Yesterday’s follow through rally brought the question back to front burner as to whether the recent down trend has run its course, and happy days are here again.

From my vantage point, it’s too early to tell. Fundamentally, nothing has changed in the past couple of days, other than that Fed talk was interpreted as a confirmation of an easing of interest rates when the Fed meets next month. The same old Subprime/credit and real estate problems still exist, but today Wall Street in its infinite wisdom focused on a “maybe” event.

Technically, we did not miss out on anything since most sector and country ETFs have now just about regained everything that they lost since our sell stops were triggered earlier in the month. Of course, if you were the adventurous type of investor and had thrown your entire portfolio at the market during last Monday’s drubbing, you would have had a nice short-term gain.

If last Monday was in fact the bottom, we will need to have a little more confirmation that this rally indeed has legs and staying power. More follow through buying is needed to confirm that the up trend has been resumed.

Remember, when following trends, we will never buy exactly at the bottom, because that point is unknown at the time and can only be determined after the market comes out of a bottom formation.

In that sense, we will always be late to the party, but it will help avoid a potential whip-saw signal here and there. The objective is to buy somewhere within 10% of the bottom, and sell somewhere within 10% of the top. Since we can’t forecast either point, both conditions have to occur first before we can take any action on either side.

Yesterday’s market rebound was a welcome reprieve from Monday’s drubbing. Actually, only one event caused the financials to come back from abyss and that was Citibank’s announcement that it had received an outside capital infusion of $7.5 billion. After much negative news from the Subprime/credit crisis over the past few weeks, this was all the markets needed to stage a rally. Whether this is sustainable or simply another dead cat bounce remains to be seen.

Our Trend Tracking Indexes (TTIs) followed market direction, and we continue to have a split picture. The domestic TTI remains above its long-term trend line by +3.93% while the international TTI remains below its long-term trend line by -2.25% and thereby in Sell mode. That puts us in no man’s land, and we simply have to wait and see which way the market breaks, before making further adjustments to our portfolios.

Here is the link to the most recent ETF Master list, which has been updated with yesterday’s closing prices. This will enable you to work with more recent data. Again, the road ahead is extremely uncertain and it pays to be on guard against any sudden changes in the long-term trend via the execution of sell stops.

While I don’t agree with Paul Farrell’s view very often, he did write an interesting article called “17 reasons America needs a recession.” In case you missed it, it’s a worthwhile read, and he addresses some of the at times hidden benefits a recession has to offer.

While I am not in the prediction business, my indicators clearly show that we are nearing the end of the bull market. Of course, things could change any day, but I don’t see how the problems that I addressed in “The Melting U.S. Economy,” could simply disappear overnight.

The only way to get these issues resolved long-term is via a process I would call “wringing out the excesses,” which I believe can only happen via a recession and an economic contraction. While all signs point in that direction, we have prepared our portfolios to deal with that possibility.

Yesterday’s drubbing of the markets took our International Trend Tracking Index (TTI) down to -3.41% below its long term trend line confirming our bearish mode in that arena.

Our domestic TTI has held on a little better and has now moved to +3.49% above its long-term trend line. While that puts us technically still in a buy mode, we are only holding on to those few positions which have not gone through their pre-set sell stop points.

As a regular reader of this blog and my weekly newsletter, I hope that you have done the same with your portfolio.

MarketWatch’s Dr. Irwin Kellner elaborated on the U.S. economy in a piece titled “Rough patch or briar patch?” His theme is that the economy is reeling from a one-two punch of plunging real estate values and a full blown credit crunch that might not be resolved with additional rate cuts.

To me, his assessment is right on and it would behoove many investors to focus on the big picture as well and get away from eagerly trying to find a place to deploy their money. Cash can be a very good invested position especially in times of turmoil. I was reminded of that when I received an e-mail from a reader who said “I’m looking for some ideas on the best way for a super senior to invest $250k in Vanguard funds.”

Given current circumstances, that is not the way to approach the market. First, our Trend Tracking Indexes (TTIs) have come off their highs. While the domestic one is still in Buy mode, the international one slipped into bear territory on 11/13/07. Second, all major indexes (Dow, S&P; 500, Nasdaq) have dropped below their long-term trend lines. Third, the Dow Theory letter, one of the most respected market timers of the past 70 years, just went into sell mode.

