One anonymous reader had these comments a few days ago:

Can you please explain how someone who appears to advocate Market tracking investing using stop losses can also advocates hedging “the simple hedge strategy”?

Can you please explain to me why you advocate both approaches, and the advantages of both?

When following major trends in the market, there will be prolonged periods of time where our Trend Tracking Indexes (TTIs) are in bearish territory and therefore keeping us out of the markets.

Case in point is the past 1-1/2 years. Our domestic TTI generated a sell signal effective as of 6/23/08. The markets subsequently crashed, recovered towards the end of 2008, dropped again 22% until making a low on March 9, 2009 and then rallied some 50% as measured by the S&P; 500.

Our domestic TTI did not cross above its long-term trend line until 6/3/09 when a new Buy signal was generated. That’s almost one year later after we headed to the sidelines.

Just because our TTI is in bear market territory does not mean there are no other investments opportunities. However, with the markets having shown the volatility they did, going outright long (against the major trend) or outright short had huge risk factors attached to it.

This is why I developed the SimpleHedge Strategy. It allows us, as described in the book, to enter the markets safely at a much earlier time to attempt to add profits before our regular buy signal occurs. This is exactly what happened, as the hedge strategy generated a buy late in December 08, when uncertainty reigned.

As it turned out, the hedge opportunity was profitable and allowed us the option to drop the short component of the hedge when the domestic Buy was generated. Some clients like the hedge so much, that they preferred staying with it.

However, let me be clear. In an outright bullish run, such as we’ve seen off the lows in March, a hedge will always lag in performance. Here again, as I discussed yesterday, a client’s risk tolerance would determine which path he should take.

The hedge concept is designed to fill the “lengthy gaps” inherent in trend tracking. I have found it to be a nice combination worthwhile considering by anybody but the most aggressive investor.

In case you missed it, reader Chuck had some interesting comments a few days ago:

It’s true that there are so many conflicting opinions as to whether the markets will rise or fall. There are good cases to be made on either side. It seems to me that, up until now, the big money is betting on this bull.
…
I think that’s why I like trend following. You can ignore the opinions and react only to what the market is actually doing. That is, if you can stick to your strategy and not let your emotions rule you. I can’t, LOL. I sold out Thursday.

Am I hopeless?

What Chuck is referring to is something I deal with in my advisor practice on a daily basis. It’s called a client’s risk tolerance. With new clients, I tend to start out with a more conservative stance within the framework of trend tracking and then switch to a more aggressive mode, if requested.

When you are investing in anything, you have to be sure that you’re comfortable with the approach itself along with the potential risk involved. If you’re not, you will not stick with for the long-term, which is where the rewards are.

While I don’t advocate setting stops as tightly as Chuck does, he seems more comfortable with the outcome and apparently does not mind the more frequent whip-saws resulting from his approach.

However, when dealing with tight stops and frequent whipsaws, you have to make sure that you don’t do the same on the upside, which is taking profits too quickly. You need to let your winners run until the trend ends and reverses. Your trailing stop loss will then tell you when it’s time to exit your position.

Not letting your profits run and cutting your losses too quickly is a bad combination. You may find out that, while your downside is well controlled, you’re not making enough on the upside to make up for the small losses you incurred. In other words, you’re simply treading water.

I am actually taking the day off to enjoy my 36-year anniversary of having immigrated to the United States.

Regular posting will resume tomorrow.

When referencing articles written by others on subjects of interest for this blog, I usually align myself with those whose viewpoints I share and value. Occasionally, I run across an opinion which does not resonate with me at all.

This happened to me a couple of days ago when I watched the following video clip on MarketWatch:

http://www.marketwatch.com/video/asset/5-reasons-to-be-bullish-2009-09-03/6817A216-C916-4167-BE38-E217E84346E6

I must admit that I simply can’t agree with any of the five arguments made, because they simply do not consider any economic reality, at least not from my way of thinking. But then again, neither did the market over the past few months.

Here’s an opposing forecast that almost reminds me of Harry Dent’s prediction of the Dow 30,000 some years ago, and we know what happened to that one.

During various recent posts, I touched on the importance of selecting ETFs with large volume to get faster and better execution along with lower bid/ask spreads. Reader TrendMan has this to say on the subject:

These new ETFs are like a run away train totally out of control. Investing is already complicated enough and now there will be hundreds more choices out there.

When it is all said and done really all most of us need are the following 4 one beta long ETFs like QQQQ, SPY, IWM, and maybe at times EFA as well as a couple of one beta short ETFs like PSQ and SH. If only two ETFs were to be used I would go with VXF long and SH short for myself. All these would be used at the appropriate times during each trend timing market cycle.

I agree with this assessment. Over the years, I have seen far more over invested portfolios than underinvested ones. What I mean by that is many investors diversify way too much. For example, a $100k portfolio does not have to contain almost 30 ETFs of every imaginable sector. 4-5 well chosen ETFs will be more than sufficient to capture the major long-term trends in the market place.

Even in a $1 million portfolio, I will use no more than 10-12 ETFs/mutual funds. You might consider this putting all of your eggs in one basket (or not enough baskets).

However, when using the trend tracking methodology (with sell stops) my mantra has always been that “you can put all of your eggs in one basket, as long as you watch that basket.”

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

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

Losses during the early part of the week proved too much to overcome, and the major indexes surrendered some ground.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.07% keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken above its long-term trend line by +13.35%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.