No Decoupling

Ulli Uncategorized Contact

The market zigzag of the past few weeks has made it abundantly clear again that whatever happens in Europe, or anywhere else in the world for that matter, does affect U.S. markets. The WSJ had more thoughts on the topic of decoupling in “No Sign of That Decoupling in Markets:”

Earlier this week, there was a dubious meme being purveyed on the Internet and by some TV talking heads that the U.S. was somehow “decoupled” from the problems in Europe.

Try to resist the obvious first reaction that these people immediately need to seek out the nearest time machine and set the dial to “2008″ to see how the whole decoupling thing has worked out in recent history.

Because they need only to witness the action in U.S. markets today to see that the notion of decoupling is, was and shall be until further notice complete bunk.

Stocks have been driven lower and Treasury bonds have been driven higher by yet another (predictable) decline in the euro and a few rumors, some sillier than others, swirling around from across the Atlantic, including talk that France and/or Germany have at various times in the past couple of weeks threatened to leave the euro or some such.

This week’s great decoupling hope was based on a Goldman Sachs econ note that pointed out, perfectly reasonably, that U.S. exporters aren’t overly exposed to European importers, meaning the U.S. economy could withstand a very weak European economy.

What was ignored by many was another key element of the Goldman report, which pointed out, again reasonably, that the trouble Europe was causing in financial markets could *not* be ignored. And we’ve all seen, again and again and again this year, that no matter how strong the U.S. and global macro data, trouble or rumors of trouble out of Europe have been enough to shake global financial markets.

And that time machine journey to the olden times of 2008 would be a reminder that if financial markets stay troubled long enough, the global macro-economy is sure to follow. We’re all in this, tightly coupled, together.

Sure, some markets will lead on the way up and on the way down, but in the end there is no one country, or stock market, that can escape the effects of any global economic slowdown.

However, there will always be sectors that are having their own bullish cycle, which is what I will be looking for should the domestic Trend Tracking Index (TTI) follow the international one back into bear market territory.

No Load Fund/ETF Tracker updated through 5/20/2010

Ulli Uncategorized Contact

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

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

During one of the more volatile weeks on Wall Street, the major indexes lost 4-5% with major support levels now having been broken.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains above its trend line (red) to the upside by +1.29% (last week +2.57%) keeping the current buy signal intact. The effective date was June 3, 2009.



The international index broke below its long-term trend line by -4.72% (last week -1.25%). A Sell Signal was triggered effective May 7, 2010. We are no longer holding any positions in that arena.

[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Bouncing Off The 200-day Moving Average

Ulli Uncategorized Contact



Yesterday, the markets deteriorated sharply at first with the S&P; 500 finally finding support at its 200-day moving average of 1,101, which turned out to be the low of the day. The support level held for the time being, and we bounced off and ended up closing only 0.51% lower.

It could have been far worse, as major selling would have set in had this level been violated. As it stands right now, this bounce gave us a little breathing room, but there is a good chance that this level will be tested again.

The culprit for the continued selling spree came in form of an announcement from Germany last night as they set in place specific rules to ban naked short selling of stocks of key banks and European Government bonds.

As we’ve seen in 2008, when similar bans were introduced here in the U.S., the downward trend was stopped temporarily, but eventually momentum continued fast and furious to the downside causing heavy losses. We’ll have to wait and see if things will play out the same in euro-land.

With yesterday’s action, our domestic Trend Tracking Index (TTI) moved a little closer to its long-term trend line, but still remains 2.12% above it, which means that technically we’re still in bullish territory.

I would consider the current period neutral and a time of transition. In other words, directional momentum has changed and most of our sell stops, with the exception of some sector funds, have been triggered. This is not the time to be a hero and add new positions hoping for a rebound, since downside risk is simply too great.

Should the 200-day moving average on the S&P; 500 (~1,100) not hold, there is no way of knowing how far south this market can go. As long as the situation in Europe does not show any signs of improvement, or at least better unity in combined efforts, we have to live with the current volatility and the distinct possibility that this bull may turn into a bear.

S+P 500 Heading Towards The 1,100 Level

Ulli Uncategorized Contact


The Euro got hammered yesterday giving our long positions in UUP a nice pop. That’s about the only positive that can be said about the market. The S&P; chart looks like a black diamond ski slope and price action seems to be headed towards the 1,100 level.

With many professionals watching the 200 day moving average on the index (1,101) for directional clues, we are now within 20 points of breaking below it, which would be a bearish sign and most likely accelerate the downward trend.

Our domestic Trend Tracking Index (TTI), which moves slower than the S&P; 500, has now moved within 2.36% of breaking below its own long term trend line. Long before this happens we will have been stopped out of our remaining equity positions.

