For the first time, Fed Chairman Bernanke acknowledged that a possible recession can’t be ruled out. Although he did not back off his viewpoint that there would be some sort of second half recovery, he seems to have come around to what the rest of us have been thinking.

His view put a stop on any continuation of Tuesday’s rally, at least for the time being. He’ll be doing a 2-day testimony, and I would expect Wall Street to hang on and dissect his every word. Interesting to me were his comments regarding the Bear Stearns assist. He said that the damage caused by a failure would have rippled across the entire U.S. economy.

MSN Money reported his statements as follows:

When Bear Stearns told the Fed on March 13 that it was going to have to file for bankruptcy, Bernanke said, the Fed believed that the issues posed by the collapse of the investment bank were bigger than the company itself.

“Our financial system is extremely complex and interconnected,” Bernanke said, “And Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.”

That’s what I thought as well. The looming question in my mind is if this will be a continued pattern. What if the next Bear Stearns runs into the same problem? And then another one? Or may 2 firms at the same time?

To me it’s not a question of “if” but simply “when,” because I fail to see how banks, having leveraged investments in illiquid or downright garbage assets, can get rid of them. Since all big players are involved in pretty much the same scheme and locked into each other via complex derivatives, which one will be the white knight?

I don’t have any answers to these questions, but I think about them. They affect me only in that my investment stance and approach remain conservative, and I need to see a clear resumption in trend before I make any commitments to the domestic or international market. Right now, our Trend Tracking Indexes are still neutral in those two areas, as I pointed out yesterday.

However, things can change in a hurry, and I am prepared to act if an opportunity presents itself.

Yesterday, the markets staged a major rebound with Dow gaining almost 400 points in very similar fashion to a few weeks ago. The big question remains now if this was just an April Fools’ joke or the real recovery many have been hoping for.

We’ve seen these head fakes not too long ago on both, the upside and the downside. The moves were usually just large enough to bring in enough participants eagerly hoping that the train will continue in the direction it started. So far, every attempt has been a disappointment, however, sooner or later a real trend will materialize, as I posted about yesterday.

For some assistance, let’s look again how our Trend Tracking Indexes (TTIs) closed out the monster day:

Domestic TTI: +0.60%
International TTI: -3.96%

While these numbers represent a great improvement from yesterday, the moment to make a new commitment has not arrived yet. Again, as we’ve seen, when the TTI momentarily broke to the downside by -1.64% a few weeks ago (for one day only), some eager investors jumped in with short positions, which are now not looking so good. The same can happen to the upside.

I found over the years that, in order to limit those whipsaws, it’s best to be a little late entering the market by making sure a directional breakout has really occurred. How can you do that? Let’s take a look at the top portion of the domestic TTI chart:

Click to enlarge

Note that for most of 2008, we have been trading in a large sideways pattern (between the red lines) and therefore have been stuck in what I call a neutral zone. Once we break out either below or above, the odds are greatly enhanced that a new trend with legs has started.

To put more concrete numbers on these lines, I have marked this neutral zone as an area defined by an upper range of +1.5% above its trend line and a lower range of -1.5% below its trend line. Once either is pierced and the price holds, I will take that as an opportunity to enter the domestic market again either on the long or the short side.

However, keep in mind that this is not an exact science but simply my experience of what has worked for me in past to minimize frustrating whipsaws.

As it turned out, this past quarter was one that many investors, traders and advisors are glad to put behind them. The major markets, as the above table shows, were mired deep in red and many sector trends came to an end in January causing several whipsaws. It was the steepest decline in 5 years.

This is not to say that there weren’t any winners. According to my data base, the year-to-date honors go to the U.S. Natural Gas fund (UNG: +34.01%), followed by the iShares Silver Trust (SLV: +16.40%) and PowerShares Base Metals (DBB: +15.11%).

We did not have any positions in these top 3; I missed the beginning of the trend and extreme high volatility did not allow for a safe entry point later on. We stayed with our more conservative allocations in gold and Swiss Francs, but the small position size only had a limited positive effect on our portfolio.

