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

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

With an apparent floor and a ceiling firmly in place, the major indexes meandered around the unchanged line, but closed slightly higher.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +6.42% 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 +14.22%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.



[Click on charts to enlarge]

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

The Wall Street Journal featured an interesting piece titled “For some Investors, Night of Living ETF.” Here are some highlights:

Low costs are a selling point for the exchange-traded-fund industry. But more than a quarter of the ETFs on the market are hitting shareholders with high trading costs that escape many investors’ notice.

The ranks of less-liquid ETFs are expanding as money available to seed new ETFs dries up but fund companies continue to roll out new products. Though many funds don’t attract much cash, they are relatively cheap to launch so fund companies will continue to throw products at the wall to see what sticks, ETF analysts said. There are more than 500 ETFs in registration, waiting to be launched.

What concerns me far more than direct costs is low trading volume. Some of the ETFs featured in the ETF Master list of my StatSheet are featured to show all the different types that are available, but that does not make them necessarily a good choice.

Once you have decided on an ETF invest in (via momentum index selection or other criteria), you need to look at volume. For quick reference, I use Yahoo Finance. Let’s say, I want to check out the particulars for QQQQ (in which we currently have positions), I simply go to this link and immediately can see that the average daily trading volume is over 113 million shares, which makes it very suitable even for large block trades.

How much volume should you be looking for in an ETF? To me, the very minimum is about 4 times the amount I am planning to invest. Say, I want to deploy $2 million of clients’ assets, I want to see an average daily volume of at least $8 million. That assures me a fairly smooth fill without too much slippage.

More importantly, looking ahead, the time will come when the trend reverses, and I’ll be heading for the exit door. I want to be able to get out as quickly as I can and with as little of a price concession as possible.

You can only do that by being invested in high volume ETFs. I suggest you use a similar approach by making a quick volume check before entering your order. In a way, investing in a low volume ETF can increase your hidden costs by decreasing your exit price and thereby lowering your accumulated profit or, in some cases, increasing your losses.

The markets bobbed and weaved a bit yesterday but Fed chairman Bernanke’s nomination for a second term cheered traders, who are now looking for more economic stability and growth.

I must be one of the few who is not impressed by Bernanke’s resume, especially due to the fact that he never saw the housing bubble and subsequent recession coming, but is now predicting that better times are ahead. It reminds me of the (former Treasury chief) Paulsen speech early last year announcing on several occasions that the U.S. banking system is sound. Yeah right.

If you are not familiar with Bernanke’s recent history, take a look at this video clip on YouTube send in by an anonymous reader.

I continue to be very hesitant in believing that these alleged economic green shoots will ever grow into Redwoods. My investment outlook remains guarded, and all of my positions have clearly defined exit points in place.

An early rally fizzled yesterday as the markets realized that two stimulus programs are coming to an end. The “Cash for Clunkers” program ended late Monday while the “Cash for Shelter” plan is still scheduled to run until November 30th. That program provides tax credits for home purchases.

Of course, stimulus is nothing more than robbing Peter to pay Paul, which is a different way of saying that future sales have been brought forward. This brings up the question how the markets will behave when stimulus is no longer used to elevate economic results.

One strategist evaluated recent market behavior this way:

Recent market gains haven’t led to a lasting pullback, despite data last week that showed a weaker consumer and a rattled China. But the market is as emotional as it is rational, says Jeffrey Saut, chief investment strategist at Raymond James.

“Indeed, fear, hope and greed (are) only loosely connected to the business cycle,” he wrote in a note to investors. “And, at session 30 in the ‘buying stampede,’ we are clearly in the ‘greed phase.’ We continue to invest, and trade accordingly.”

What that simply means is that you need to be prepared for a directional change in the trend whenever it occurs. Those without a plan to exit the market will very likely get broadsided – again.

I found this abstract on leveraged ETFs:

Leveraged and inverse Exchange-Traded Funds (ETFs) have attracted significant assets lately. Unlike traditional ETFs, these funds have “leverage” explicitly embedded as part of their product design. While these funds are primarily used by short-term traders, they are gaining popularity with individual investors placing leveraged bets or hedging their portfolios. The structure of these funds, however, creates both intended and unintended characteristics that are not seen in traditional ETFs.

This note provides a unified framework to better understand the underlying dynamics of leveraged and inverse ETFs, their impact on market volatility and liquidity, unusual features of their product design, and questions of investor suitability. We show that the daily re-leveraging of these funds can exacerbate volatility towards the close. We also show that the gross return of a leveraged or inverse ETF has an embedded path-dependent option that under certain conditions can lead to value destruction for a buy-and-hold investor. The unsuitability of these products for longer-term investors is reinforced by the drag on returns from high transaction costs and tax inefficiency.

Just because leveraged ETFs are available does not mean you should use them. To me, they are designed for the sophisticated investor and generally not for Main Street.

Several readers have written in on the subject lately and complained about the lack of promised returns when using leveraged ETFs. My very limited experience confirms that. When testing my SimpleHedge concept during the past 1-1/2 years, I included some of these ETFs, namely SDS.

While SDS performed OK in general, I encountered periods where it did not give me the 200% performance I had expected, and which was necessary for the successful outcome of that particular hedge.

My view is that most investors should stay away from using these products and focus on an investment strategy where leverage is not a necessary ingredient. While maximizing returns is important, the increased risk in today’s volatile and uncertain market environment make using leveraged ETFs a questionable approach.

One anonymous reader submitted the following PBS video, which revisits the 1929 market crash. To me, there are some eerie similarities to today’s environment especially when looking at the total disconnect between Wall Street and Main Street.

Can it happen again? Sure, only time will tell. However, it was not the crash that was devastating; it was the years that followed. To be clear, I am not making any predictions here, but I find it worthwhile to occasionally revisit history to see if there are any obvious parallels to current conditions.