The Subprime pig strapped on his wings this week and feasted at different troughs in a variety of countries. While the countryside varied, much to the pig’s delight, the food was identical: Same old leftover slop from irresponsible subprime lending procedures primarily designed to feed somebody’s corporate bottom line no matter what the long-term outcome might be.

Affected countries, besides the U.S., included Australia, Germany and France. Yes, even the French saw their culture invaded by having to interrupt their wine and cheese desert to come to grips with the fact that some of their own U.S. exposed hedge funds stopped redemptions. The European Central Bank injected some $130 billion into the financial system to provide liquidity, a step which was followed by the Fed a day later.

Once the subprime pig is on the move, there is no way of knowing where it might stop and feast next. And that is a big problem because there is no transparency as to which financial institution has how much exposure.

There is a good chance that far more companies have invested in these loans through a variety of schemes, and fear of redemptions may keep them from disclosing their true risk exposure until the heat is really on.

If this trend continues, it will be an absolute certainty that the stock market rally of the last 10 months will come to an end. And don’t kid yourself into believing that there are asset classes that will resist the subsequent downdraft.

The only safe position will be in money market—until the subprime pig has found its last meal.

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

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

Tremendous market swings to the upside and downside left the bulls coming out ahead by a small margin. For more details, please see the above link.

Our Trend Tracking Index (TTI) for domestic funds/ETFs rose and still remains +2.00% above its long-term trend line (red) as the chart below shows:

The international index has now moved to +1.67% above its own trend line, as you can see below:

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Today’s steep sell off (based on the continued spread of the subprime virus) did not affect any of our sell stops. Since I had liquidated some of our more volatile holdings in some country and sector funds last week, we are left with positions that have been fairly stable.

Most of them have come off their highs by 4%-5%, which means there is still a little “play room” until the 7% sell level gets triggered.

Our Trend Tracking Indexes (TTIs) rallied early in the week and are, as of today, positioned in regards to their long-term trend lines as follows:

Domestic TTI: +2.54%
International TTI: +3.07%

We will hold all positions subject to our sell rules.

Last week, reader Craig pointed towards my previous observation that gapped upside openings will always be closed, which translates into a market pullback.

The odds of this happening are extremely high, although I have not read any study confirming that this is a 100% occurrence. Let’s take a look again at an enlarged portion of the Domestic Trend Tracking Index (TTI):




As you can see, the lower arrow shows a gap that was formed during the first quarter of 07. While the markets retreated a few weeks later, the gap was never completely closed. This is in contrast with a more recent gap (upper arrow) which was closed during the sharp pull back 2 weeks ago.

I have seen thousands of charts where these types of break-away gaps have been closed, the timing, however, has always been uncertain. Sometimes it happens quickly, as in the case with the upper arrow, sometimes it may take months.

How can this be of value to you? Recent gaps allow you to look at market behavior in a different light. When a correction occurs, such as we’ve seen over the past few weeks, you can look at the TTI chart and hold off making any sell decisions until the gap has closed. In many cases, this will also coincide with our sell stop discipline. Many times, after a gap has been closed, the markets will resume their previous trend, which was to the upside.

If the original gap in the above chart gets closed, that will put us at a very critical juncture in that most likely the trend line (red) will be pierced to the downside. However, there again is the chance of a rebound. That is why I evaluate the breaking of the trend line to the downside for a few days to be sure the break holds before issuing an all-out Sell signal.

Again, you need to be humble and accept the fact that there is no investment method which will get you in and out of the market correctly 100% of the time. However, having a plan that attempts to keep you away from the devastating impact of another bear market (whenever it occurs) sure beats the buying, holding and hoping approach that has proven to be a portfolio killer.

To no surprise, Vanguard’s latest ETF offering has arrived and started trading a couple of weeks ago. It’s called the Vanguard Europe Pacific ETF (VEA) and it has 1,134 holdings and a low expense ratio of 0.15%. This is quiet a contrast to the average ETF expense ratio of 0.42%.

This new ETF tracks an index of stock performance in 21 countries in Europe, Asia and the Far East. It will be tracking the EAFE index and competing with EFA, the second largest ETF (0.35% expense ratio) in the world. If performance turns out to be similar, then Vanguard will most likely have the edge with its low fees.

However, before adding this new fund to my dbase, I want to see close to a year’s worth of price data to be able judge and compare its performance and to establish a trend.

While there are a variety of duplicate ETFs in various orientations on the market, I welcome that as it increases competition for lower expense ratios, which will benefit the investing public.

As a result, ETF assets have risen dramatically. Sooner or later, many of the bloated and underperforming mutual fund companies may get the hint and finally wake up to the fact that, if they don’t start competing seriously, the interest in their products my continue to wane.

Yesterday’s rebound, which recovered just amount all of last Friday’s losses, was a welcome relief but huge one day market moves, whether up or down, are rarely indicative of a trend.

As I mentioned last Friday, I liquidated a few volatile positions with sector and country orientations. The sell stop points were clearly penetrated and, if this is in fact only a temporary bounce, we’ll be glad to have taken some volatility out of our portfolios. If this rebound turns out to be the resumption of the long-term trend, we’ll be looking for other opportunities.

Right now, I prefer to err on the side of caution. Our Trend Tracking Indexes (TTIs) recovered as well and remain above their long-term trend lines as follows:

Domestic TTI: +2.61%
International TTI: +2.53%

Most of my domestic and international positions have stayed above their sell stop points, and I will hold them until market activity tells me otherwise.

All eyes are now on the Fed for any hint that they are willing to throw an assist should the markets need it. Well, even the “Donald” (as in Trump) has thrown his name into the game on CNBC as he called for a rate cut. Hmm, he just can’t stand not being in the limelight.