Things looked bleak Monday morning as the Dow surrendered some 130 points before storming back in the last hour to wipe out all losses. The only negative about the comeback was that it occurred on very low volume.

It’s been a recurring theme lately that early bearish tendencies did not hold, and the bulls ended up in the driver’s seat.

Yesterday’s late buying was triggered by Nobel Prize winning economist Paul Krugman, who commented that the U.S. economy may start to emerge from the recession in September. This hopeful outlook turned what appeared to be a rut into a rebound rally. Go figure.

Not much changed with our Trend Tracking Indexes (TTIs), which are now showing the following positions:

Domestic TTI: +0.50%
International TTI: +8.84%
Hedge TTI: +0.45%

We are holding all positions subject to our sell stops.

While I have discussed the use of sell stops and occasional whip-saws on several occasions, reader William had this to say:

I am following your guidelines and have started to cautiously invest a small portion of some of my IRA in some ETFs. I am putting a 7% trailing loss on them.

Let’s assume that my fund loses 7% of its value from its high, and we are still over the trend line and the market then starts going up again. I have sold the fund, what do I do with the money? Buy a different fund, reinvest it in the fund (at what point)?

Or is this a scenario that won’t happen realistically?

Also, another scenario is that we are under the trend line when my 7% trailing sell stop hits. I then reinvest when it goes back over the trend line, right. This could happen multiple times so I could loose up to 7% of 1/3 of my portfolio, then up to 7% of 1/3 of what is left of that etc. That starts adding up to real money real fast. I guess that we hope that out fund goes up at least 7% after we buy it so we at least sell at a neutral.

I hope this market finds real direction!

While all these things you describe can happen, they usually don’t. There are some precautions I take to minimize the possibility of a whip-saw signal. For one, I don’t jump in the market the moment one of the Trend Tracking Indexes (TTIs) crosses its long term trend line.

I want to make sure that the trend line is clearly penetrated by +1% as well as by waiting a few days to make sure the TTI remains above it.

For example, when the international TTI generated a Buy on 5/11/09, it had fulfilled those requirements before I actually pulled the trigger. We allocated 1/3 of portfolio value, and our positions subsequently gained over 8% before coming off their highs by -4.16%. This means if I implement the sell stop after a drop from the high of 7%, I will come out ahead by +1% or thereabouts.

The domestic TTI generated a new Buy signal on 6/3/09. If you missed that exact entry point, it’s no big deal yet since the market has not moved much, and you can enter at a later time.

As I’ve said repeatedly, missing a buy signal is not as crucial as neglecting a sell signal. The former will only cost you potential profits, while the latter can have a serious impact on your portfolio.

If you get stopped out at the worst point with a 7% loss that means, if you had only 1/3 of your portfolio invested, the impact on the total would be -2.33%, which is reasonable. Even if that happened 3 times in a row (unlikely, but possible), you will have lost 7% of your total portfolio. While you may not like it, it sure beats the alternative, which many investors experienced in 2008.

Once you’re back on the sidelines, the proceeds should be in money market. If the market stages a recovery, and the trend line is crossed again to the upside, repeat the process.

If you been stopped out prior, and the market turns on you and resumes the up trend, you have a decision to make in respect to re-entry. If I liked the fund/ETF I had chosen, I re-establish my position after the old high has been taken out. Remember, the idea of following trends is to be onboard when the trend is intact and not try to bottom fish when things head south.

Above all, you need to keep in mind that this is not an exact science or an engineering problem to which there is only one correct solution.

At major inflection points, when trends change, the danger exists that whip-saws will become part of the equation. Investing always involves an element of risk no matter what you do, but I have found that these ideas are suitable for most investors, because they contain a blue print to follow, although it may be far from being perfect.

The WSJ featured an article titled “Taking Control,” which gives some advice as to how investors can better protect themselves against schemes and scandals.

