I received several e-mails from readers who are “angry” with the market direction or at least their interpretation of it. When the domestic Trend Tracking Index (TTI) moved closer to the lower end of the neutral zone a few weeks ago, some investors apparently ended up being a little premature as they initiated substantial short positions. Some committed up to 30% of portfolio value.

As is often the case, when trends can’t be clearly defined, the markets can move sideways and/or back to the higher end of the neutral range causing some whip-saw losses. As you know from my updates, I have repeatedly cautioned not to make to early of a commitment either on the long or the short side.

It is important to accept the fact that the market is never wrong. You can be wrong or you can be right, but still lose money because your commitment happened to be too early. If your timing is off, just be sure to limit your losses via my recommended sell stops.

You have to be big enough (and forget about your ego) to accept the fact that you will be wrong at one time or another. The only way I know of how to deal with being wrong is to cut your losses short and forget about them. Prepare yourself for the next opportunity as well as the next trend, which is sure to come along; we just don’t know yet when.

Thanks to Michael Covel, whose book “The Turtle Trader” I reviewed a few weeks ago, I found a link on Michael’s website to a song created by Ed Seykota, a long time super-successful trend follower, whose blue grass band perfectly interprets and offers solutions to the whip-saw problem.

It’s a well done music video and you can watch it by visiting this link.

Enjoy!

Reader Brad pointed to an article titled “U.S. vs. Global Markets: Pain is Where You Feel It.” Here is an excerpt:

For months now, the entire media and the financial blogsphere has been talking about how dismal the U.S. financial markets have been. There is a tendency to believe that we are at the center of the world and that our problems are amplified compared to everyone else’s. In reality, although it may be true that we are situated at the hub of the world economy; but relatively speaking, our problems are not so bad.

The decline of the U.S. market (DJIA) by 7.9% YTD is hardly a dent compared to the losses other countries have been experiencing this year.

The featured map illustrates this point well as it shows at a glance how the world stock markets fared during the first quarter:

I like American success stories. You realize that there is simply no place like the U.S. when you read some of Lee Iacocca’s books or others detailing how a dishwasher made it up the food chain all the way to company president.

Entrepreneurial spirit along with boundless opportunities makes the Unites States a unique country to live and work in. With all of the gloom and doom of late, not much of this spirit has made front page anywhere. I was reminded of this when I read Timothy Sykes’ book “An American Hedge Fund,” a ‘Rocky-like’ story about a realistic look at the world of stock trading and hedge funds.

It is very inspiring and educational as Tim describes his trials and tribulations as he, while in college, turned $12,415 of Bar Mitzvah gift money into $1.65 million trading thousands of stocks from1999-2002. He managed the #1 Short Bias Hedge Fund from 2003-2006, and starred in the TV documentary Wall Street Warriors all before the age of 26.

What I liked about this book is Tim’s admission of failure and how he messed up trades by letting his ever growing ego get in the way. Here’s a man who definitely learned from his shortcomings and is willing let the world know about it by sharing them in his book.

The knowledge he gained from several years in the trenches represents wisdom that I have found also applicable to the world of trend tracking. Here are some highlights:

Before many traders even take a position, they guarantee their inevitable failure by allowing their obsessive research to cloud their objectivity. After putting in countless hours, days and sometimes even months of hard work, these traders aren’t open to the possibility that they may be wrong in their assumptions. They’re unwilling to admit that the most effective course of action might be contrary to their thinking.

Well said! Any trader or investor should adhere to Tim’s findings. This book is a fast and fun read, and I couldn’t put it down. Tim is a reader of this blog, so feel free to post comments below.

Bloomberg reported “Lehman Says It Bailed Out Money Market, Cash Funds.” (sorry, I misplaced the link) Here are some highlights:

Lehman Brothers Holdings Inc. bailed out five of its short-term debt funds, joining a growing list of securities firms and asset managers that have propped up investment vehicles crippled by frozen credit markets.

Managers of money market funds have spent more than $4 billion to prop up money funds that were supposed to have investments that were the safest outside of bank deposits and government debt.

This is the latest update I have found in a follow up to my previous post about the questionable security of high yielding money market funds.

Remember, the biggest investors in Subprime garbage were money market funds trying to enhance their yields. Again, if you haven’t done so, look into a U.S. Treasury money market option at your custodian. The Subprime mess is not over yet contrary to what you might think based on recent stock market behavior.

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

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

General Electric’s report card pulled the rug out from the market today. All major indexes lost for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved now +0.19% above its long-term trend line (red), which means we are close to slipping back to the middle of the neutral zone.



The international index dropped to -5.65% below its own trend line, keeping us in a sell mode for that arena as well.



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

Reader Mr. G had this to say about my post from last Tuesday:

Ulli: Yesterday you wrote, “Other asset classes have rallied strongly above their respective trend lines issuing a buy of their own. Today, we added a small holding in Latin America and in an Intermediate-term bond ETF.”

Please advise; thanks!

To clarify, I have always said that most country funds are a leveraged play on the United States. As such, I have used my domestic TTI, currently slightly above its long-term trend line, as my guide to determine whether to be invested in that arena or not.

Additionally, in my advisor practice, I also look at how an individual country ETF is situated in regards to its own long-term trend line and how it has performed in the past. Let’s take a look at a chart of ILF, in which now we have a small position:



Click to enlarge

As you can see, the price of ILF (green) has broken above its trend line (red) and pierced the upper envelope line (yellow) designed to minimize (but not eliminate) whip-saw signals.

Looking back over the past 4 years, we had 6 buy signals, of which 3 of them (50%) turned out to be profitable. In addition, the ratio from average wins to average losses was 1.9. In other words, for every dollar we lost, we gained almost two.

While it’s too early to tell how this position will work out, it details some of my thoughts and discipline I use to determine if a trend is in place or not. In this case, our sell stop is set and, if it gets triggered, we will head back to the sidelines.