It is not often that anyone, let alone a politician, says things as they are without sugarcoating and/or distorting facts to ensure that no one is offended. Such is unfortunately the ridiculous world of political correctness we are living in.

So it its surprising and unusual when a politician calls a spade a spade as this US senator did in the following short video clip as he commented on the AIG bonuses:

[youtube=http://www.youtube.com/watch?v=iCsbva1eCNI]

The following was brought to us from England where one representative dressed down the Prime Minister in no uncertain terms about the state of the economy.

[youtube=http://www.youtube.com/watch?v=94lW6Y4tBXs]

Straight talk like this is rare in today’s society, but I personally appreciate it when people have the guts to say it as it is, especially in light of the current world wide economic crisis with its many questionable bailout attempts.

The markets continued to stall yesterday as many investors wondered if the March rally had finally run its course.

Contributing to the weakness was famous speculator George Soros when he chimed in with his view that the rally was pretty much done.

Additionally, investor Mark Faber added fuel to the downside move by saying that that the S&P; 500 could drop as much as 10% to around 750, because the market had moved up too quickly.

As I pointed out yesterday, economic prospects do not look very inviting at this time, which means sudden moves to the downside remain a distinct possibility. Mish at Global Economics minced no words when he commented on the signs of the alleged recovery:

These “signs of recovery” that cheerleaders have been seeing are mostly nonsense. The stock market has been rallying because Treasury Secretary Geithner and President Obama are willing to screw taxpayers out of trillions of dollars for the benefit of banks. Such action will not reduce defaults, restore lending, or do a damn thing for cash strapped consumers out of a job with no job prospects.

I couldn’t have said it better myself.

Last week’s rally ran into brick wall yesterday as worry about the upcoming earnings season surfaced.

While the major indexes closed to the downside, a recovery rally during the last couple of hours reduced the damage considerably.

The current question is as to whether the “earnings bar” has been set low enough. In other words, worse reports than the already low expectations could bring this current bear market rebound to an end in a hurry. Slightly better results, along with improved future guidance, will undoubtedly support the bulls and may provide more fuel to the upside based on the (erroneous) view that the economy has turned the corner and happy days are here again.

While I don’t always agree with Bill Fleckenstein’s view, he had this to say in “A bear rally in bull’s clothing?”

There is also another possible reason for the celebration: the copious amounts of money being created from thin air by the world’s central banks (not least of which being the early stages of quantitative easing, the conversion of government debt into money). Money printing plus imagination are potent forces that can’t solve our problems but can affect the stock market in such a way as to make it appear that the worst has passed.

It must be remembered that some of the best rallies occur in bear markets. For instance, in the first half of 1930, the market jumped 40% — twice what Bubblevision defines as a bull market — and it certainly didn’t end very well. (Part of the reason for that big rally was a belief that the recession, which became the Great Depression, was already over.)

I have touched on the fact before that not only sudden but also the most violent rallies occur in bear markets. Personally, until proven wrong, I can’t see that reckless monetary expansion over 30 years along with the destruction of assets and employment of historic proportions will be resolved with government stimulation packages and an ephemeral bear market.

Yesterday, I talked about the flattening of the trend line and its potential effect on a buy signal. Today, let’s look at a historical chart of the domestic Trend Tracking Index (TTI) to determine if a rising trend line should you keep you in the market, even though our trading rules signal a ‘Sell.’

Take a look a the graph below, which shows the price action along with our ‘Buy’ and ‘Sell’ signals over the past 6 years:




[Click chart to enlarge]

There were 4 sell signals identified by the large red arrows. You can look at each one of them and note that the trend line was still rising when the ‘Sell’ occurred. The first 3 ended up to be whip-saws as the markets subsequently resumed their long-term upward trend.

