing was learned from the past.

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

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

No negative front page news was good news, and the major indexes closed higher again for the second week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +3.78% 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 +3.24%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.



[Click on charts to enlarge]

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