Fundamentally, the facts that Dr. Kellner addresses in his above article are all well known and are expounded upon in daily news. I believe that we are right at a dividing point where the market can break either way. I am playing it safe by protecting my capital from severe downside moves.

If it turns out that the market decides to climb a wall of worry and get back into sustainable rally mode, I will adjust my holdings at that time, even though I will be a little late for the upside party. I don’t mind that at all, since I believe right now far more dangers are lurking on the downside.

Among the daily news barrage about the Subprime/credit crisis, high oil prices and the ever worsening real estate down-turn, a little noticed item with potentially grave implications surfaced a week or so ago.

I had originally heard about it a few months ago when a friend of mine, who works for GE (General Electric), mentioned that some of his clients with money at GE where outraged when the cash holdings in their money market accounts were devalued below the $1 level per share. At that time, I suggested that surely GE would not let that happen permanently but infuse capital to maintain the steady $1 level.

Apparently, I was wrong. MSN featured an article titled “No shelter from the housing storm,” which addresses the fact that GE confirmed that it “broke the buck” on its Asset Management money fund, which is a nearly unprecedented event. I have to agree with the author when he posed the question:

“To do that instead of shoring up the fund, one wonders: How bad does GE think things are going to get?”

Writer Andrew Bary, on Barron’s Online on Wednesday, reported that the fund has “suffered losses in mortgage- and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.”

Hmm, 96 cents on the dollar? That’s a sure 4% loss with no way to make it up. Why bring it up now?

As the economic picture worsens, you are likely to see this scenario repeated. Smart firms, if they can, will avoid this outcome by shoring up their money funds with an infusion of their own cash, such as Legg Mason did last week by adding $100 million to one of its money funds and providing $238 million in credit for two others.

Obviously, mutual funds will try as hard as they can to avoid this disaster; however, if pressed due to credit or liquidity problems, you will be left holding the ever shrinking bag.

What can you do about it?

For years, I have advocated the fact that when our Trend Tracking Indexes are in negative territory, and our holdings are in cash, safety is of the utmost importance. That means using a treasury-only money market.

Whenever I talk with new clients, undoubtedly one of the early questions is how much interest the money market account pays when we’re in cash. Usually, the rate has been somewhat lower than what you could get in the open market. My argument that safety is of primary concern when in money market funds has largely been ignored. Most every investor smugly tries to squeeze an extra ½% yield or so out of their cash holdings.

This has now become a dangerous game, and I suggest that you review your money market prospectus especially if your yield is too good to be true. Remember, there is no free lunch!

My view has always been that the yield of a money market account is unimportant; it will not make you rich unless you have a vast amount of cash to play with. Investing at the right time during an up trend, using sell stops and avoiding bear markets is what will grow your portfolio.

When that trend comes to an end, and you are headed for the sidelines, safety of capital should be your priority number one. Especially in today’s volatile, over-leveraged and non-transparent investment climate, don’t try to pick up nickels in front of a moving bulldozer.

Despite Wall Street’s peculiarities and never ending scandals, there always seemed to have been some information available which you presumably could rely on and which served as a resource with integrity.

Well, that seems to have changed now too due to the current credit crisis. Michael Shedlock’s article “Any Credibility Left At Fitch,” sheds some light on (credit rating service) Fitch’s approach to lowering credit ratings. I always thought that a rating company would/should be unbiased and issue ratings based only on facts and no other potential implications. That credibility went out the window when Fitch stated the following:

“Fitch recognizes that financial guarantors view maintenance of their ‘AAA’ ratings as a core part of their business strategies, and management teams will take any reasonable actions to avoid a downgrade.”

Huh? To avoid a downgrade? Why? If a company’s debt has become junk, it needs to be downgraded no matter whether there are grave implications or not. Any action to the contrary will make the function of a rating company obsolete.

If you invest in bonds or other interest rate sensitive instruments, you better think twice before silently acknowledging that AAA rating. It may not be worth the paper it’s printed on.