Despite last week’s bounce in the market, we really have gone nowhere. The S&P; 500 started the month at 1,280 and closed at that number yesterday. Despite some sharp drops during the first couple of weeks in July, it’s questionable whether the subsequent rebound rally has legs, as economic circumstances have not changed.

Sure, lower crude oil prices helped matters, but who knows what’s around the corner. Financial institutions are still settled with bad debt and, until all skeletons have come out of the closet, there is no way to assess the total damage.

With the major trend having gone nowhere, here’s how our Trend Tracking Indexes (TTIs) currently stand:

Domestic TTI: -3.20%
International TTI: -7.56%

There are no changes to our investment positions and cash or hedged positions remain to be king.

Most likely, you’ve been reading the Fannie Mae and Freddie Mac debacle, and the various plans for a bail out, along with banning naked short selling. Bill Fleckenstein had an interesting piece on the subject called “Feds can’t fix Fannie and Freddie.” Here are some highlights:

Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) do not have a liquidity problem that can be solved by the Federal Reserve or even by an injection of Treasury capital. It’s a solvency issue. Short-term cash isn’t the real problem. Over time, the mortgage giants’ liabilities are quite likely to swamp their assets. Thus their assets are contingent, but their debts are forever.

This business of blaming short sellers for lower stock prices (and speculators generically for high oil prices) is getting ridiculous, especially when the real perpetrators suffer minor consequences as they walk away with giant piles of money.

Bill hits the nail on the head with his analysis. Only time will tell if any of these attempts of rescuing insolvent institutions will fail or succeed. My guess is that they will fail, and the tax payer will ultimately be the only one left to pick up the tab in one form or another. Déjà vu!

While there are not many mutual funds suitable to buy and hold forever, some do better than others depending, of course, on the current economic environment.

Earlier in the year, we started to diversify into Swiss Francs and gold as the dollar continued its descent to new lows. Since many clients have several accounts with me, and some being of smaller size, I opted to invest in PRPFX, which has a variety of hard assets that automatically take care of diversification.

Yahoo Finance describes the profile for PRPFX as follows:

The investment seeks to preserve and increase the purchasing power value of its shares over the long term. The fund invests a fixed target percentage of net assets in the following investment categories: gold, silver, Swiss franc assets such as Swiss franc denominated deposits and bonds of the federal government of Switzerland, stocks of U.S. and foreign real estate and natural resource companies, aggressive growth stocks and dollar assets such as U.S. Treasury securities and short-term corporate bonds.

One reader apparently discovered this fund as well and had this to say:

Would you please look at PRPFX? It holds a number of assets and its trend line is always above an upward sloping 50 day MA and 200 day MA. When you look at the 200 day MA, am I correct in saying that you want the MA line to have a positive slope (and not be flat) – indicating increasing stock price?

Would you please tell us what you think are the pros and cons of investing in PRPFX. Many thanks for your wonderful service.

The reader is absolutely correct as the 2-year chart shows:

If you are following trends, this chart is as ideal as they come. Low volatility makes this a good fund to have a portion of your portfolio invested in. For the first half of the year 2008, it’s up +5.19% vs. the S&P; 500’s loss of over 12%.

Over the past 12 months, it has not come off its high by more than 5.20%, which occurred on 8/16/07 and means a trailing sell stop would have never been triggered. Of course, trends can reverse, but should you decide that this fund is a worthy addition to your portfolio, be sure to use my recommend exit strategy.

I have always maintained that country ETFs are a leveraged play on the United States. In other worlds, when the big dog goes down, so will most of the rest of the world.

One reader had this to say:

Would like to have your thoughts on ILF. Though your trend tracker indicates being out of the market for international ETFs, can investors still invest in ETFs which are trading above their 200 day MA? For example, ILF trades just above its 200 day MA. Is it prudent to invest in such ETFs or not?

Let’s look at a chart of ILF first:

The price has clearly broken its long-term trend line to the downside by -2.14%. The high for the year occurred on 5/19/08 and since then, ILF has dropped some 16.65%.

