MarketWatch reports that “Bear Market brings new funds for the fearful:”

After last year’s market meltdown savaged just about every U.S. and international asset class, many investors have concluded that traditional portfolio diversification is not only discredited, but pure bunk.

“A lot of this is just a reminder that really nothing worked last year,” said John Coumarianos, a mutual-fund analyst at investment researcher Morningstar Inc. “Treasuries were the only thing that held up.”

[My emphasis]

Read the highlighted part again. The ignorance and cluelessness is absolutely mindboggling.

To state that “there is not much wrong with mainstream investing strategies that a tweaking of asset allocation can’t fix” has to go down as the most stupid statement of the year. I would like to see a sample of that tweaked asset allocation. Tweaking it how? By adding a different menu of bullish funds and hoping they will fare better during the next bear market?

Yes, everything asset class suffered in 2008. Moving to the sidelines, and staying in cash, was the only way to survive the bear. But that is something you will never hear in the mainstream media and certainly not from Morningstar.

Be very aware of the pitfalls when you read articles like this one and look at the “new funds” with a grain of salt. Chances are that this is just another attempt to keep people investing when common sense (and Trend Tracking) tells you, you should be out of the market altogether.

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

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

A sell off early in the week caused losses for all major indexes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.08% keeping the current buy signal intact. The effective date was 6/3/2009.



The international index has now broken above its long-term trend line by +8.75%. 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.

President Obama attempted to unleash creativity by announcing the widely anticipated new regulations designed to overhaul financial markets.

The new regulations would increase some of the powers of the Fed but also add another layer of bureaucracy via a newly created consumer protection agency.

For some straight talk, please read Mish’s commentary at Global Economics titled “Obama’s Blueprint for Reform Concentrates Still More Power in Hands of the Fed.”

The market’s merely yawned and ended almost unchanged. Our Trend Tracking Indexes (TTIs) barely moved, and we seem to have reached a point of equilibrium. With no apparent driver to propel the indexes higher, the path of least resistance could very well be to the downside.

Nobody knows for sure, so we are content tracking our sell stops and will let the market tell us what our next move is to be.

Monday’s market drop continued Tuesday as economic worries persisted.

The only saving grace for the bulls so far was that volume was very light again, and the S&P; 500 bounced off its 200-day moving average.

Our Trend Tracking Indexes (TTIs) all retreated and are showing the following positions:

Domestic TTI: +0.62%
International TTI: +7.92%
Hedge TTI: +0.03%

Weakness has definitely set in and pulled our international holdings off their highs. We will watch the sell stops closely and take action when our pre-set trigger points get pierced.

A variety of forces combined yesterday and pulled the major indexes off their highs.

Some kind of a correction was long overdue with the markets having enjoyed an extended run. It remains to be seen, if this is the start of something prolonged.

Judging by the low volume, it does not appear that way but, nowadays, you need to be prepared for the fact that anything is possible. We may very well enter a period in which neither wild fear is coming back into the market nor unbridled enthusiasm.

Our Trend Tracking Indexes (TTIs) retreated and are hugging their respective trend lines as follows:

Domestic TTI: +0.86%
International TTI: +8.79%
Hedge TTI: +0.27%

All buys signals remains if effect subject to our trailing stop loss points.

Reader Joe had an interesting comment in response to Saturday’s post “Beating the S&P; 500 Index with an S&P; 500 Mutual Fund.”

Here’s what he had to say:

There is a flaw in your hedge – all Ultra-Long and Inverse funds have a “daily rebalancing” problem that causes them to all trend down over long periods.

For example, if you bought SPY in early November and sold it yesterday, you broke even. However, if you held SH for the exact same period, you would have lost 10% of your money. See the charts attached.

You are better off shorting SPY as a hedge (or even better, shorting 1/2 as much of SSO since it has the same problem, but by going short you put it to your advantage – the trouble is finding shares to short, and also you can’t short in a retirement account).

I appreciate Joe’s input since it allowed me to look at other hedge scenarios I normally would not have considered. I do not advocate hedging SH vs. SPY, but since he brought it up, I decided to run the test.

As an aside, whether inverse funds do daily rebalancing or not, does not matter to me; what matters is the published closing price, which is what I work with and which is the standard used to mark all accounts to market.

There are a few things that you may have overlooked when doing your calculations. First, SH had a huge distribution in December 08, which you must have not have considered. Here’s what the matrix looks like for that time frame:




[Click on chart to enlarge]

Please note, the distribution had a major effect on the outcome during this period and is most likely not accounted for in the charts you presented.

Second, the key is the rebalancing of the hedge when it becomes lopsided. Any hedge has an optimum rebalancing percentage, but for this example, I have used 61%.

Here’s the summary for testing your hedge SH vs. SPY for the period of 11/3/08 to 6/12/09:



[Click on chart to enlarge]

As you can see, this turned out to be a winning situation and not at all what you had assumed. It’s a better outcome than what I would have expected from such a hedge combination.