I just want to hone in on one part that deals with potential conflicts of interest:

Financial advisers essentially fall under one of two of regulatory structures, one often considered stricter than the other. Under current law, “brokers”—who often are called financial advisers or wealth managers—don’t consider themselves to be “fiduciaries,” who are required by federal law to act in the best interest of their client. Brokers can put the interest of a mutual-fund firm ahead of yours, although they are required under law to follow a “suitability” standard, meaning they can’t recommend a product that is inappropriate for an investor.

On the other hand, “registered investment advisers” have to follow a fiduciary standard.
…

A big difference among advisers is how they are paid, and some have financial incentives to recommend one strategy or product over another. There is nothing necessarily wrong with commission-paid advisers, and many investors may well prefer to work with such professionals if it means they don’t have to pay a sales load. Still, it is important to know if an adviser has a financial incentive to recommend what he or she is recommending.

[Emphasis added]

While earning a sales commission is an honorable way to make a living in many industries, it has been more of failure than a success when it comes to the investment arena. The history books are filled with stories about scrupulous brokers and brokerage houses that used the commission structure for their benefit and not the client’s.

In the financial service industry, abuse tends to be greatest when larges sales commissions are at stake and many victims are clueless as to either what they are buying or getting involved with.

I believe that RIAs (Registered Investment Advisors), who work on a fee only basis (assets under management), will offer you the best opportunity to receive an unbiased opinion since money does not change hands whether you follow the advice or not.

If you think I am biased, you are absolutely correct. I am a fee based RIA, and I have represented this opinion for over 20 years.

Reader Richard had some interesting thoughts on what he considers market manipulation and asks whether it might affect trend tracking in general:

I really value your work and daily comments; so what I am about to say is not meant as a negative reflection on you or your tracking signals.

Again, I so value your work and your comments that if I didn’t I wouldn’t even bother to write what I have here.

First, I have to say that you can’t be sure of any manipulation via “painting the tape.” Just because large orders come in at the close does not mean anything at all. Case in point is what happened this week.

If you had watched certain ETFs (long and inverse ones) you might have also noticed millions of dollars of orders coming in right at the closing price. To you, the casual observer, you might have interpreted this as something different than it actually was. It had nothing to do with market manipulation; it simply was me setting up hedged position at MOO (market on close) to be sure that my intended ratios of long to short were what I wanted them to be.

There are a lot of trading strategies that utilize market-on-opening and market-on-close orders to fulfill an investment objective. To draw any other conclusion without any additional facts is simply guesswork.

Second, if someone really would want to manipulate markets, keep in mind that he is stuck with a position which he eventually has to unwind again. Yes, I am sure there have been manipulation attempts especially in thinly traded futures markets, which is why I always stress the need of investing only in high-volume products.

Third, what matters in the end is the closing price no matter how you arrive at it. Stringing together closing prices will form a trend that can be measured and is the only thing when it comes to investing that is real to me. I have more trust in those than company reports with their misleading footnotes and questionable interpretations.

When all is said and done and analyzed to the hilt, we end up with a final price for the day. If it turns out that this price was incorrect because of misleading facts, then it will correct itself the next day or the next week. I see no reason that this has changed over the past 25 years to make me reevaluate the basis of trend tracking.

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

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

Increased unemployment figures today did not derail the gains made earlier in the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +0.80%% keeping this week’s buy signal intact.



The international index has now broken above its long-term trend line by +9.47%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

It could have been a lot worse yesterday but, as we’ve seen quite often lately, a last hour buying spree limited the risk of a nasty slide.

Despite Fed Chairman Bernanke’s rhetoric that the recession will end this year, the markets seemed to ignore his words of encouragement.

The main focus this week will remain on Friday’s employment numbers. The expectation is that “only” 500,000 jobs were lost. If the real number comes in close to that, it would be interpreted that things might be “less bad” as in the recent past, which could provide fuel for another rally.

If the number comes in considerably higher than expectations, all bets are off.

As of yesterday, our Trend Tracking Indexes (TTIs) are showing the following positions:

Domestic TTI: +1.02%
International TTI: +8.84%
Hedge TTI: +1.54%

We continue implementing our plans as posted previously.