Happy Thanksgiving!

This week’s downside market action will make many investors feel like they are chomping on a cold turkey for Thanksgiving. The culprits have been the same and diversification, as so many times during recent corrections, hasn’t meant a thing. As I have repeatedly written, markets are so intertwined that the only true safe play will be on the sidelines in money market.

Oil prices approaching $100/bbl, continued housing troubles, along with new daily stories about the Subprime fallout and credit problems are not giving this market any support. Yesterday, after the markets had closed, another blow came when the editors of the Dow Theory newsletters moved to the bearish camp.

Why is that important? One reason is that many investors pay attention to it. MarketWatch had a feature story called “The Dow Theory Says Sell.” Their 70-year record shows that it beat Buy-and-Hold by an annual average of 4.4 percentage points per year.

While our domestic Trend Tracking Index (TTI) still remains +3.15% above its long-term trend line, and therefore in Buy mode, we have liquidated most of our positions as they triggered their 7% sell stop points. By the time the TTI actually crosses to the downside, the remaining holdings will have been sold.

With the benefit of hindsight, you may find some stories in the media analyzing how the current Subprime debacle and subsequent credit crisis started and the ever lingering question if it could have been avoided in the first place.

While the final results cant be tabulated yet, it turns out that Wall Street may have been its own worst enemy, at least according to Minyanville’s Eugene Linden, who wrote the excellent article “Could This Credit crunch Have Been Avoided?”

It’s a great read and sheds some light on the fact that the motivation of profit at all costs is greater than any fiscal responsibility. While that is not earthshaking news, the article further goes into detail how banks managed to camouflage problems to feed near-term profits and bonuses while future write-downs would be somebody else’s problem.

The final paragraph really sums it up by saying that in the meantime, we can guess what asset class will fuel the next bubble should we not break this cycle. As one former Goldman Sachs securities packager put it “Wall Street’s genius is taking simple, transparent and liquid tradable instruments and turning them into opaque and illiquid derivatives, while making money by overpricing the embedded options.”

That’s not going to change, so take your best shot at guessing where the next bubble will pop up. There’s only one condition in this contest. The underlying assets will have to be big enough to support several trillion dollars in derivatives.

Other than that, it will be business as usual.

I have been elaborating on the need for methodical investing almost on a non-stop basis. Sometimes it seems that, when reading media stories, that I am the lone ranger. Many of my newsletter readers are aware of that and at times submit stories that support the fact that there are others who have similar viewpoints by trying to make sense out of Wall Street’s irrationalities.

Recently, reader Mike shared an article from “Money and Markets” titled “U.S. Stocks Skating on Thin Ice.” Author Tony Sagami makes a lot of sense, and not only because it goes along with my way of thinking, when he outlines 4 things you can do to protect yourself from more stock market weakness:

1. Adjust your asset allocation. This is a great time to look at what percentage of your portfolio is invested in stocks, bonds, cash, etc. If you’re heavily invested in stocks, you may want to consider reducing your equity exposure and raising cash.

2. Implement stop losses. These orders tell your broker to sell your shares if they fall to a predetermined price. Only you can decide what prices you’d like to sell at, but many investors choose an acceptable percentage amount (say, 10%) and apply that to each of their positions.

3. Use a strict sell discipline. Market technicians use tools like moving averages, relative strength indicators, and other momentum-oriented tools to tell them when to buy and sell. One of the simplest market-timing strategies is selling a stock or fund whenever it drops below its 50-day moving average. But whatever indicator(s) you use, the key is removing as much emotion as you can from the process.

4. Don’t get stuck in one country. The U.S. economy is rapidly slowing and even on the verge of falling into a recession. However, that is hardly the case in other parts of the world. It’s a lot better to invest in countries that are growing like mad than those that are crawling along like inchworms.

I agree with Tony’s assessment because as part of trend tracking we regularly follow all of those suggestions. The only caveat I have is regarding his point 4. As the U.S. markets slide, so will most countries but at an accelerated pace. But you already know that. If you followed our recommended sell stop discipline, you should not have much exposure to most foreign countries, especially those that have come off their highs by more than 10%.

Since I have been writing frequently about the Subprime debacle for most of this year, you might be getting tired of reading about it.

However, its incredible negative impact and consequences are here to stay for some time to come and will affect adversely not only the U.S. economy but many countries worldwide.

It’s interesting how the Subprime pig, as I called it, made its way around the world rattling countries when and where you least expected it. How did this crisis spread from being a bunch of Subprime loans, originated by greedy, irresponsible mortgage brokers, become such a powerful tool that brought down hedge funds and so far has caused losses in the neighborhood of $50 billion dollars—with no end in sight?

MarketWatch recently featured a story called “Toxic Export,” which explores how America’s risky Subprime mortgages fouled the world markets. It’s an interesting read and will enlighten you as to how, among other things, U.S. Subprime loans caused havoc for a British bank that never lent a penny across the Atlantic.

When I wrote last Sunday’s piece on the newly created term “Market Dislocations” and the possibility that we might be introduced to more BS terminology relating to the Subprime fallout, I did not realize how quickly new terminology might appear.

MarketWatch had a blurb titled “Bear CFO: some prime brokerage clients moved money to rivals,” in which he explained that “we did see some balance migration going to other prime brokers.”

Hmm, balance migration? I wonder who thinks up that terminology. If you haven’t read the article, you may be trying to figure out what he is talking about. While all businesses, at one time or another, “lose” clients, customers or patients, that would be too ordinary of a statement for a Wall Street firm. They don’t ‘lose’ customers, they simply experience ‘balance migration.’

The CFO went on to say that “what we really saw were clients trying to be more defensive and moving balances in many cases into the hands of the banks where they felt there was a stronger hand, if you will.”

Ouch; does someone actually get paid to write this garbage?

The company has lost billions of dollars of clients’ money and still can’t get off their high horse. Wouldn’t this be the time to eat some humble pie and use a different tone to re-connect with lost customers?

On the other hand, BS (not Bear Stearns) terminology permeates every part of American business in good times and bad. If you’re in sales and have recently lost some customers, you might consider going to your boss (or write an e-mail) and explain that there is nothing to worry about; you simply have experienced some balance migration to your competitor. See what he says; maybe that will qualify you to move up in the company food chain.

No matter which investment methodology you use, you are bound to be frustrated and disgusted from time to time. Recent market behavior seems to have brought these feelings to the front burner, as reader Chris writes:

I value your input and am grateful for the service you provide.

How do you distance yourself from what you do and not take it personally?

I am sure that Chris is not alone with this assessment, so here’s how I answered her:

“I have found that the only way to deal with the irrationalities of the market place is to detach myself emotionally by using a systematic approach to investing such as I advocate.

I don’t like the day-to-day changes any more than you do, but I keep my nose away from hyped up news stories and focus on the big picture as outlined. That helps me keep my emotions in check.”