Many investors prefer utility funds/ETFs when it comes to the generation of income but, as the past years have shown, they are anything but the perceived place of safety where money can be parked without worry.

The WSJ featured an article on the subject titled “A Classic Dividend Play.” Let’s listen in:

Utility stocks didn’t fully participate in last year’s market rebound and may remain laggards for some time, given the likelihood of an anemic economic recovery and higher interest rates. Considering that, the biggest appeal of utility-stock mutual funds and exchange-traded funds may continue to be what has been the sector’s main drawing point historically: high dividend yields over the long haul.

Higher interest rates are of particular concern, says Don Linzer, managing director of Schneider Downs Wealth Management Advisors. Utilities tend to have a lot of debt because of construction requirements, so a rise in interest rates would increase those borrowing costs. And if bond yields rise, that increases the appeal to investors of bonds versus utilities stocks.

[Emphasis added]

I must be missing the point, because I am not sure how utilities can be considered a “defensive position.” Is it maybe because they lost “only” 34% in 2008 vs. the S&P;’s loss of 38%? Sure, that would make an investor feel much better…

All kidding aside, while utilities can be a great place to park your money in order to generate a consistent dividend, you still need to pay attention to the direction of the trend. One look at the chart of XLU makes this abundantly clear:



Even supposedly safe investments such as utilities took a steep dive in 2008, and for those who participated, it will take quite some time to make up the losses despite the 2009 gains.

Actually, from a trend tracking point of view, utility funds/ETFs are well suited since they tend to move in less erratic fashion compared to other sectors. If this type of investment appeals to you, pick your entry point once the long term trend line has been crossed to the upside.

Then work with a trailing sell stop so that will never participate in a disaster year like 2008. All the data you need are easily accessible in my weekly StatSheet.

Reader Bill was looking for clarification with setting his sell stops as we moved into the New Year. Here’s what he said:

I have all the formulas (for my sell stops) on my spreadsheet so the NOW part updates itself everyday giving me a new GET OUT @ number.

I would think just to keep them running.

Let me make it clear again. Just because we enter a new year does not mean you have to adjust the high points for your sell stops.

The only high price of any importance is the one your fund/ETF has made since you purchased it. While this may coincide with a yearly high, it does not have to.

For example, say you bought an ETF at 10.00. Since that purchase, the price may have gone to 11.00 before slipping back to, say 10.70. The yearly high may have been at 11.75, which does not matter to you at all. In this case, 11.00 becomes the price from which you calculate your trailing sell stop until that price is being taken out.

On a side note, tracking low points has no value when it comes to the use of a stop loss strategy.

One reader is concerned about the effects of a correction on his portfolio. This was his recent comment:

If the markets, both domestic and international should have a considerable correction, any thoughts on what asset class might have the largest drawdown? Generally, I think it’s those up the most. At this time it would seem to be emerging markets, Nasdaq tech and small cap).

The obvious leaders on the way down will be all leveraged funds, such as the ProFunds Ultra series and yes, those that have gained the most.

From my vantage point, those ETFs with the greatest DrawDown (DD) during the fairly minor corrections since the low of March 9, 2009, will be the ones to watch.

In regards to Country ETFs, here are the top five with the Max DD% (not shown in the StatSheet) in parentheses:

Russia (RSX: -30.21%), India (IIF: -27.03%), Emerging Europe (GUR: -24.25%), Turkish Investment Fund (TKF: -18.86%) and Asia Index (ADRA: -18.25%).

Looking at sectors, here are the top five from that arena:

Natural Gas Fund (UNG: -52.59%), Internet Infrastructure (IIH: -30.61%), Regional Banking (KRE: -26.50%), Homebuilders (XHB: -24.10%) and Metals & Mining (XME: -23.56).

Of course, some of these (not UNG) also have moved up the most, so if you work with my recommended 10% trailing sell stop in these areas, you should be able to lock in most of the gains once the downside comes into play.

Along these lines, some readers have emailed and asked if it would be wise to take profits now or at least reduce exposure. To me, that would be making an emotional decision based on what might or might not happen. The purpose of trend tracking is to stay in the market until the trend comes to and end and starts to reverse.

That’s when your trailing sell stops will indicate that’s it’s time to step aside and move to the sidelines—and not before.

I am not a believer in conspiracy theories, but occasionally I have voiced my opinion during the past 9 months questioning the fundamentals driving this market rebound. While fundamentals do not influence my decision making process in regards to trend tracking, I do try to evaluate the economic landscape.

Predominantly questionable economic news reports have made me wonder where all this market support is coming from. Friday was one example when a horrific jobs reports report, at least compared to expectations, left the markets unscathed with the major indexes closing higher.

It’s a well known fact that the Fed has manipulated interest rates in order to support and speed up an economic recovery. I have sometimes wondered whether the Fed has given a helping hand and supported the stock market as well by pumping in a few trillion dollars.

Of course, I can’t be sure, but I consider it a possibility. Hat tip goes to Random Roger, who featured a couple links on this topic. One is titled “TrimTabs on that US government rigged stock market:”

TrimTabs Investment Research Asks Whether Federal Reserve and U.S. Government Rigged Stock Market, Pushing Market Cap up $6+Trillion since Mid-March

In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

There are many more details available, so if this topic interests you, follow the above link.

Again, I can’t be sure whether any of this played out along these lines, but by just having watched market behavior, I have had similar thoughts.

I am sharing this with you to point out that this remote possibility exists and to make sure you do not become complacent during this rally. Sooner or later the trend will come to an end, maybe abruptly, so be sure to know where your sell stops should be, and be prepared to act when market behavior tells you to do so.

In case you missed it, Reader Paul posted a comment last week that he was a little discouraged with his investment results. He had this to say:

Your post “Absolute Returns” really helped me emotionally. Yesterday, I was a little disappointed when I compared my 2009 returns to my benchmark returns. After reading your post today, I decided to combine my 2008 and 2009 returns. I discovered that I am much better off by using a trend following strategy!

Still following the trends…

This brings up an important issue. Once you decide to use an investment discipline, such as trend tracking, you need to be aware of its strengths and weaknesses by looking at the big picture when evaluating its results.

It’s an unfortunate fact that investors have very short memories and seem to live by the mantra “what have you done for me lately?” Of course, the media supports this type of thinking, which is why the focus of investment returns has been the rebound of 2009 while the effect of the market disaster of 2008 (or the decade for this matter) has been shoved on the back burner.

To evaluate your returns, you need to combine the good with the bad as Paul has done and not just focus on one exceptionally positive or negative period. That is what I mean by keeping the big picture in mind.

There are some investors who got caught in between. They decided to switch gears late in 2008, after the market drop, and adopted trend tracking. Obviously, their main motive was to make up losses, which may not have worked out to their satisfaction.

The reason is that, once a severe market drop occurs, Trend Tracking lags before it gets us back in the market as we’ve see last year. Our domestic TTI not signal a buy until 6/3/09. While it simply takes time for long-term trends to re-establish themselves, I realize that it did not help those with the urge to quickly regain what was lost in 2008.

Everyone else, who got out in June of 2008, had no problem patiently waiting until a new buy was generated. If you are in the camp that would have liked to have done better in 2009, combine your returns of 2008 and 2009 and you may find, as reader Paul did, that you are ahead in the game compared to simply having held on through the past two roller coaster years.

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

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

After a strong start, which set tone for the week, the major indexes maintained their upward momentum and closed higher.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.45% 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 +10.64%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.