Euphoria returned to Wall Street as yesterday’s sharp rebound rally lifted the major indexes out of the doldrums after relentless selling for most of November. The question now is whether this marks the beginning of a trend reversal or is simply a dead cat bounce with more downside activity to come.

While obviously no one has that answer, I believe it pays to be a bit more conservative for the time being. If you like charts and technical analysis, this article in MarketWatch makes a case that the healthy pullback from the highs has accelerated into a more technically threatening downturn. Translation: The near to intermediate-term outlook has turned lower.

Singing a similar tune was chief economist Dr. Irwin Kellner in his article “Goodbye, expansion; hello, recession,” which focuses on the plight of the consumer. He makes the case that the value of people’s two biggest assets, their homes and their investments, are falling.

Many have little or no savings to fall back on, having spent more than they have earned for the past two years. Adding insult to injury, the credit squeeze has made borrowing no longer an unchallenged privilege for the masses; if you can’t prove you don’t need the money, lenders will be very hesitant.

More interest rate cuts by the Fed would confirm that the economy is indeed sliding, which will affect stock market direction. Right now, it’s too early to tell if this market will climb a wall of worry or if this rebound was a one day event. I am playing it conservatively, until momentum numbers show that the uptrend is alive and well.

Our domestic Trend Tracking Index (TTI) has climbed to +4.89% above its long term trend line while the international TTI has rebounded from negative territory, two days ago, back to +1.33%. I will hold off with making new commitments to the international arena until I can see a more consistent upward trend.

As I mentioned in last Friday’s update, we eliminated some of the more volatile sector and country funds from our portfolios. Yesterday’s morning rally gave me the opportunity to continue that effort by liquidating some of our other major holdings in those sectors and countries which had performed well over the past couple of months and were in shouting distance of their pre-set sell stop points (to me, the definition of a major holding is one in excess of $1 million).

For the time being, we eliminated our positions in VWO (emerging markets), XBI (healthcare) and ITA (U.S. aero/defense) thereby reducing our portfolio volatility sharply and locking in profits. It turned out to be a good decision for the time being as the markets collapsed in afternoon trading.

Last week’s Subprime debacle seems to continue and may very well accelerate with the latest casualty being E-Trade. Some news reports are talking about the possibility of bankruptcy filing, which E-Trade has denied.

I have repeatedly written about and poked fun at the Subprime pig and its relentless appetite for the same food but served in a different trough. This ordeal is far from being over but it has the potential to derail the current bull market; the beginning stage which we may be seeing right now although we won’t know for sure until the benefit of hindsight sets in.

It therefore is wise to reduce exposure to volatile sectors and follow our sell stop discipline. If sectors/countries resume their up trend, we’ll find a new entry point. We may miss a little on the upside, but that’s better than losing too much on the downside.

Today’s market activity pushed our international TTI (Trend Tracking Index) below its long-term tend line by -1.43%. I will liquidate the remaining holdings in that area, which we still own, effective tomorrow, Tuesday, November 13, 2007. Should the markets reverse again, we will look for a new entry point at that time.

While the domestic TTI has remained +3.23% above its trend line, some of our invested positions will be liquidated as well due to the piercing of their individual trailing stop loss points.

Every so often, I get emails from readers who are looking towards the bottom of the weekly StatSheet to see if picking up some bargains in the beaten downs areas might make some sense. Based on my M-Index ranking, the bottom of the totem pole is currently occupied by ITB (home construction), XHB (home builders), IAT (regional banks) and UYG (financials).

With the financial sector being in the news on a daily basis, some investors are wondering if this would be the right time to do some bottom fishing. MarketWatch had an article titled “Stupid Investment of the Week,” which elaborates on that idea.

Personally, I do not like to try to catch a falling knife by guessing if this sector in fact has reached bottom. While I think that financials still have a ways to go to the downside, I can’t be sure at all. It’s a guessing game.

My preference is to buy sectors that are on the way up and have some track record of upward momentum. Sure, you could argue that financials now represent a good value, but that’s relative.

I liked Al Thomas’ (author of “If it doesn’t go up, don’t buy it”) quote best, when he said in his latest weekly update:

“Value like beauty is in the eye of the beholder. There are hundreds of ways of measuring value, but I only know of one. If it is going up it has value. If it is going down, the value is yet to be determined. Don’t buy it.”

Couldn’t have said it better myself.

A few months ago, I reviewed one of my favorite books titled “Why Business People Speak Like Idiots.”

I was reminded of that as I read the latest (I think) Subprime mortgage fallout article in which B of A announced that 4th quarter results will be hurt by continued “market dislocations.” While the bank did not provide an estimate of how large this impact might be, they at least were able to identify the culprit for their potential problems by name.

In their SEC filing, they further stated that “we expect these significant dislocations in the CDO (Collateralized Debt Obligations) market to continue, and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions.”

Translation: We are losing money big time, but we don’t know how to stop the bleeding nor do we know much about the current value of the CDOs. However, we are sure that we can blame it on something called “market dislocations.”

As the Subprime pig make its rounds and affects more and more financial institutions, you are bound to hear more of these newly created terms designed to project an aura of control and sophistication, yet it is nothing more than epidemic bull.

Reading daily about write downs on Subprime related losses, now totaling some $45 billion, you may be wondering how this whole mess got started. How can it be that simple real estate loans have the power, when improperly used, to negatively affect some of the largest financial institutions in the world?

An anonymous reader submitted this hilarious video clip analyzing how a Subprime mortgage ends up as a SIV (Structured Investment Vehicle) on Wall Street. The British actors are superb in their interpretation of Wall Street investment bankers, and I like to thank the anonymous reader for submitting it so that you too can be exposed to Wall Street’s infinite wisdom.