You never know where a catalyst for buying may come from. Sometimes, it’s simply bottom fishing after a market slide and at other times, it may be encouraging words from an influential analyst.

Yesterday, it appeared to be a combination of both. However, when Meredith Whitney, the analyst who became famous for her 2007 prediction that Citigroup faced huge losses, uttered her first buy rating (Goldman Sachs) in two years, the markets jumped and never looked back.

The rally moved the Dow to its highest level since July 1, however, volume was light, and the economy still does not show any signs of a rebound. Nevertheless, it was the biggest gain for the indexes since June 1.

One day does not make a trend, and we will wait and see if corporate earnings along with forward guidance can support new upward momentum.

The WSJ featured an article titled “Rebound of the Losers,” which focused on well-known mutual funds that got clobbered in last year’s market meltdown.

Much of the discussion centers on how fund managers misread the market and stayed the course, which turned out devastating for those investors who hung on for the ride.

Of course, since the end of last year, many have rebounded along with the recent market recovery. The featured chart about the comeback kids says it all:

[Click chart to enlarge]

Hopefully, you did not have any part of your portfolio invested in these funds. The 2008 losses were devastating reaching up to 55% for LMVTX.

The much hyped rebound of 2009 wasn’t really that impressive if you consider that from 1/1/2009 to 3/9/2009 the S&P; 500 lost another 25% before the comeback started.

This is why the above funds have not even come close to making up their losses. The math is simple. Say, you had invested $100k in a fund that lost 50% last year, which brings your balance down to $50k. This year, the fund “roars” back and gains 24% within the first 6 months, which brings your balance back up to $62k.

To make up all losses, you’re still $38k short. Translated that means, you have to gain another 61% (on $62k) just to get back to your break even point.

I don’t know about you, but that does not leave me with the warm fuzzies. The early rebound out of a bear market bottom (if in fact this was the bottom) represents the easy part. Expecting that another 61% growth will happen just as quickly is being unrealistic.

If you are in this situation, the most important thing for you to do is not to do it again. The economic landscape does not warrant prices to race straight north.

Odds are that this bottom of March 9 will be tested again or even taken out. Be prepared by bailing out of your holdings via implementation of a predetermined sell stop discipline. As a reader of this blog, you do have a sell stop discipline, don’t you?

Barron’s posted an article about California IOUs along with some thoughts on the possibility of purchasing muni bond funds. Let’s listen in to “California Scheming:”

The outcome of the California crisis ultimately will be determined by politics. As I pointed in the print edition of Up & Down Wall Street a few weeks ago, “Having bailed out the banks and provided a lifeline to Chrysler and General Motors, how does Washington tell California, the eighth-largest economy in the world, to drop dead? That’s the slippery slope that America’s credit rating is on.”

All in all, California closed-end muni funds offer the potential for equity-like returns, albeit with undeniable risks, but arguably less than stocks’. And they could get still cheaper if the state’s fiscal crisis worsens and nervous holders dump anything with California in the name. That would be the time to pounce.

The last sentence says it all. Munis could get cheaper, and you really are put in a position to try to pick a bottom if you consider these investments.

My personal view is far less enthusiastic. I don’t think much of bottom picking to begin with. However, more importantly, we are entering unchartered territory when it comes to State and municipal deficits along with severe budget problems. Potential bankruptcies are certain to become a viable option.

What good does a high yield do, if you lose far more on the principal side, which is exactly what happened last year?

In terms of deficits, things have gotten far worse since then, and no one knows if a bottom is even on the horizon. I don’t like to bet on totally unknowns in the hope that I might get lucky. I will stand aside on this one.

Just after the bear market of 2000, I published an article called “Do Lifestyle funds Provide Greater Security?” I talked about the fact that they were a new product that could be sold to investors by giving the incorrect perception that the value will not drop, and they would provide some means of safety.

That fact got shattered in a hurry as losses piled up big time as the bear struck and ravaged portfolios.

Lifestyle funds have since been renamed and are known as Target funds. The underlying problems have not changed as these funds again got clobbered during the 2008 market meltdown.

Kiplinger writes as follows in “The Best Target Funds:”

The bear market punished target-date retirement funds. From October 9, 2007, through March 9, 2009, funds geared for investors expecting to retire in 2010 tumbled 35% on average, while the average 2030 target-date fund plunged 51%. Meanwhile, Standard & Poor’s 500-stock index lost 55%.

Bear-market performance of 2030 funds clustered tightly. Leading the losers again was the Oppenheimer fund, which fell 57%. So did AllianceBernstein’s. But that’s only six percentage points worse than the average 2030 fund’s loss. Investors in these funds are presumably more than 20 years from retirement, giving them plenty of time to recover. That is especially true for those who have continued to invest regularly.

[Emphasis added]

This is the idiocy of it. Because you have presumably 20 years to retirement is now the justification for you to be able to afford losses because you have plenty of time to recover.

Nothing has been learned from the bear market of 2000 or from 2008. If this economy follows the direction of Japan, and we end up with a lost decade or two, these target funds will have a hard time making up those losses.

I am whistling the same tune over and over again: The only way to get ahead with your portfolio long-term is by not participating in severe market drops and ending up spending years making up losses.

Whatever investment approach you follow, you need have an exit strategy in place to guard against the unknown. Working without one can and will be hazardous to your financial health as history has shown.

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

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

Lack of confidence in the recovery pulled the markets down for the 4th week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.75% 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 +6.42%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.



[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.

The markets continued to struggle yesterday but managed a turnaround in the last hour from another sharp sell off. The effect on our Trend Tracking Indexes was negligible.

Every so often, I like to look at the big picture as to where we are in relation to other historical bear markets. The best graph on that subject is compiled by Doug Short, and I have referred to it in the past several times.

Take a look:



[Click chart to enlarge]

A picture is worth a thousand words and this one is no exception. It is interesting to me that the current market drop from 2007 (blue line) most closely resembles or tracks the crash of 1929 (gray line).

Sure, nothing is certain, and there is no way to accurately forecast if the current trend will end up like the 1929 scenario. My point is that a directional change can happen either way at anytime; it simply pays for you to be prepared so you don’t end up wandering around in astonishment should the bottom drop out again.

Any investor not preparing himself via some kind of exit strategy may be doomed to pay a high price for ignorance—again.