I will be traveling this weekend and will not have an opportunity to write the usual Sunday Musings. Regular posting will resume on Monday. Stay tuned.
Market Top?
Bob Prechter appeared on CNBC a few days ago and discussed seeing a market top similar to the one in 2007. Take a look at the video:
While I believe that the Elliott Wave Theory has merit, it is not a very good timing indicator. Some of Bob’s previous forecasts based on his E-wave analysis have been correct, but were made way early. Given what has happened in the market in 2008, an early exit certainly was better than a late one or none at all.
With the S&P; now having retraced recent gains back to the November level, a trend reversal is a distinct possibility. So far, only sell stops in Asian, Chinese and international ETFs/mutual funds have been triggered, but many more will follow if the markets give back another 2%.
Don’t make any emotional decisions; simply let the market tell you when it’s time to get out.
No Load Fund/ETF Tracker updated through 1/28/2010
My latest No Load Fund/ETF Tracker has been posted at:
http://www.successful-investment.com/newsletter-archive.php
Continued downside momentum pulled the major indexes lower. It’s interesting to note that the international TTI has now passed the domestic TTI by moving closer to its respective trend line and a potential sell signal.
Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +3.13% 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 +2.97%. 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.
Reader Help Requested
Reader Russ had a great suggestion and commented as follows:
I enjoy your columns and blogs and have benefitted from your recommendations to set firm sell points. My question/request is on finding information on a specific fund or ETF within the stat sheets.
It would seem very helpful if there would be a search feature that one could enter the name or symbols for a fund/ETF to see if it is in the stat sheet rather than scanning through all the pages to see if it is there. Just a suggestion to speed things up.
This would indeed be helpful for many readers, especially as the offerings of ETFs increase. Since the StatSheet files are in PDF format, I am not aware whether or not you can actually search through them.
I found a program on the internet called Powergrep that will actually do that and a lot more. I have not tried it so I can’t vouch for its accuracy, but they offer a free trial.
If you are aware of an easy way to search through PDF files, please share it with me.
An Easy Oversight
The WSJ featured a story on the discrepancies between an ETF’s performance and the underlying index it is supposed to track:
True believers in index funds are eyeing a problem churned up during the market’s turbulent passage over the past two years—tracking error.
That is where a fund’s performance veers from the index it is supposed to track. This is a problem for index funds covering smaller slices of the market, whose member stocks are less liquid and sometimes more volatile than broad-market benchmarks.
Tracking error isn’t much of a problem for funds following the most-used broad-market index, the Standard & Poor’s 500-stock index.
In light of the tracking situation, investors should pay attention to the differences among the niche index portfolios. That is particularly true for buyers of exchange-traded funds, which unlike open-end stock funds, are predominantly index-linked.
Look at the markedly divergent results of two ETFs that track the same international-stock index—iShares MSCI Emerging Markets Index ETF (EEM) and Vanguard Emerging Markets ETF (VWO). Both follow the MSCI Emerging Markets Index. But the Vanguard ETF gained just over 76% last year, while the iShares offering was up nearly 72%. The index itself was up 78.5%. In 2008, though, the Vanguard ETF was down almost 53% while the iShares fund fell about 50%. Both beat the index, which was down 54%.
One factor here is cost. The Vanguard ETF charges much lower yearly fees than the iShares fund: 0.27% of assets compared to 0.72%. That savings is passed directly to the investor and boosts returns.
While I am aware of these discrepancies, they will have no bearing as to whether I take a position in either fund once the upward trend dictates that I do so. However, my point here is a different one.
A reader, who had seen this article as well, mentioned in passing that VWO, having lost 53% in 2008, certainly had made up its losses with a stellar performance of +76% in 2009.
That is not correct, and it’s an easy mistake to make.
Say, you invested $100k in VWO the beginning of 2008. With a loss of 53%, this reduced your portfolio value to $47k at the end of 2008. In 2009, this ETF gained 76% bringing your portfolio value back up to $82,720. That means, despite the great gains in 2009, you still need to make another 20.89% just to get back to break even.
Such is the enormous power of a bear market. You need to avoid it at all costs. Otherwise, you will be stuck trying to make up losses which, despite market cooperation, may take years to accomplish.
Disclosure: I have no positions in the ETFs discussed above.
Bumping Against Trading Limitations
With the markets having corrected three straight days in a row last week, some readers are getting close to having to execute sell stops and/or contemplating how to reenter the market should this downturn to be short-lived.
Reader Bruce had this to say:
Preparing for a market exit, I have been reading up on the short-term trading rules for funds in my 403b account. Most seem to forbid a repurchase in less than 30 days.
Could you discuss the typical time frames that the TTI in the past has kept money out of the market, and any problems with short-term trading rules? I guess one option would be to just buy back in the market with different funds.
Unfortunately, there are no typical time frames. You just have to deal with the facts as they develop. Sure, if your custodian will not let you re-purchase the same fund for 30 days, then simply use another one that is comparable. On the other hand, if you get stopped out, we could be heading towards much lower levels, or even into bear market territory, which would make this a moot point.
Most important is the execution of your actual sell stop. I have touched on this before, but it bears repeating.
If one of your fund holdings comes off its high by say -7.10%, don’t sell right away. Make sure that your 7% level gets clearly pierced. Since you are working within the trading limitations of a 403B account, this is more important here compared to an unrestricted account. You may give up a little more to the downside, but may avoid a whipsaw signal.
To me, that means that for the restricted trading accounts I manage, such as 401ks, I will wait with the actual execution of a sell stop until I see a level of worse than -7.50%. That gives me a little extra leeway in case of a market turnaround.
Again, this is not an exact science, and you need to use a little common sense. Keep the ultimate goal in mind, which is to limit any losses so that you don’t succumb to bear market forces.