Here’s where percentages can get you into trouble. If you were to conclude that 75% of the time a rising trend line renders a sell signal invalid, then you would be right—until you’re wrong. This is where the magnitude factor kicks in. Had you made the decision to stay in the market and ignore the ‘Sell’ on 6/23/08 as well, your portfolio would be in the same shape as that of the buy-and-hold crowd.

Three times you would have been right over 6 years by avoiding a whip-saw, but the fourth time you would have gotten clobbered.

My experience from following these trends for over 20 years simply tells me that you can never be sure. I have learned that it is better to live with an occasional whip-saw than to arbitrarily use rising or falling trend lines to fine tune my decisions.

The simplicity of following all buy and sell signals regardless of outcome is what will keep you consistently on the right side of the long-term trend; even though at the time it may not always seem that way.

If you adopt the long-term view, as I tried to by using these occurrences over a 6-year period, you may find these whip-saws to be nothing more than a necessary evil on your way to safely avoiding bear market disasters.

One reader pointed to a CNBC video featuring a short presentation about a “flattening trend line.” Take a look but disregard the useless chatter afterwards:

While I don’t use the 150-day moving average as shown in this demonstration, this nevertheless poses an interesting question. Does entering the market (using our entry rules), after the trend line of the Trend Tracking Index (TTI) has flattened, enhance the chances of success?

In other words, are the odds of the price trend continuing to the upside greater when a trend line has flattened as opposed to getting a buy signal while it is still falling?

To find an answer, I had to look back to the last bear market of 2000, where our sell signal kept us out of domestic equities from 10/13/2000 until 4/29/2003.

However, that time frame was interrupted by a short whip-saw period (which was long enough to result in a profit) from 3/7/02 until 6/12/02. Take a look at that enlarged portion of the chart:

As you can clearly see, the trend line (red) was still descending as the ‘Buy’ on 3/7/02 was generated. At the moment the ‘Sell’ was triggered on 6/12/02, it had actually turned up slightly.

Since this is the only example I could find, it certainly is not conclusive to say that buy signals, while the trend line is still descending, will always lead to whip saws.

To gain more insight, let’s look at the opposite tomorrow: The effect of selling when the trend line is still rising. Maybe that will lead us to a better conclusion.

The recent market rebound has shown a lot of legs ever since the S&P; 500 made a 12-year low on March 9th. This prompted many readers to ask whether this is still a bear market bounce or possibly the beginning of a new bull market.

Reader Mel had this comment:

As I’ve said before, I appreciate very much your sharing your opinions, including your passing on of the writings and videos of others. But for those of us who have been following your advice to stay on the sidelines (with the exception of the new hedge strategy) during the past few weeks, it would be very helpful if you could include a few lines in your daily blog just stating that you don’t trust this rally, even as the market continues to move higher 🙂

Thank you again for sharing your knowledge and opinions.

I pointed out in Bear Market Rallies that rebounds off new lows can be fierce and lengthy in duration. Of course, a subsequent correction can be just as violent as we’ve seen during the first couple of months of 2009.

To me, this is not a matter of trusting this rally. While I believe that this bear market is far from being over, it does not mean that we won’t get a prolonged period of rising prices even to a point where our domestic TTI signals an outright buy. If that happens, I will follow the trend; however, my hands will be placed firmly around the trigger for our exit points.

The line between bullish and bearish territory is clearly drawn in the sand, so there is never any question as to where long-term market direction is at. I’ve seen many newsletter writers being labeled over years to be either perennial bulls or bears.

I am neither.

If the market crosses the major trend line into bullish territory, I am bullish. If it heads south and crosses below the line, I am bearish. It’s as simple as that. I have no bias either way and let the market tell me what position to take.

Sometimes, when a period, such as this bear market, goes on for some time, a few readers have commented that I am too negative. That is incorrect; I simply go with the trend and my views at the time support the current reality and not some wishful thinking.

This allows me to treat events in the market place without too much emotion and simply focus on what’s most important, which is to be onboard when a major trend develops.