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

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

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +7.52% 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 +12.24%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

Charles Schwab Corp. has finally entered the crowded Exchange Traded Fund arena as MarketWatch reports in “Schwab lists first ETFs:”

The financial-services giant, which boasts nearly 8 million brokerage accounts, listed four ETFs on the NYSE Arca exchange. The ETFs, which are baskets of securities that trade like individual stocks, feature low fees and represent a clear challenge to industry heavyweights State Street Corp., Vanguard Group and Barclays Global Investors, which is being acquired by BlackRock Inc.

“Investors should welcome Schwab’s entrance into the ETF universe,” he added. “While there’s nothing earth-shattering about the exposures offered by the new Schwab ETFs, the relatively low expenses that Schwab plans to charge should at least keep the big boys in the industry honest.”

[Emphasis added]

I always welcome new products in the ETF marketplace, especially when they are being introduced with lower costs to investors. Even though, I use Charles Schwab & Co. as custodian for my clients’ assets, I will not immediately jump at these new offerings.

My reasoning is the same for all newly created ETFs. I want to see price history for some 6-9 months so that I can better evaluate the trend. At the same time, I want to make sure that enough interest has been created so that the volume has increased to acceptable levels.

To invest in any unproven ETF with low volume is simply asking for trouble. The bid/ask spreads are high, and you may not be able to liquidate your holdings quickly without too much slippage in price.

In other words, you are giving up control, which is something we as trend followers try to avoid.

Reader Tom had this comment:

A provoking question I thought about is: How do I get a fund or ETF based on your TTI? An ETF or fund with the return of your Domestic TTI of 8.53% would be nice.

Tom is missing the purpose of the Trend Tracking Index (TTI). It is designed to determine market direction so that we can easily identify whether the overall long-term trend is up or down. Nothing more and nothing less.

The TTI does not have a return. The percentage stated is simply its current position above or below its trend line, which changes daily with the market movement. It does not represent any gain or loss.

To see how domestic ETFs have fared since our latest Buy signal on 6/3/09, simply reference the StatSheet. If you look at the latest issue, you will note the second column from the right titled “Since 6/3/09.” That represents the performance for this cycle.

To sum it up, use the TTI first to determine market direction and then the StatSheet to select funds based on momentum rankings. Keep in mind that it is not always advisable to pick the top ranked funds/ETFs. While they will give you great firepower, if the markets move your way, they will also give back any gains the fastest when a pullback occurs.

I personally always drop down in the fund/ETF pecking order to find those that give me the best of both worlds: Decent gains and some resistance to sell offs.

One look at the chart tells you that yesterday could have been a real bad day in the markets. An early rally of 145 points in the Dow was completely wiped out as the markets briefly dipped into negative territory as a result of a sharp sell-off in the financials.

Things looked pretty bleak at that moment; however, decent economic news proved to be the savior and a rebound and pulled the major indexes out of the doldrums. Uncertainty about market direction is bound to continue especially in view of the Fed meeting and Friday’s all important employment report.

I took the opportunity today to liquidate those holdings which had triggered their preset sell stop points during last Friday’s drubbing. Only time will tell if this move is in sync with the overall trend. If not, and the markets resume upward momentum, I will look for new entry points. For the time being, I am comfortable with a little less exposure to equities.

As an aside, Mish at Global Economics wrote a nice piece titled “Is Debt-Deflation Just Beginning.” It’s a bit lengthy but well worth the read if the deflation/inflation scenario is of any interest to you.

I am in the camp of those who believe that deflation will be with us for years to come, before any inflationary scenario can actually play itself out.

In response to a recent post, reader Don provided this feedback a week ago:

This is in response to “How High Can We Go“, and the current overbought condition of the market. John Hussman has a superb article on this, which you can read here.

In terms of how to deal with the current market, instead of just making sure that one has stops in place because it’s likely that the market’s going to roll over soon, I think one should have stops in place all the time–including, and perhaps especially–in those markets in which it appears least likely that they’re going to roll over.

[My emphasis]

Yes indeed, the article by John Hussman is a worthwhile read.

Take a look at the highlighted sentence again. I want to make sure that there is no misunderstanding. Whenever you initiate any position (other than money market), you need to track your trailing sell stops no matter what the appearance of market behavior tells you.

Reader Don seems to imply that he does not have stops in place for those holdings that don’t appear likely to roll over, as he puts it.

That is not correct. If you are working with sell stops, the rule simply is to “track sell stops for all positions all of the time.” Never get caught without one, because you don’t know when and where the next shoe will drop.

Most investors don’t realize that market returns, as measured by the S&P; 500, are in negative territory for this decade.

In other words, even money under your mattress would have done better than having been invested on a buy and hold basis in the major indexes.

MarketWatch featured a story on the subject a month ago, but it is still as valid as it was then, especially with the markets having been in correction mode recently. Take a look at some highlights of “To finish the decade in the black, S&P; has its work cut out:”

After back-to-back 15% gains that made for the best two quarters since the first half of 1975, the S&P; 500 Index needs to advance another 39% for the index to break even for the decade.

Among the S&P;’s 10 industry groups, energy advanced the most from Dec. 31, 1999, through Sept. 30, 2009, with the sector climbing more than 92% and in need of a 48% drop to finish the decade at neutral. Conversely, telecommunications fell more than 66% during the not-yet-finished decade, with the sector in need of a 198% boost in the final three months to break even.

Sure, the market rebound of 2009 has been impressive by any measure, but for the S&P; to gain an additional 39% in the next 2 months is highly unlikely. It only took two bear markets in 10 years to destroy portfolio returns, which supports my view that is far more important to avoid the big drops in the market than to be permanently invested in the “best” funds.

With the recent pullback, even the odds of the S&P; reaching the level of our sell signal on 6/3/08 (1,318) are remote at best. As of Friday, the S&P; (1,036) would have to gain over 27% just to get back to that break even point.

Chances are pretty good that, given the general state of the economy, the next decade will bring more of the same.

Personally, I believe that we will see more stunning rallies, as the economy allegedly improves, only to be followed by jaw dropping pullbacks as reality proves otherwise. In other words, recoveries based on the “WW” concept (up-down-up-down) are very likely in my opinion. As a result, those investors simply buying and holding will again be left holding an empty bag.

Follow the trends unemotionally, get in when the markets confirm upward momentum, and get out when your trailing sell stops tell you to do so. This will be your best opportunity to deal with the ever increasing uncertainties in the market place.