Reader Steve is still unclear about an important part of Trend Tracking, namely when to take profits. He writes as follows:

Thanks again for your great blog and newsletter.

Again, thanks for you generosity in sharing your experience.

The general idea is let your trailing stop loss be your guide when to get out, either to limit losses or to lock in profits. Here is how I have described it in more detail in my Investment Policy Statement under the “Risk” section:

With Trend Tracking, we set up a clearly defined risk limit. Upon executing the purchase of an investment, we immediately establish a trailing sell stop point of 7%. In other words, as prices rise, the stop loss point rises as well. This essentially fulfills 2 functions:

Sometimes it may take several buys and sells, also called whip-saw signals, before the major trend establishes itself. Investor patience is a requirement!

In other words, if the trend continues your way to the upside, you trail your sell stops along with the rising prices until the trend eventually reverses and triggers your exit points. Using this method, you eliminate any emotional decision making and let the market tell you when it’s time to get out.

I get a lot of e-mails and comments about my articles and weekly updates. I find most of them constructive, but once in a while I get a real winner. This was the case yesterday, when reader Doug had this to say:

I was disappointed in your facetious comment in the second paragraph under MIXED BAG, regarding the CPI numbers. I’m absolutely sure you understand the reasoning behind keeping food and energy prices out of the CPI, but can you be so sure each of your readers also does? Your attempt at humor in that paragraph is misleading and ill-advised.

Lest this email appear completely negative, let the record show that I thoroughly enjoy your weekly newsletter.

Hmm, here we are at the brink of a recession, with the financial system in shambles, gas, energy and food prices at an all time high and showing no signs or receding, and this reader is worried about my facetious comment.

The direction this economy is going, I will be making a lot more facetious comments in the future just to underscore the silliness of some the skewed numbers being released or things like Fed chief Bernanke’s comments that the danger of downturn has faded among many others.

I am not an economist, but I read a lot about economic events, since they all tend to affect the investment arena. I suggest that this reader focuses his energies on the reality of things as pointed out succinctly in the latest issue of Dr. Housing Bubble called “Cultural Spending Neurosis,” and maybe then he will understand that a sense of humor is badly needed to survive in this environment:

I was having a conversation with someone last week regarding his home equity line being shut down. He was rather distraught and frustrated by the sudden move of the lender to close off his line due to market conditions here in California. “How can they do that? They have no right to take away my hard earned money!”

Aside from restraining myself from smacking him upside his head I did ask him how he earned that money that was now gone. “My home equity was my money. The bank has no right in closing access to my money.” Welcome to the new mentality of wealth in our nation.

The great majority of the public started associating the ability to access credit with true financial prosperity. Well as we all now know, anyone with a pulse and one tooth was able to get a large mortgage in California by simply making things up.

Need we remind you about the farmer making $14,000 a year with access to a $720,000 loan? Or what about the hundreds of credit card offers Americans receive each year in the mail? When debt is no longer seen as a necessary evil and a sign of wealth, new definitions take hold of mass psychology.
…

That is why at the height of pseudo prosperity and the pinnacle of the housing bubble, Americans had for the first time crossed the negative savings barrier. This is the perfect example of watering down the definition of wealth in our country; collectively as a society people started having an aversion to saving money and a liking to debt.

This of course is a major problem and no country can survive in the long run with crushing amounts of debt. I don’t care what kind of math political parties want to sell you but there is no way a country can be prosperous in the long run by running larger and larger deficits.

This implosion of the credit (debt) markets is simply a decade long debt ponzi scheme that can go on no longer. Consumer psychology still can’t understand why fuel is rising or why everything from education to groceries are costing much more. The perfect scheme was to con people into believing that going into debt, meaning you were spending tomorrow’s dollars today, was somehow a prudent way toward wealth.

And the entire idea of savings lost its allure. In fact, society punished savers implicitly. For much of the past, if you bought a home folks knew that you had the diligence and restraint to hunker down for 2 or 3 years and put off conspicuous consumption for a larger goal such as a home. That entire romanticism of saving went out the window when anyone and everyone was getting BMWs and McMansions with zero down.

Spouse B: “Go ahead and take the dog while you’re at it. I always hated how he looked at me anyways.”



What a lovely and heart warming story don’t you think? As you can see from the above sign, many people did have a conversation like this except in our story above, the couple split ways because of diverging financial goals and with that lawn sign, we can see that some folks unfortunately realized that selling a home in a busted bubble is no easy task.

You can’t be any more direct than this. To me, this viewpoint is right on and is simply a realistic assessment as how things are and not what we would like them to be.

While we all enjoy the incredible benefits that technology has brought us over the past few years, there have been some disadvantages especially when it comes to handling your portfolio. Sure, instant access to all information anywhere, e-mail, the internet and customized tracking of your investments have made a mostly positive difference in all of our lives.

