I found this interesting video clip on YouTube featuring Lawrence Hrebiniak, Professor of Management at The Wharton School. It’s a bit lengthy but well worth it. His book with the same title has just been published.

With the dollar having turned the corner and headed higher, at least for the time being, we got stopped out of our Swiss Franc positions last week. Gold went from sideways to south, and our stop loss point was triggered there as well.

Reader Steve had this to say:

I am confused, what caused the dollar to strengthen and what caused Oil to weaken? In fact why have commodities weakened, has demand changed so much?

Can you help me understand the dynamics of the dollar and the commodities in general?

Thank You.

From my vantage point, a dollar reversal was coming; it’s just not clear yet whether this is just a short-term phenomenon or a long-term directional turn around. The Euro zone finally realized that their economies were weaker than anticipated and may even be worse off than the domestic one here in the U.S.

With the “Euro’s” constant concern about inflation supported by a trigger happy (in terms of raising interest rates) ECB (European Central Bank), interest rates may have hit a brick wall. Slowing economies may force lower rates in the future and that has put a floor under the dollar and contributed to the recent reversal.

Slowing economies around the world causing less demand for a variety of materials (including oil and commodities) may cause that bubble to burst as well. After all, demand, or lack thereof, is what makes prices move.

One new reader is still uncertain on the proper use of the sell stops. Here’s what he had to say:

In your write up for new investors you say that as soon as you buy a mutual fund or ETF, you establish two sell rules. The upside and the down side.

The down side is clear – a trailing 7% stop or TTI falling below its MA.But the upside selling rule is unclear. Can you please elaborate on how you set up the upside selling rule?

When the markets go your way, after you have purchased an ETF or mutual fund, the same 7% sell stop rule applies to the upside. You follow the trend upwards until it reverses and the trailing stop loss point gets triggered. Since you have been accumulating profits, the sell stop will tell you when to take them naturally, that is when the trend ends and starts to reverse.

With this in mind, the trailing stop loss point fulfills two functions:

1. It limits our losses in case the trade goes against us, and

2. It locks in our profits if prices continue to rise until the trend ends

Trend Tracking, along with the disciplined use of trailing sell stops, greatly reduces market risk.

Despite the major domestic indicators having rebounded last week, we are still in a bear market with our Trend Tracking Indexes (TTIs) being stuck below the trend line, as I pointed out last Friday.

However, some sectors are bucking the trend and are breaking out to the upside. VHT is one example and a reader had this to say:

Can you please tell us your thoughts on Vanguard Health care ETF with the symbol VHT?The price has just moved above the 200 day MA?

Should we buy this? Also, does the slope of the 200 day MA line make a difference? Positive slope versus flat versus negative slope?

Thanks for your time.

Let’s take a look at a 1-year chart:




The price in fact broke above its long-term trend line. To be more specific, and to use my 39-week average, it has broken above it by +3.05% as of last Friday. The momentum figures are positive with YTD being the only one still in negative territory.

I have found that the slope of the trend line has over time no effect on the outcome of taking a position. If you’re into sectors, this one would constitute a buy; however, you need to protect yourself against a reversal via my recommended sell stop discipline along with only a small portfolio allocation of some 5% to 10%.

This is important since this sector can be volatile. Back in March, it dropped over 17% off its high before finding a bottom.

I currently have no positions in VHT.

Two of the heavyweights in investment banking, Citigroup and Merrill Lynch, have been taken out to the barn and spanked because of improper sale of their ARS (Auction Rate Securities).

Bloomberg reports as follows:

Citigroup Inc., the largest U.S. bank by assets, agreed to buy back or help clients unload as much as $19.5 billion in auction-rate securities and pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds.

Citigroup estimated that securities eligible for the buyback have a face value of $7.3 billion and may be worth about $500 million less on the market than their purchase price. Under accounting rules, Citigroup may have to record a pre-tax loss to reflect the difference. The actual loss “will depend on the market value at that time and the amount of securities purchased,” the bank said in the statement.
…
Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.

Yahoo had this update:

Citigroup (C.N) and Merrill Lynch (MER.N) said they would buy back billions of dollars of illiquid auction-rate securities from retail clients, and Citigroup agreed to pay a $100 million fine to settle charges it fraudulently misled investors about the debt’s risk.
…
Regulators said Citigroup would buy back auction-rate debt from about 40,000 retail customers, charities and small or mid-sized businesses by November 5. Citigroup agreed to fully reimburse retail investors who sold the debt at a loss.

“Our clients have been caught in an unprecedented liquidity crisis,” Chief Executive John Thain said. “We are solving it by giving them the option of selling their positions to us.”

Both companies got caught with their hands in a cookie jar and are offering to make good. Somehow Wall Street firms always seem to have the ability, when caught in the act of shafting, to simply get away by neither admitting nor denying allegations of wrongdoing, paying a pittance of a fine, after which all is forgotten and it’s business as usual.

While in this case there maybe more financial fallout because of the forced buyback offer, I have always wondered why these companies are held to a different standard than the rest of us?

Reader Mike decided to not to follow our last domestic Sell Signal (6/23/08), but he actually added to his investment positions. Here’s what he had to say:

I have been buying CGMFX over the last 6 weeks between $54 and as high as $60 per share. I have bought about $40,000 of it. It seemed to go up every time the S%P went down so I thought it was a good hedge. Lately, it has just been going down with oil prices and commodities.

Now I feel like an idiot for buying it at its peak. Should I just get out now?

Mike obviously went against the major trend hoping that the dip would only be a small one. This actually has happened many times in the past as readers have tried to use pullbacks as buying opportunities only to be caught in a bearish downdraft.

If you put yourself in this position, there are two things you can do, and they depend on your risk tolerance:

1. Sell all holdings now and chalk up the result as an expensive learning experience, or

2. Sell 50% now and put a 5% stop under the balance. That way, you have protected half of your assets from further declines and, should the markets rally from here, you have the other half working in your favor.

While CGMFX is one of the better mutual funds in existence, it still is not a buy and hold forever. Major trend changes to the downside will pull the best managed funds into bear market territory as well so the best course of action is not to own them in this type of environment.