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

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

Aimless meandering would describe this week’s market activity with 2 of 3 of the major indexes ending up lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains now -0.73% below its long-term trend line (red), which means we are in bear market territory.

The international index dropped to -7.02% below its own trend line, keeping us in a sell mode for that arena as well.

Ever since the Fed provided an assist in bailing out Bear Stearns, I’ve been wondering who might be really on the hook if things go bad. The Fed in essence guaranteed some $30 billion of Bear Stearns’ questionable assets in order to persuade JP Morgan that this purchase was the right thing to do.

Bloomberg reports as follows:

Even as the Bush administration insists it won’t risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.

The Delaware company will liquidate the assets over 10 years, with JPMorgan absorbing the first $1 billion in losses, with the Fed bearing any that remain. Any such losses would hurt the Fed’s balance sheet, and ultimately the taxpayer, because they would reduce the stipend the Fed pays to the Treasury from earnings on its portfolio. The dividend was $29 billion in 2006.

Sure, there is always the remote possibility that Bear Stearns’ assets can be sold at the full value they were guaranteed. However, judging by the amount of garbage subprime assets still floating around the world, chances are much greater that they are either worth less or even worthless.

In that case, an unwanted tax payer bailout would be complete. Maybe with proper juggling of the books or new and creative accounting rules, the Fed can postpone the inevitable “coming clean” for a few years.

OK, here are the latest headlines from yesterday:

1. Consumers’ confidence plunged to a 5-year low on worries over rising inflation and fewer jobs

2. Prices of existing single family homes dropped 11% in January from the same month in 2007

3. Consumer expectations for the future were at a 34-year low

You’d think that with news like that, the markets would have been heading south in a big way, but no dice; the major indexes held remarkably steady and some even gained. If you find this confusing, you are not alone. It just shows you the value of trying to look at news events, or fundamentals for that matter, and arriving at a conclusion as to how the markets are supposed to react.

I quickly learned over 20 years ago, that I had absolutely no ability to take information such as the above and make a reliable forecast as to where we might be headed. This is why my focus is on trends, which I reduce to numbers I can measure and work with.

Reader G.H. had this to say about yesterday’s post:

“If you had eagerly initiated a short position at that time, you are not a happy camper at this moment.”

Yep, count me in this group. My SOPSX has not performed well. In my defense it was a decidedly small position and will not open much of a wound should I have to sell at a loss.

The reader is right about the war going on between what should be happening in the markets and what the powers that be are manipulating for the benefit of the markets.

I’m suspecting that we could soon see a buy signal triggered in domestic markets. And why not, just look at some of the about faces that have surfaced in the last few days. Mish has revealed that his advisory practice has “gone net long”!! And I read today in the Orlando Sentinel a column by an ordinarily bearish commentator that Orlando is poised to be in great shape for an economic recovery as everywhere South of Orlando falls into the abyss. Never mind that Orlando has 24 months of housing inventory on the market. It seems we’re now trying to talk our way out of a recession no one seems to think we ever entered.

There is no doubt that since I began following the TTI’s and the advice on this forum I’ve gained more and lost less than I would have done on my own. But I must say, given the recent mysteriously uncommon circumstances surrounding Bear Stearns among other things, if in fact a buy signal does occur, I’m afraid that I’m just going to sit this one out for awhile. I’ve mis-placed my dancing shoes.

As of yesterday, the domestic TTI has now crawled above its long-term trend line by a scant +0.29%. As I pointed out two days ago, not only do I want to see a clear break above the +1.50% level, I also like to see some staying power of several days above that number, before I am willing to commit to domestic equity funds/ETFs. We’re still several large rallies away from this target, nevertheless, I personally would not go as far as G.H. suggested and sidestep this potential trend change.

Why? I witnessed this very thing in 2003 when a well known large advisory firm, which shall remain nameless, overrode its own buy signal and remained on the sidelines as the new bull market unfolded. Talk about a professional with egg all over his face…

However, your personal comfort level and risk tolerance should always be your guide when it comes to your investment decisions. Right now, cash is king, so let’s revisit my entry point thoughts if and when we actually get to that moment of truth.

As was widely expected, there was some follow through buying yesterday as a result of last week’s rebound and the major indexes moved higher. One reader had this to say in regards to my post last Sunday titled “Controlling The Urge:”

The market these days seems like the patient on the table alternating between irregular heartbeat and flat line. Helicopter Ben applies the paddles and revives it for a few days, but then disease takes hold again. No damn way I’m placing bets either way…

That’s actually a good way of putting it, because we’ve had the dance around flat line (trend line) for quite some time now and a directional break-out is not yet apparent. Here’s where the Trend Tracking Indexes (TTIs) stand as of yesterday:

Domestic TTI: -0.22%
International TTI: -7.18%

The international TTI still remains deep in bearish territory, while the domestic TTI is getting closer to crossing back above to the upside. Just a slight crossing above does not constitute a new upward trend. I need to see some staying power as well. In my advisor practice, I use a trading band of 1.5% above and below the trend line, which needs to be pierced first before I commit to either the long or short side.

