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.

Over the past few months, I have expressed my hesitation in investing in any municipal bonds or bond funds. Many readers have emailed me regarding my thoughts on various opportunities in that arena.

I believe that the continuing fallout from the Subprime/credit/real estate crisis will have negative economic effects with the exact extent still being ahead of us. One “casualty” of reduced revenues due to weak real estate prices and record foreclosures will most likely be those municipalities with weak balance sheets, which covers just about everybody.

The first county to fail was Vallejo, California, but Jefferson County in Alabama faces its own set of problems along with many others that are still unknown. Mish at Global Economic Trend Analysis had some updated information on the tripling of Muni defaults this year over 2007.

Here are some highlights:

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the “Distressed Debt Securities” newsletter, published in Miami Lakes, Florida.

We’re probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

I have to admit that I am uncertain as to how deep and lengthy the effect on municipals bonds/funds will be. Given that uncertainty, my personal view is that I’d rather not invest in anything that currently has such a potentially negative outcome; I suggest you do the same.

With the market trends zigzagging, and our domestic Trend Tracking Index (TTI) having moved closer to its long-term trend line (+0.73%), a potential Sell signal has become a possibility again.

One reader had this question:

Would you please take a moment to elaborate on your sell strategy?

You will sell if the TTI falls below the 195 day MA. Will you sell even if the price of your mutual fund has fallen only by, say, 4%? Or will you wait till the price drops by 7% though the TTI has fallen below the 195 day MA?

Your posting on Trend clarification is great. But if you could elaborate on your sell strategy, it will benefit people like me.

My apologies if the question is unclear.

As I mentioned in my weekly StatSheet, 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.

At the end of the last domestic Buy cycle (1/18/08), all of our positions had been sold before the TTI pierced its trend line to the downside. Right now it appears, with the current buy cycle not even being a month old, that the reverse might happen.

Please remember that this in not an exact science. The goal is to be out of the market before major portfolio damage due to a possible bear scenario occurs.

If in fact we head further south, and the Trend line gets violated to the downside, I will sell or neutralize my domestic holdings. What that means is that I have basically two options:

1. Sell all domestic mutual fund/ETF holdings outright, or

2. Sell all domestic ETF holdings, but hold the mutual funds and add an equal amount of short positions to offset the potential drop. In other words, I would be market neutral at that point.

The first choice is pretty clear, so why would I consider the second one? The main reason is that we have only held the mutual funds for a month and are still subject to the 90-day short-term redemption fees. While the fees have become relatively modest ($49.95 at my custodian), some mutual fund companies may not like the short-term sale and could ban me from further trading.

This is an option that was available a few years ago, and I may very well consider it. The short S&P; 500 (SH) ETF lends itself to such a transaction. If subsequently the markets go one way or the other, I can then later on remove the hedge and become net long or short again.

If you find yourself in a similar situation in regards to your mutual fund holdings, you may want to consider this kind of approach.

Last month, I referenced Lee Iacocca’s new book “Where Have All The Leaders Gone?” I finally got around to reading it, and I have to admit that it was one of the more inspiring books I have come across in a while.

Provocative and timely, the most widely recognized business executive of all time asks the tough questions that America’s leaders must address:

What is each of us giving back to our country?
Do we truly love democracy?
Are we too fat and satisfied for our own good?
Why is America addicted to oil?
Do we really care about our children’s futures?
Who will save the middle class?

A self-made man who many Americans once wished would run for president, Iacocca saved the Chrysler Corporation from financial ruin, masterminded the creation of the minivan, and oversaw the renovation of Ellis Island. He believes that leaders are made in times of crisis—such as today.

Iacocca has known more leaders than almost anyone else—among them nine U.S. presidents, many heads of state, and the CEOs of the nation’s top corporations—and is uniquely suited to share his wisdom, knowledge, and wit about the leadership in America.

Author of previous number one bestsellers, Lee Iacocca famously doesn’t mince words and offers his no-nonsense, straight-up assessments of the American politicians running for president in 2008, including Hillary Clinton, Barack Obama, and John McCain.

Knowing that the times are urgent, the iconic leader shares his lessons learned and issues a call to action to summon Americans back to their roots of hard work, common sense, integrity, generosity, and optimism.

It’s a fascinating, uplifting book to read, and I for one couldn’t wait to finish it.

TheStreet.com featured coverage of 37 new ETFs including a ranking which combines risk and performance data combined into a single composite opinion represented by a letter. Here’s a partial view of the table featured:


double click to enlarge

I have been tracking some of these in my weekly StatSheet. The problem with the type of rankings featured here is to find a proper entry point. Let’s take a look at some snippets from the story:

With an initial rating of E, investors in the HealthShares Ophthalmology ETF(HHZ – Cramer’s Take – Stockpickr) are seeing red after losing 40.20% in a year. Over the same period, the holdings providing the worst of the damage include ISTA Pharmaceuticals Inc(ISTA – Cramer’s Take – Stockpickr), off 77.25%; LCA-Vision Inc(LCAV – Cramer’s Take – Stockpickr), off 75.12%; TLC Vision Corp(TLCV – Cramer’s Take – Stockpickr), off 74.70%; and Opko Health Inc(OPK – Cramer’s Take – Stockpickr), off 65.21%.

Also, speculators expecting fat returns from the E- rated HealthShares Metabolic-Endocrine Disorders ETF(HHM – Cramer’s Take – Stockpickr) ought to be roundly disappointed with a loss of 36.55%. The one-year loss of 89.61% from Nastech Pharmaceutical(NSTK – Cramer’s Take – Stockpickr), 82.12% loss in shares of MannKind(MNKD – Cramer’s Take – Stockpickr), and 72.18% drop in Altus Pharmaceuticals(ALTU – Cramer’s Take – Stockpickr) contributed most to the investor account shrinkage.

As you can see, this is volatility and losing money at its finest. If you like gambling, this is for you. Jumping into these types of ETFs without use of sell stop points can expose you to losses of some 80% although, in all fairness, some funds like GXC gained some 46%.

Nevertheless, following any ranking scheme blindly, will expose your portfolio to gigantic losses probably more often than huge gains. Keep in mind that no matter which investing approach you prefer, the entry point is important, but the exit strategy will save your bacon.