In last Friday’s market commentary, I talked about the fact that we have reached the upper band of the recent trading range and that a potential break above the S&Ps; 200-day moving average could mean a resumption of the bull market.

This level could also present major resistance and pull the indexes off their lofty levels. Reuters reports more on the subject in “Stocks on brink of breakout:”

Wall Street enters next week on the cusp of a breakout in U.S. stocks, but it will need another spate of convincing earnings reports to feed the rally that sprouted at the end of this week.

Analysts will also digest the results of the European stress tests on banks. But if Friday’s session is an indication, market movement will likely be muted.

What is has come down to is a battle of earnings vs. economic data. The bond market rally indicates that slower economic times are ahead. The recent stock market rebound supports the opposite. Both can’t be right!

We have to wait and see how this battle plays out in order to see which direction the next long-term trend will take. Right now, it’s anyone’s guess.

The WSJ featured a niece pieced titled ‘Trend’ Investing Gains Converts:

Proponents of “trend” investing—buying and selling stocks depending on technical analysis of the market’s direction—say the tactic not only enables investors to navigate unstable markets, but also prevents big losses when prices fall.

“We’ve heard for years from money managers the pitch that ‘it’s not about timing but time in the market,’ but then you notice that the ones pitching this are the ones that make money if you stay fully invested,” he said.

[Emphasis added]

The article did a nice job on describing trend following or trend tracking as I refer to it. While there are many different approaches, the ultimate goal is the same: to avoid seeing a portfolio go down in flames when the bear strikes.

To be clear, no matter what strategy you use, you will never be able to avoid losses altogether; they’re simply part of investing. They key is to keep them manageable by not letting a portfolio deteriorate by 40% or more, which will make recouping losses an almost impossible task.

Case in point is a new client who recently came aboard. His portfolio had a value of $1.3 million in the early 90s. It’s now worth some $530k. Two bear markets along with using advisors with no exit strategy can do that to you. Do you think this client is comforted by the fact that “long-term” the market has returned an average of 9%? Of course not, his retirement life has been changed forever.

One key point was totally missed in the above article. If you sidestep one of the worst bear markets (2008) in history, it is not necessary to participate in the subsequent next year rebound to stay ahead of the S&P; 500.

I elaborated on that to some degree in yesterday’s post and in more detail in Buy and Hold Revisited; however, main stream media with its one-sided view never seems to get that point.

Hat tip goes to a couple of readers for pointing to a mutual fund that actually tracks trends (by investing in ETFs) and moves to cash when a bear market strikes or during times of uncertainty.

The fund is Stadion Managed Portfolio (ETFFX). To get a better idea of its price movements, let’s first look at a 2-year chart:

It’s interesting to note the flat horizontal periods where this fund obviously has taken a defensive position during which the NAV remained steady. ETFFX has been on the market since Sept. 2007. While this represents only a short period of time, it nevertheless includes one of the worst market crashes in history (2008).

Let’s see how ETFFX has fared in comparison to the S&P; 500:

A picture is worth a thousand words, and this one is no different. While any investment approach suffered some losses in 2008, ETFFX managed to keep those to a minimum.

This also supports my view that #1 it’s far more important to avoid the big losses than to participate in every uptrend and #2, as I posted in “Buy And Hold Revisited,” missing the next major rebound (from March 9, 2009) is unimportant (after having moved to the sidelines) as it only serves the purpose (so far) of making up heavy losses.

In its fairly short life, ETFFX has performed well. So what’s wrong with it?

The only thing I found is that it is a load fund with an upfront charge of 5.75%, which is not acceptable to me. However, at my custodian (Schwab), anyone can purchase it as a “load waived fund.”

If this fund is of interest to you, you might want to check with your custodian to see if it can be bought there as well without any fees.

Disclosure: No current positions in ETFFX

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

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

Across the board positive earnings pushed the major indexes to the top of their trading ranges despite warnings by the Fed that a recovery might take longer than expected.

Our Trend Tracking Index (TTI) for domestic funds/ETFs held above its trend line (red) by +2.62% (last week +1.28%) and remains in bullish mode.

The international index has now broken ABOVE its long-term trend line by +1.16% (last week -0.93%). A new Buy Signal was triggered today with the effective date being 7/26/10. Be sure to use my recommended 7% trailing sell stop discipline should you decide to participate in this new uptrend.

For the most part of the day, the markets were entrenched in a sideways pattern yesterday, when suddenly the indexes dropped like a rock as if pushed off a cliff.

The culprit was none other than Fed chairman Bernanke who testified before congress about the state of the economy. His words were anything but assuring for Wall Street as he used phrases like the outlook is “unusually uncertain” and “in all likelihood, a significant amount of time will be required to restore the nearly 8 1/2 million jobs that were lost over 2008 and 2009.”

Not exactly confidence building for a market that has rallied way ahead of any economic reality. At the same time, he mentioned that the Fed will act if the economy needs more boosting. I guess, since it worked so well last time, we need to do more of it. Go figure…

Bulls and bears are just chasing each other’s tails without clear direction. This is a market environment where you can lose money quickly on the short side and on the long side.

It’s best to stay away from equities for the time being (unless you are hedged) and remain in bond funds/ETFs. As the economy weakens further, bonds will be the beneficiary. The trend is up and, until it reverses, I see no reason to change.

The markets still had a hangover yesterday from Monday’s disappointing results by IBM and TI. Nevertheless, a rebound materialized reminding me of the old adage “one man’s trash is another man’s treasure,” as buyers saw opportunities where others saw disaster.

Domestically, the only negative news came from the housing sector with housing starts falling again while building permits were up.

This rebound may be supported further today as Apple surpassed analysts’ estimates after the close yesterday. The number to watch in terms of new upward momentum being generated is the 200-day moving average of the S&P; 500, which currently is around the 1,111 level.

Until that is broken, we remain in neutral territory, moving in a large sideways pattern, and aware of the possibility that a break-out to either side can occur at anytime.