A few days ago, Mish at Global Economics wrote a nice piece called “Long Term Buy and Hold Is Still Bad Advice.” I want to hone in on a few paragraphs outlining well known pitfalls when investing that are very important; however, most investors are either not aware of them or don’t pay attention:

Why Is Bad Advice So Common?

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet “Stay The Course”.

There you have it. Nothing has changed since the last bear market in 2001 as I wrote back then in “The Conflict of Interest Game,” “The Demise of Buy and Hold” and “Your Worst Enemy to Successful Investing.” These articles are 8 years old, and I am sorry to say they are just as true nowadays as they were back then.

A Look Ahead

Buy and hold is no more likely to be a good choice for the next 5 years than it was for the last 20.

Yes, no one knows how the next few years will play out, but a similar scenario, as Japan has experienced, is a distinct possibility.

From this point forward, we may see rally attempts followed by sharp drops into bear market territory or vice versa. So far, this century has not been kind to the buy-and-hold crowd with the S&P; 500 being down 37% since 12/31/1999.

I believe that there are several steps you can take to guard against the unknown:

1. Never ever listen to anyone with a biased opinion, such as a commissioned sales person. The closest you can get to receiving unbiased advice is from a fee only advisor.

2. Never take any investment advice from the media.

3. Follow the trends in the market place and be disciplined by establishing an exit point at the time you make your initial investment.

4. Take a little time to explore my SimpleHedge Strategy. I believe it has great potential to successfully deal with the uncertain market conditions we will be facing over the next few years by greatly reducing market risk while offering good profit potential.

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

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

In a repeat of last week, the major indexes closed slightly lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +2.46% 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 +9.22%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

The Fed left key short-term interest rates alone as expected and hinted that the economy, while stabilizing, does not require any rate hikes in the near futures.

While that should have been good news, Wall Street reacted somewhat negative, and the major indexes surrendered their early gains, as the above chart shows. Meeting anticipation apparently wasn’t a good thing.

Right now, we’re still stuck in a trading range, which encompasses about 880 to 910 on the S&P; 500. As I said yesterday, be prepared that a breakout will occur; that is a sure thing. What is unknown is when it will occur and whether it will be bullish or bearish.

This lack of direction is reflected in our Trend Tracking Indexes (TTIs) as well, which have not moved much at all. Here’s the latest update:

Domestic TTI: +0.58%
International TTI: +7.61%
Hedge TTI: -0.49%

We’re holding all positions subject to our trailing stop loss points.

As the Trend Tracking Indexes (TTIs) are hovering tightly above or below their long-term trend lines, I tend to spend a little bit more time updating the important numbers you need to know on a day-to-day basis.

These are critical times in terms of making decisions and, once a clear trend (either up or down) has been established again, I will focus again on other issues.

Yesterday, the markets retreated first and then traded the day in a sideways pattern, essentially closing unchanged. What that tells me is that there is great uncertainty, and we could very well be at a major inflection point. That simple means that right now upward and downward momentum are fairly balanced, which is why we haven’t seen any clarity in direction.

While this pattern may continue for a while, sooner or later a break out will occur. That could be either in form of a renewed downward slide back into bear market territory or as a breakout, which could carry the major indexes to higher levels.

I have no clue which way it will play out but, as I have repeatedly said, I prefer to err on the side of caution. To me, that means enforcing my sell stops even if I have to hunter later on for a new entry point should the markets head back north.

The old saying that “I’d rather live with lost opportunity than with lost money” is something that many investors should take to heart in these uncertain economic times.

The markets started the week out on a sour note yesterday as they have for the past two Monday’s.

Some of our sell stops in the international arena were triggered and, barring a major rally today, the affected positions will be liquidated.

It was a bit of good news/bad news scenario. The good news was that the sell off happened on light volume (again), but the bad news was that we closed at the lows for the day as the above chart clearly indicates. This means that further weakness is likely.

A forecast from the World Bank that the global economy will contract by 2.9% this year vs. an earlier forecast of a more moderate 1.7% proved to be more than the markets could handle and south we went.

Our Trend Tracking Indexes (TTIs) slipped as well and are showing now the following positions:

Domestic TTI: +0.12%
International TTI: +6.60%
Hedge TTI: -0.94%

This means that we are within striking distance of a domestic sell signal. Before pulling the trigger, I want to make sure that the TTI clearly pierces the trend line to the downside. I will keep you informed via this blog, so stay tuned to any changes.

Today marks the one year anniversary of our last domestic Sell signal, which was effective 6/23/2008. Those who followed it were richly rewarded; those who didn’t suffered steep portfolio losses. One year later, the S&P; 500 is still down over 32% from the point of our sell signal and many portfolios are worse off.

At this very moment, it seems to me that the government induced stimulus rally has run out of steam, and we will need to wait to see if there are some positive news on the horizon that can pump some life into the fading indexes.

I won’t hold my breath, but I believe that a defensive posture, such as I advocate via our hedged positions, is in order—at least for the time being. If things get worse, we will be heading for the sidelines.

Again, my mode of operation is (and always has been) that I’d be rather safe than sorry. I suggest you do the same, if you handle your own portfolio.

The investment world is scrambling to come up with new and improved products to ascertain the public does not lose confidence. I posted about actively managed ETFs and “new funds for the fearful” over the past couple of days.

Now Long/Short fund providers started to chime in by promoting the features of their products. I received one such mailing from Palantir Funds with the following comment:

In these turbulent times, it may be vital for you to have awareness and access to alternative investment strategies designed to work well through all market cycles. The Palantir Fund (PALIX) is such a vehicle. Regardless of market direction, the goal of the Palantir Fund is to make money every year. Using a Global All Cap Long/Short investment strategy, this no-load mutual fund is designed for use as a core holding in a well invested portfolio.

• Zacks Investment Research ranks the Palantir Fund “1 for Strong Buy”

I don’t think much of ranking agencies and much prefer to a look at a chart. Here’s a graph of PALIX plotted against the S&P; 500 as comparison:

This fund has only been around for about 1-1/2 years. What becomes very clear is that PALIX tracks the S&P; 500 pretty closely. While it did not drop as sharply during the 2008 market massacre, it nevertheless did not avoid the sell off.

If you are of the opinion that Long/Short funds are the savior during bear markets, you’d be dead wrong. As last year has shown, PALIX reduced portfolio damage somewhat, but not enough to make me comfortable owning this fund when the next down leg occurs, whenever that will be.

Portfolio damage in bear markets can only be controlled by being out of equities and on the sidelines (or possibly in bond funds) via a clearly defined entry and exit strategy. Long/Short funds have been around a long time, but they don’t seem to address that issue to make them a valid investment choice.