Our buy and sell signals are based on our Trend Tracking Indexes (TTIs) crossing their respective trend lines (39-week Simple Moving Average). Reader VR posed an interesting thought about it:

Thanks for your response to my question about trend tracking on Saturday (11/16). I understand no strategy works all the time and so you have adapted to more volatile reality of the market in the last few years. I have a related question.

In general, we want our new invisible ‘trading’ trend line to follow the chart steepness of a particular security as closely as possible while we still have our long term ‘zoning’ trend line of 200 Day MA as our guide.

The idea is not to buy and sell more often. Our buy signals are generated based on the Trend Tracking Indexes (TTIs) crossing their long-term trend line (39 week SMA). To me, that would be quite different from buying and selling based on a 50-day moving average trend line, which would definitely increase the frequency of your signals.

While the trailing sell stop is based on a fixed percentage, I don’t think that really shortens the trend line we’re following. The idea is to simply control downside risk as much as we can without waiting for the TTI to pierce its actual 39-week MA.

As I posted before, waiting for the long-term trend line to be pierced to the downside will only work to your advantage if your price line is within close proximity of the trend line. If it’s not (right now it’s +8.83% above it), and you wait for it to happen, you are guaranteed to turn a potential profit into a loss, since the TTI drops at a much slower rate than the price of the security your tracking.

If it seems to you that we are following a new “invisible trading trend line,” that’s fine, as long as you follow its signals and protect your portfolio when this rally comes to an end.

I have had some interesting email exchanges with reader Tad, who was kind enough to share some of his experiences:

Yeah, I understand, “analysis paralysis” we used to say. I am a math nut, what can I say…. sorry…. I have managed my own money since 1984 and had done extremely well, until last year. Can’t do anything about the past, except learn from it.

I strongly believe that eventually all sell stops will hit and I will be in cash again and when I start buying again, I want to have improved. If you have already gone down this path, please let me know. Constantly trying to do better.

Let me clarify a few items. The incremental buying procedure (1/3 at a time) does not depend on the amount of money you have to invest. To me, it is strictly a reflection of the risk tolerance of an individual.

For example, if you are the aggressive type you can, at the beginning of a buy cycle, allocate 100% of your portfolio. The downside is that, if the market goes against you right away, you lose about 7% using the trailing sell stop discipline.

If that potential loss does not sit well with you, invest only 50%, which reduces the risk to about 3.5% of portfolio. Or, if you are the conservative type, use the incremental buying procedure by starting out with only 33% portfolio exposure, which reduces your potential loss to about 2.5%. That’s how you should determine the amount of money you are willing to allocate once a buy is triggered.

No matter where you fit in, you can further reduce risk by using lower beta funds/ETFs, which will move less than the overall market as measured by the S&P; 500. While this will limit upside potential, it will also reduce possible whip-saws when the markets correct.

All these decisions are not a matter of right or wrong but merely one of preference depending on your risk appetite.

And last not least, eventually all sell stops will get triggered and therefore guarantee a move back to money market.

The longer it takes to get there while the trend is up, the more profits will have accumulated. In that case, the sell stop will no longer function as a measure to limit your losses but to lock in your profits. And that’s a good thing.

One reader had these thoughts to see if he could combine DCA with trend tracking:

What are your thoughts on dollar cost averaging (DCA)? The traditional concept, such as contributing to an IRA monthly or quarterly, or regularly to a 401K at work, is a good way to save/invest. To get the most benefit of DCA, the most volatile fund should be used, to buy more shares on the downswings. (A fund with no volatility, such as a money market, looses this advantage.)

How should DCA be incorporated into your plan?

I’ve never been a friend of dollar cost averaging since the issues I have with it are not much different than those with buy-and-hold.

To be clear, I use a form of dollar cost averaging after the markets have generated a buy signal to move into equities via my incremental buying process. So I try to average in on the way up (not on the way down), when momentum supports my decision.

Take a look back at 2008. Using DCA, you would have purchased incrementally more shares as asset prices declined. These purchases at lower prices will show some gains during this recent rally. However, the bulk of your assets, which you had accumulated prior to the crash, took a big hit.

DCA may get you in the market at lower prices from time to time, but it will not prevent your portfolio from getting slaughtered during a major market decline. If you have incremental money to invest, do so during bullish periods only and track your sell stops as recommended.

I am currently reading “Dear Mr. Buffett: What An Investor Learns 1,269 miles From Wall Street.” The author is Janet Tavakoli, a well known structured finance and derivatives consultant.

She writes about her “meeting with Warren Buffett on the eve of the greatest market meltdown in history” and how meeting him changed the way she looks at global financial markets.

During their initial meeting, Mr. Buffett talked about something that really resonated with me, and which has been an important part of my business dealings for a long time.

He suggested to Janet that “she is in a position that she should not have to deal with difficult people. There are so many good people to work with that it isn’t necessary to spend time with those who do not recognize the value of your services.”

“Difficult” people! What an eloquent way to put it. I am sure that in your work environment or business dealings, you may have even a more appropriate word for some of the people you encounter but, for this discussion, let’s be polite and use the word “difficult.”

How do you deal with them? In my business, I try to use the old bar adage that I “reserve the right to refuse to serve anyone.” While most potential clients assume that they are picking an investment advisor, I am doing the selection at the same time by making sure during the interview that there is a fit, a common ground and a similar line of thinking.

If there are excessive demands via 40 email exchanges covering the same thing over and over, along with several hours of personal meetings and/or phone calls, I realize that I have encountered a “difficult” person and use my right to refuse to enter into a working relationship.

This very thing happened to me recently when, even after my refusal to work with that person, two more emails came in elaborating how right he had been all along. There are “difficult” people everywhere, even when you least expect it.

For example, you’d think that providing a free service designed to help share experiences and processes about investing, such as my blog (and those of many other bloggers), would invite only readers who appreciate the work and effort, but not so.

Recently, there have been some downright vicious comments, apparently by “difficult” readers with nothing else to do and probably not much of a life going on.

Needless to say, these were not published. The good thing is that these are exceptions, since 99% of those following my blog and newsletter are gracious enough to show their appreciation.

If you are in the fortunate position to have a choice of whom you wish to deal with, heed Mr. Buffett’s words; if not, how do you deal with “difficult” people?

As Trend Followers, our main focus is always on the direction of the major trend (along with our sell stop points) and not on the fundamentals, although from time to time I have voiced my opinion about the current economic recovery, or the lack thereof.

In a recent interview on CNBC, Meredith Whitney, who does not mince words, commented on the current overvalued stock market and the odds of a double dip recession. Take a look:

I agree that a double dip recession in form of a “W” (or several Ws) is a distinct possibility, especially once the stimulus runs out.

While such a scenario will be a death blow again to those simply holding on to their investments, it will offer us trend followers the opportunity to sidestep the downturns via our sell stops and be onboard when the uptrend resumes.

To be clear, as was the case in 2008, trend tracking will not get us out on top of the market, nor will it get us back in at the exact bottom. Both points (the top and the bottom) need to occur first before they can be identified.

However, avoiding the brunt of the sell off, and participating in a good part of the subsequent up move, will certainly help your portfolio avoid a serious haircut, whereas mindlessly hanging on to your investments, regardless of market direction, will have dire consequences—again.

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

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

A tug of war between bulls and bears left the major indexes with not much to show for this week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +8.16% 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 +12.40%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.