While it’s always possible that the 1,100 level may function as support and trampoline the markets higher again, I would not hold my breath. Fundamentally, the news out of Europe is anything but encouraging, with daily surprises on the menu, so be sure to watch your sell stops and execute them when necessary.

We’re currently in an environment where it’s better to be safe than sorry.

Who Is Affecting Who?

Ulli Uncategorized Contact

Reader John had this question regarding the interaction of world markets:

The markets in China, Japan and Europe all trade and close before ours. I’ve often wondered if the trading on our markets is affected by the results in these other markets, like an “early warning system”. I would like your opinion on this, realizing that’s there is no absolute “yes” or “no” answer.

This is one area where I have not found any consistent relationships. Sometimes they react to our previous day’s events, and sometimes they don’t; very rarely are they front runners. Even watching the futures at night is not a guarantee that the markets will open in the direction futures trading indicates.

Last Sunday night was a good example. The Asian markets were down sharply, and the domestic futures pointed to a lower opening with the Dow trading down 120 points. When the markets actually opened, we were bouncing around the unchanged line with no clear direction apparent until later on.

While I have not measured this exactly on a day to day basis, from my general observations, the overnight effect one market has on the others appears to be totally random.

Limited Risks And Limited Returns

Ulli Uncategorized Contact

A new type of fund called “target band” fund is supposed to smooth the ride on Wall Street as MarketWatch submits in “Putting a speed limit on risk and return:”

We have target-date funds. We have target-risk funds. We have absolute return funds. And now — just in time for this year’s market volatility — introducing “target band” funds.

Target band funds use options to place a “collar” on a portfolio’s losses and gains. They’re not available to the masses just yet, but Kent Smetters, president and founder of Veritat Advisors, plans to roll out these funds — which are now in beta testing — this summer. If ever there was a time for such funds, especially for those want to preserve wealth and have some certainty around their portfolio outcomes, now would be it.
…

In the case of Veritat Advisors, Smetters is creating a family of funds that would offer investors the chance to put targets on, or a band around, how much they might lose or make in any given year. Investors, for example, will get to choose whether they want to lose no more than 10% and make (currently) as much as 12% (the TB10), or lose no more than 20% and make as much as 25% (the TB20).

Smetters will do this by investing in the Standard & Poor’s 500-stock index and then using a zero-cost collar. He’ll be buying out-of-the-money, one-year puts for downside protection and selling out-of the money, one-year calls that will pay in full for the put. Here’s how Smetters describes it: “Veritat Advisor’s ‘Target Band 10%’ protects against losses above 10% by overlaying the S&P; 500 with one-year option contracts,” he said. “This insurance is funded by forfeiting positive gains above a certain threshold, currently about 12%. The performance of the client’s account, therefore, is effectively ‘banded’ between a loss of 10% and a gain of about 12% per year.”

In the old days, sophisticated investors might have referred to this as a version of portfolio insurance. But portfolio insurance, according to Smetters, has negative connotations. What’s more, it’s not really what he’s creating at all. “Unlike previous attempts at ‘portfolio insurance’ or ‘stop loss’ orders, the TB10 risk management system does not rely on markets remaining liquid,” he said. “All of the TB10 protection takes the form of absolute contracts that are backed by the Chicago Board Options Exchange.”
…

As for whether target band funds will sell? In a world where investors buy target-date funds and target-risk funds and absolute return funds, the short answer is yes. However, just as happened with those funds, a bit of investor education will be in order. And explaining how target band funds work without getting too deep into the weeds could be a challenge, according to Sullivan, who — in the interest of full and fair disclosure – also sits on Veritat Advisors’ board of advisors.

The other issue has to do with human behavior. Investors say they would be happy to buy a fund that puts a band around their returns and losses. They’ll soon get a chance to actually do what they say.

[Emphasis added]

Leave it up to Wall Street to come up with a fancy new product. To me, it seems like a bad idea to be limited with upside gains of 12% while having a downside risk of 10%. That’s not a good risk reward ratio.

Here’s how we accomplish the same thing but with unlimited upside potential using trend tracking.

Upon executing the purchase of an investment, we immediately establish a trailing sell stop point of 7%. In other words, as prices rise, the stop loss point rises as well. This essentially fulfills 2 functions:

1. It limits our losses in case the trade goes against us, and

2. It locks in our profits if prices continue to rise until the trend ends when it bends, and we get stopped out.

It couldn’t be any simpler; your downside risk has been clearly defined and your
upside potential is limited only by the duration of the major upward trend.