However, there have been some negatives too, as you can get overwhelmed by instant information overload and easily change your focus from macro to micro.

That happened to a couple of retired clients, who got stuck in that mode last year when first being exposed to ETFs. The instant price availability throughout the day caused them to watch the market incessantly while hanging on to every tick change of the ETFs they were invested in. They could not control themselves to do otherwise and finally asked me to replace the ETFs with comparable mutual funds.

Many investors are checking their portfolios several times a day or worse yet, on their cell phone. Others have the need to at least review portfolio changes once at the end of each business day.

Psychologists have proven that constant portfolio monitoring has unintended negative consequences and drains investors’ emotions based on the series of “pangs” (negative or positive portfolio changes) they experience. Here’s how Nassim Taleb describes this curious phenomenon in his book “Fooled by Randomness:”

Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.

Note also that the implication that wealth does not count so much into one’s well-being as the route one uses to get to it.

In my advisor practice, I have a wide variety of clients form all walks of life with all types of behaviors. I have found that those investors with busy lives (and not much interest in the markets), who only check their brokerage statements once a month, do not lose their long-term perspective as easily as those who are engaged in constant monitoring.

While it’s a natural desire for many to increase tracking of their portfolios when the markets whip-saw and meander aimlessly, much of what we have seen during the past 18 months or so, it can lead to an emotional deficit, as Nassim describes above. If you have found yourself being more on the edge lately, this may explain why.

What can you do about it? Change your habits, which is the hardest thing to do for most of us.

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

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

A volatile week left the major indexes with only minor changes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved lower and now remains -0.08% below its long-term trend line (red).



The international index dropped as well and now remains -5.65% below its own trend line, keeping us on the sidelines.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

In regards to Monday’s post “Honing In On The Sell Strategy” one reader had this to say:

In Friday’s newsletter stat sheet, you said “My sell rules are as follows: I will liquidate any of my holdings if they drop by more than 7% from their highs since I bought them, or if the TTI breaks below the neutral zone, which is a point of -1.50% below its long-term tend line — whichever occurs first.”

In Monday’s elaboration, you say “I will liquidate my domestic holdings if the sell stop gets triggered or the TTI breaks below its long-term trend line, whichever occurs first.” Which is it? Am I missing something?

Thanks for your good work.

Yes, the reader is correct; I said both. When posting the sell rules in the StatSheet after the Domestic Buy signal was generated on 5/15/08, my intention was to give the market some room to breathe to the downside, in case a sell off had materialized right after our purchase. This would have avoided an immediate whip-saw signal.

While this whip-saw did not happen, here we are less than a month later staring a new Sell signal in the face. While domestic buy cycles usually last from several months to 1-1/2 years, this one may not. From my vantage point, this is either an indication that a major trend reversal may be forthcoming or that the past upswing was merely a bear market rally.

Again, as I said on Monday, this is not an exact science, and we’re simply trying to stay out of the way of an oncoming bear market train.

Given that, I will use the latter and issue a sell signal for domestic equity funds, if the domestic Trend Tracking Index (TTI) breaks its trend line to the downside and stays there for a couple of days. Remember, markets go down a lot faster than they go up, so use the solution to get out that best fits your risk tolerance.

Wednesday Market Update:

All major indexes retreated sharply as the markets were unable to absorb news of higher oil prices and interest rates as well as questionable economic news. I took the opportunity early in the day to unload some of our more volatile positions in technology, emerging and Latin American markets.

To no surprise, our domestic Trend Tracking Index (TTI) dropped as well and has now pierced its long-term trend line to the downside by -0.40%. Barring any super rebound rally on Thursday, I will initiate some short positions to neutralize our long mutual fund holdings as discussed in Monday’s post.

If the TTI stays below its long-term trend line for another day or two, that will constitute an official “Sell” signal for the domestic arena, and I will make the announcement on this blog.

The bulls claimed victory on Tuesday because the markets held their own and closed around the break even point as the chart from MarketWatch shows. These days it seems to take very little to keep the bulls happy.

However, Fed chief Bernanke’s saber rattling about inflation and potentially higher interest rates boosted the dollar but caused other markets to decline. Heading south more sharply than the above closing figures indicate were Emerging and Latin American Markets along with Gold, Technology and the Commodity Index.

Our Trend Tacking Indexes (TTIs) declined as well and are hugging their long-term trend lines as follows:

Domestic TTI: +0.16%
International TTI: -5.59%

Domestically, we are approaching a sell signal, barely 30 days after receiving the Buy on 5/15/08. If this sell comes to pass, it will definitely qualify as a whip-saw signal. I will clarify my exact exit strategy tomorrow as there seems to be some confusion based on several readers’ emails I received.