Unless you are an aggressive bottom picker, which I don’t recommend, this fund has entered bear market territory, following the U. S. market with some delay. Personally, I would not buy ILF until it crosses its long-term trend line to the upside, which should be accompanied by our domestic Trend Tracking Index (TTI) turning bullish again.

Remember what happened with the China Fund (FXI), where many investors got their head handed to them on a silver platter as they tried to engage in bottom fishing.

I am sure that you have read various references online and in other news media where derivatives have been referred to as financial WMDs (Weapons of Mass Destruction). I think the term was originally coined by none other than Warren Buffett.

To find out more about it, and to get some inside scoop as to the goings on in that area, I just finished reading Satyajit Das’ fascinating book “Traders, Guns and Money.”

The author is an international expert in the dazzling world of financial derivatives and has 25 years experience in the financial markets. He has had a foot on both sides of the derivatives equation, having worked for banks (the “sell side”) such as the Commonwealth Bank of Australia, Citicorp Investment Bank and Merrill Lynch and, as Treasurer of the TNT Group, for clients (the “buy side”). He now acts as a consultant advising banks and corporations and presenting seminars throughout the world on the slippery subject of derivatives.

Derivatives for the most part are unknown unknowns. Here’s an example and a humorous explanation of that term for anybody, especially women, to understand:

In most businesses, the nature of the product is a known known. We do not spend a lot of time debating the use of or our need for a pair of shoes. We also understand our choices—lace up or slip-on, black or brown. I speak, of course, of men’s shoes here.

Women’s shoes, well, they are closer to derivatives. The derivatives sales process is more complex. You may not know that you need the product—an unknown known. You probably haven’t got the faintest idea of what a double knockout currency option with rebate is or does—a known unknown. What should you pay for this particular item? Definitely, unknown unknown. Derivatives are similar to a Manolo Blahnik or Jimmy Choo pair of women’s shoes.

This book is a sensational and controversial account of the often dazzling business of derivatives trading. No money is ever really made in financial markets. Markets merely transfer wealth. As to how to make money? Well, it is basically theft, misrepresentation, lies, cheating, deception or force.

It is impossible to make the staggering amounts made in derivatives in good years honestly.

The book is a wry and wickedly comic expose of the culture, games, and pure deceptions played out every day in trading rooms around the world, usually with other people’s money. Even though you do not need to follow every derivative example shown, it’s a fascinating read guaranteed to make you think.

I’ve received a lot of reader comments and questions during these uncertain times with one reader asking: “Can you not post more frequently during these turbulent times giving your views on what the market is doing and where it is headed?”

Because you ask that question, I believe that there a few things wrong with your approach to investing. I already post once a day, just about 365 times a year. For the strict purpose of following my trend tracking methodology, that is way more than necessary. A commentary once a week and somewhat more often as we approach potential buy and sell signals, would be totally sufficient.

The remainder of my posts are dealing with items of interest and investment philosophy as well as “how to” subjects. My objective is not to regurgitate daily financial news, which you can read anytime at your favorite web site. The goal is to comment only on those events that have a direct impact on our investment plans. Everything else represents Wall Street noise and is immaterial.

As you know, I don’t believe in predictions, and I have no idea where the markets will be at next week, next month or how long the current bear market will last.

Based on your question, I have to assume that you are drowning in information overload and may even be getting some enjoyment out of it. You are probably putting too much weight on daily useless information, and I’m guessing that you are spending considerable time digesting it.

What the market does throughout the day, or most of the time even during the week, is pretty inconsequential to our plan unless we are approaching major inflection points. You need to simplify your approach by only focusing on the events (major changes in trend direction) that matter.

Here’s how I do it. Right now, both Trend Tracking Indexes (TTIs) are in bear market territory and the recommended position is to be on the sidelines in money market. As I have pointed out repeatedly, we are holding some small positions in gold, Swiss Francs and a mutual fund hedge. Our stop loss points are being tracked daily, but until the markets make a major and sustained move to one side or the other, there is not much else we can do.

Since I don’t control market behavior, nor do I have any inside knowledge as to what will be happening next, I have to wait for the trend to establish itself before I can make my next decision. I suggest you follow a similar pattern, in order to get away from the apparent need to be constantly bombarded with market information.