Reader and client Nitin pointed out an article in the NYT called “Is It Just A Strong Market, or The Bubble, Part 2?”

The story goes on to compare the differences between the events of 2000 and the market in 2007. Several academic studies suggest that current sentiment isn’t likely to be low enough to prevent another bubble form forming.

Professor Porter pointed out that a typical pattern for a burst bubble (2000) is to be followed by a somewhat less extreme version of the original—something he refers to as a “bubble echo.” He said that this pattern has appeared so consistently in psychological experiments that “you could almost set your clock according to it.”

There are some interesting points he makes, but he also admits that his research can’t be used to predict when a bubble echo might burst.

Too bad, I thought I had something of value here that could be used to somehow improve my investing prowess. I guess it’s back to tracking trends and monitoring sell stops.

Just a quick update as to how today’s downside activity has affected our Trend Tracking Indexes (TTIs).

Our domestic TTI has come off its high by 3%, but still remains above its long-term trend line by +2.39%. The international TTI also moved lower and currently sits +6.80% above its own long-term trend line.

None of our pre-set trailing sell stops have been triggered, although the Utilities sector seems to be closest to a potential ‘Sell’ by having come off its high by -8.59%. Keep in mind that for volatile sector and country funds/ETFs my sell stop is at -10%. For domestic and general international funds/ETFs my trigger point is at -7%.

I’ve touched on this before, but it’s worth repeating. With the onslaught on new ETFs coming on the market, it’s important that you don’t jump in before you get all of the facts. I generally make it a habit not to invest in any ETF, or mutual fund for that matter, if there is not at least some 9 months of price data available.

This will allow me to track the trend and also observe the daily volume. A recent article in the WSJ called “Before you drive that hot ETF…” details other points for you to consider:

1. Expenses
2. Trading Costs
3. Confusing choices
4. Aberrations from tracking an Index
5. Performance histories
6. Hedge Funds and high rollers

While not all points are critical, it pays to read the story to make sure that you are aware of some of the pitfalls you may have been unaware of.

The explosion that rocked Wall Street last week was bond guru Bill Gross’s (PIMCO) admission that he has turned bearish and that worldwide stronger economic growth over the next few years will lead to higher interest rates.

Bond prices tanked, yields rose and real estate funds/ETFs headed south. Some media had a hard time comprehending why Mr. Gross changed his position after having been a long-term bond bull. Did he cave in?

Not in my view. PIMCO is in the investment business and fundamentals, even for those with a very long-term view, change from time to time. I like the quote from famous economist John Maynard Keynes best who said, when encountering criticism about his change in viewpoint, that “when the facts change, I change my mind—what do you do, sir?”

What are some of the effects of higher rates? A good analysis to read is Michael Shedlock’s story on “The Bond King’s Capitulation.”

Of course, the trend to higher rates will be a severe handicap for the Fed in potentially bailing out the most troublesome weak spots in the economy, namely SubPrime and Real Estate.

Whenever the market behaves in a tumultuous way to the downside, as it did last week, I like to look back to see if there were any mutual funds or ETFs that bucked the trend. I’m not talking about the obvious bear market funds, but others that may have held up well and may have been part of your portfolio.

This is only a short-term view of market activity and certainly not meant for you to rush out and buy those that survived the week on a positive note. But you may consider them and do further research to see if an investment in them is merited.

Higher interest rates were the culprit for last week’s 3-day slide, which means that interest rate sensitive funds/ETS fared the worst. This is confirmed in our momentum tables; here are the worst of the bunch out of my data base containing 1,504 funds/ETFs:

1. UTPIX, Utilities, -7.80%
2. PMPIX, Precious Metals, -7.05%
3. XLU, Utilities, -5.30
4. EWZ, Latin America, -5.28%
5. FSUTX, Utilities, -5.27%

The top five, which held up best, are:

1. CH, Country Fund, +3.04%
2. TIFQX, Technology, +2.75%
3. TF, Pacific Asia, +1.44
4. EWT, Pacific Asia, +1.22%
5. CNZLX, Pacific Asia, +1.17%

As a general comparison, the S&P; 500 lost -1.87% for the week while Gold dropped -3.38%. That means that even a traditional safe haven such as Gold failed to hold up again just like it failed during the meltdown of February 27.

While it is important to diversify your holdings, it is not a guarantee that your portfolio will withstand a severe market slide. The sell offs during May/June 06, at the end of February 07 and now last week, are proof that many markets work very much in tandem and to own a “zig” holding when the market “zags” is rare indeed.

That’s why I continue to believe that a clearly defined entry and exit discipline is the best way to deal with market uncertainties and keep your portfolio from freefalling.

A few weeks ago, on May 16, I posted about how sometimes technical analysis can help forecast market behavior. While it is not crucial for the use with my trend tracking methodology, I still like to look at patterns that have historically been repeating themselves on a consistent basis.

What I am referring to is the “break away” gap as shown in the domestic TTI chart below:



The theory is that break away gaps will sooner or later be closed. What that means is that prices tend to always come back down and “close” the gap—eventually. And that’s the rub. It’s not a reliable timing indicator as to when this will occur.

With the bloodletting of this week, I wanted to revisit the chart to see if this week’s price drop had any effect. As you can see, the pullback did not make it quite to the gap let alone close it. Today’s rebound took us (thankfully) back in the other direction.

However, the jury is still out to see if this phenomenon holds true again. Once the gap closes, we could see a solid rebound and a move back to higher territory. However, if prices move right through the gap on the downside, then odds are high that a trend reversal has occurred. Our sell stop points will approximately be triggered around the low point of the gap thereby protecting our portfolios should the slide worsen.