Remember, just a couple weeks ago, the domestic TTI dropped to -1.64% but did not stay at that level for more than one day before reversing. If you had eagerly initiated a short position at that time, you are not a happy camper at this moment. Again, the use of this trading band will (hopefully) avoid some of those whipsaw signals, which happen during times of uncertainty.

This cautious view is further supported by the momentum figures in my weekly StatSheet. Out of 184 domestic ETFs, only the Dow Jones Transportation (IYT) has crossed its own long-term trend line to the upside, while out of the 615 domestic no load funds I track, only 5 have barely moved into bullish territory.

From my vantage point, more follow through is needed to make sure that this is not just another head fake.

MarketWatch featured an article titled “No time like the present,” presenting the usual but questionable advice about investing. Let’s take a look:

While trading in and out of funds is frequently a recipe for disaster, there are moves that investors can make to improve their confidence and portfolio without blowing up the long-term returns that they supposedly surrender by giving up on a fund.

To see why that is, consider that the standard advice warns against riding trends or timing the market, because it’s hard to use those strategies to improve returns consistently over the long haul. The evidence supporting the idea that investors are supposed to stay put in funds during downturns is a long-running study from Dalbar Financial Services, which shows that the Standard & Poor’s 500 had an annualized average gain of 11.8% over the last two decades, but the typical equity fund investor was able to capture just 4.3% annually.

Yes, standard advice recommends staying put with your investments no matter what. This sounds great in theory, as does an average gain of 11.8% over the last 2 decades, but it does not tell the entire story.

What does tell it is when an investor calls to tell me that his portfolio dropped some 50% during the last bear market and that it altered his upcoming retirement plans forever. He was not impressed by the fact that he may be able to get an average gain of 11.8% over the next 20 years. Why? Because actuarial tables tell him that he will be dead by the time that 11.8% comes around again.

There are lies, mean lies and statistics. You can prove or disprove anything depending on the chosen time frame. For example, from 12/31/1999 to 3/20/2008, which represents this century, the S & P 500 still shows a negative return of some -9.5% because of the last bear market. It will take a huge bull market to turn that around to a positive 11.8% over two decades.

But if you talk to the guys who study behavioral finance — the way investors act — they are not opposed to small moves to boost confidence. They’ll warn of the dangers of portfolio overhauls, where an investor claims to make faith-inspiring moves, but is really just tilting a portfolio in the direction of what has been hot lately.

The changes to consider in times like these are more about upgrading a portfolio than overhauling it.

Overhauling a portfolio refers to investing in mutual funds that have done well in the past. The article cites a number of them, which all have shown a performance history superior to the S & P 500. However, before you jump in, consider that all of them are bull market funds, which will go down if the bear rears its ugly head again. To me, those odds are pretty high based on my trend tracking indicators and the bursting of the various bubbles.

As I said before, you will be better off being a little late to the party by making sure that a new major uptrend is in place before you invest. While it will cost you a little on the upside, you will also have eliminated some big headaches if we head further south again.

Based on the emails I have received over the past few weeks, it appears that there are a number of readers who have a hard time controlling the urge of jumping in on the long side of the market during any 2-day rally, or wanting to go short with vigor anytime a pullback occurs.

While it seems that you are missing out on profits during those times, you need to realize that this kind of bottom fishing can be hazardous to your financial health. Waiting for an identifiable trend to emerge is my preference and, given today’s volatility due to the various bursting bubbles, you’re better off being a little late with your commitments than being too early and getting caught in constant whipsaws.

While this is the prudent thing to do, I realize that there are all kinds of investors, and some have a certain gambling instinct that somehow needs to be satisfied. Short of traveling to Las Vegas, is there a way you can invest wisely and take chances at the same time without jeopardizing your hard earned investment capital?

Yes there is. Here’s what some of my clients have been doing for years. First, they divided their money into two piles; one small one and one big one. The small one represents their “play money,” while the larger one represents their “serious money,” which I manage for them conservatively.

With the play money they do all kinds of wild investments using options, volatile stocks and shorting anything that has a chance of going down in value. The idea here is to satisfy the gambling instinct knowing that, if they lost all of it, it won’t affect their retirement status or their quality of life. If they hit a home run, they’ll be talking about it at the next cocktail party to no end.

If this kind of thing matches your personality, you may be wondering how much is “play money.” There is no set answer and depends on your emotional make up. Look at a certain percentage of your portfolio and ask yourself if you lost it all, would it bother you? If the answer is yes, the assigned percentage is too high and you need to go lower until you reach your comfort level.

This is not meant for everybody to start divvying up their portfolios, it is meant to address an issue that has frequently come up, and I simply wanted to share with you what others are doing that have the need for “more action.”