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

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

High volatility marked this week as the major indexes managed to come out ahead.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.44% above its long-term trend line (red) as the chart below shows:




The international index slipped -0.63% below its own trend line, keeping us in a sell mode for that arena.

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

The Dow Theory, a market trend forecasting system developed in the late 19th century by WSJ editor Charles Dow, is close to signaling that the primary trend of the market, which has been up for five years, is down, or bearish, USA Today reported.

Chuck Carlson, contributing editor of Dow Theory Forecasts newsletter said that “the market is at a big inflection point.” According to Dow Theory, if the Dow industrial average (made up of companies that make goods) and the Dow transportation average (made up of companies that ship goods) both breach significant market levels, it confirms a trend change.

The transports are trading below their August low, when the credit scare first hit stocks. What is worrisome is that the industrials, after plunging 4.5% the past three sessions, are hovering less than 197 points, or 1.5%, above their August low. If the industrials close below their Aug. 16 low of 12,845.78, it would confirm that the market trend has turned bearish.

“Dow Theory looks at significant points on the downside and upside,” Carlson says. “If stocks breach those points, such as the dark period in August, it means something significant is going on. If both the industrials and transports are moving lower in tandem, it’s not good for the economy, profits or stocks.”

While I agree with this assessment, it also seems to go along with our Trend Tracking Indexes (TTIs) coming off their highs and subsequently triggering sell stops for a variety of our holdings. Again, just because a trend turns down, it does not mean that a return to bear market territory is imminent, although many fundamentals point in that direction.

As always, my preference is not to guess, but the let the actual numbers (and not the media) dictate my next move. If it turns out that this downturn was temporary’ and the main trend heads due north again, we will pick our entry points at that time. While this means that we will have to give up a little on the upside, we were well protected on the downside had it played out that way. That’s what let’s me sleep at night.

Euphoria returned to Wall Street as yesterday’s sharp rebound rally lifted the major indexes out of the doldrums after relentless selling for most of November. The question now is whether this marks the beginning of a trend reversal or is simply a dead cat bounce with more downside activity to come.

While obviously no one has that answer, I believe it pays to be a bit more conservative for the time being. If you like charts and technical analysis, this article in MarketWatch makes a case that the healthy pullback from the highs has accelerated into a more technically threatening downturn. Translation: The near to intermediate-term outlook has turned lower.

Singing a similar tune was chief economist Dr. Irwin Kellner in his article “Goodbye, expansion; hello, recession,” which focuses on the plight of the consumer. He makes the case that the value of people’s two biggest assets, their homes and their investments, are falling.

Many have little or no savings to fall back on, having spent more than they have earned for the past two years. Adding insult to injury, the credit squeeze has made borrowing no longer an unchallenged privilege for the masses; if you can’t prove you don’t need the money, lenders will be very hesitant.

More interest rate cuts by the Fed would confirm that the economy is indeed sliding, which will affect stock market direction. Right now, it’s too early to tell if this market will climb a wall of worry or if this rebound was a one day event. I am playing it conservatively, until momentum numbers show that the uptrend is alive and well.

Our domestic Trend Tracking Index (TTI) has climbed to +4.89% above its long term trend line while the international TTI has rebounded from negative territory, two days ago, back to +1.33%. I will hold off with making new commitments to the international arena until I can see a more consistent upward trend.

As I mentioned in last Friday’s update, we eliminated some of the more volatile sector and country funds from our portfolios. Yesterday’s morning rally gave me the opportunity to continue that effort by liquidating some of our other major holdings in those sectors and countries which had performed well over the past couple of months and were in shouting distance of their pre-set sell stop points (to me, the definition of a major holding is one in excess of $1 million).

For the time being, we eliminated our positions in VWO (emerging markets), XBI (healthcare) and ITA (U.S. aero/defense) thereby reducing our portfolio volatility sharply and locking in profits. It turned out to be a good decision for the time being as the markets collapsed in afternoon trading.

Last week’s Subprime debacle seems to continue and may very well accelerate with the latest casualty being E-Trade. Some news reports are talking about the possibility of bankruptcy filing, which E-Trade has denied.

I have repeatedly written about and poked fun at the Subprime pig and its relentless appetite for the same food but served in a different trough. This ordeal is far from being over but it has the potential to derail the current bull market; the beginning stage which we may be seeing right now although we won’t know for sure until the benefit of hindsight sets in.

It therefore is wise to reduce exposure to volatile sectors and follow our sell stop discipline. If sectors/countries resume their up trend, we’ll find a new entry point. We may miss a little on the upside, but that’s better than losing too much on the downside.

Today’s market activity pushed our international TTI (Trend Tracking Index) below its long-term tend line by -1.43%. I will liquidate the remaining holdings in that area, which we still own, effective tomorrow, Tuesday, November 13, 2007. Should the markets reverse again, we will look for a new entry point at that time.

While the domestic TTI has remained +3.23% above its trend line, some of our invested positions will be liquidated as well due to the piercing of their individual trailing stop loss points.

Every so often, I get emails from readers who are looking towards the bottom of the weekly StatSheet to see if picking up some bargains in the beaten downs areas might make some sense. Based on my M-Index ranking, the bottom of the totem pole is currently occupied by ITB (home construction), XHB (home builders), IAT (regional banks) and UYG (financials).

With the financial sector being in the news on a daily basis, some investors are wondering if this would be the right time to do some bottom fishing. MarketWatch had an article titled “Stupid Investment of the Week,” which elaborates on that idea.

Personally, I do not like to try to catch a falling knife by guessing if this sector in fact has reached bottom. While I think that financials still have a ways to go to the downside, I can’t be sure at all. It’s a guessing game.

My preference is to buy sectors that are on the way up and have some track record of upward momentum. Sure, you could argue that financials now represent a good value, but that’s relative.

I liked Al Thomas’ (author of “If it doesn’t go up, don’t buy it”) quote best, when he said in his latest weekly update:

“Value like beauty is in the eye of the beholder. There are hundreds of ways of measuring value, but I only know of one. If it is going up it has value. If it is going down, the value is yet to be determined. Don’t buy it.”

Couldn’t have said it better myself.