Our Trend Tracking Indexes (TTIs) closed out the quarter being positioned relative to their long-term trend lines as follows:

Domestic TTI: -0.44%
International TTI: -6.76%

I can’t be sure, but I would expect a trend, either up or down, to be set in motion at some point during this coming quarter. History has shown that the longer a sideways pattern lasts, the stronger the subsequent breakout.

A few days ago, a retired reader asked my opinion on a variety of income funds since his goal is to supplement his pension.

Most of the closed end funds he mentioned looked pretty much the same when looking at a chart. As an example, here is DDF:

As you know from my weekly newsletter and published articles, as well as this blog, my investment preference is the use of a methodical and mechanical approach to investing, which eliminates emotional and irrational decision making.

Trend Tracking (or trend following) has had its share of supporters for a long time, some who have amassed huge fortunes via fairly simple but successful trading approaches based on nothing else but measuring prices, breakouts and the resulting long-term trends. Over the last 20 years, with the advancement of computers and programs, many of the systems have been automated to enable the user to easily scan entire world markets for certain investment criteria in only a few minutes.

Can such an investment methodology using a trend following approach be taught to others?

Author Michael Covel’s book “The Complete Turtle Trader” features the story of Wall Street legend Richard Dennis, who made a fortune by investing according to a few simple rules.

Convinced that great trading was a skill that could be taught to anyone, he made a bet with his partner and ran a classified ad in the Wall Street Journal looking for novices to train. His recruits, later known as the Turtles, had anything but traditional Wall Street backgrounds; they included a professional blackjack player, a pianist, and a fantasy game designer among others.

For two weeks, Dennis taught them his investment rules and philosophy, and set them loose to start trading, each with a million of his money. By the time the experiment ended, Dennis had made a hundred million dollars from his Turtles and created one killer Wall Street legend.

In this book, Michael Covel tells their riveting story with the first ever on the record interviews with individual Turtles. He describes how Dennis interviewed and selected his students, details their education and experiences while working for him, and breaks down the Turtle system and rules in full. He reveals how they made astounding fortunes, and follows their lives from the original experiment to the present day. Some have grown even wealthier than ever, and include some of today’s top hedge fund managers.

Equally important are those who passed along their approach to a second generation of Turtles, proving that the Turtles’ system is reproducible, and that anyone with the discipline and the desire to succeed can do as well as—or even better than—Wall Street’s top hedge fund wizards.

It’s a fascinating story and supports my view that most investment advice provided in the media or promoted via Wall Street is nothing but fluff without substance and designed to have entertainment value, but not much else.

As this book outlines, using a mechanical, computerized approach to systematic investing has tremendous advantages; I believe that it’s the way of the future because it gets investors away from the mindless self serving Buy and Hold promotions. It’s a must read for today’s investor.

A couple of days ago, I posted about the obvious as to who eventfully will have to foot the bill if the Fed’s guarantee of JP Morgan’s purchase of Bear Stearns’ assets should prove to be a losing proposition.

MarketWatch featured a follow up story about the Fed’s partnership with JP Morgan. Here are some highlights:

The Federal Reserve has gone into business with J.P. Morgan Chase & Co. by taking effective ownership of $30 billion of the most toxic waste on Bear Stearns’ books.

For many analysts, the fundamentals of the transaction remain unchanged: gains on Wall Street are privatized while losses are socialized.

The last sentence pretty much sums it up. If there are losses, the taxpayer will take the hit, if there are gains, the government will keep them.

Looking at the big picture, however, I feel like I’m stuck in this dichotomy: On one side, in a capitalistic society, a failing enterprise should be allowed to fail and the market place will sort things out without any government intervention or involvement.

On the other side, you could make the argument that if a failing enterprise, such as Bear Stearns, with its non-transparent assets and financial intertwinement with many banks and other institutions, poses a potential risk of causing the financial system to collapse, then intervention might be warranted.

The speed, with which the Fed stepped in to lend a helping hand, makes me believe that we were close to a financial collapse with a potentially incalculable domino effect, which was avoided for the time being.

The question in my mind remains as to whether an intervention is justified given the circumstances as described. What’s your view?