The markets zigzagged yesterday, but ended up closing modestly higher thanks to support from industry heavyweights Boeing and Microsoft. Despite this higher close, participation was not widespread, which explains why our Trend Tracking Indexes (TTIs) retreated slightly.

The domestic TTI fell to a level of +1.37% above its long-term trend line, just below the upper range (+1.50%) of the neutral zone. We will hold off with any further commitments to the domestic market until a sustainable breakout occurs.

The International TTI slipped as well and is now positioned -3.82% below its own long-term trend line, which has kept us out of this market since 11/31/07.

The markets retreated yesterday as the dollar’s record new low against the Euro, along with soft earnings and oil prices hugging the $120/barrel mark, proved too much resistance. The bears prevailed and sent the major indexes lower, although a rebound late in the session cut down on the losses.

Our domestic Trend Tracking Index (TTI) came off its high, and dropped below the +1.50% threshold to +1.48%. This means we’re back in the neutral zone and will have to wait for another breakout with legs before making any commitments to that market.

The International TTI retreated as well and is currently positioned -3.32% below its own long-term trend line. The bottom line is that there have been no changes to our investment positions.

If the domestic TTI continues to vacillate around its buy level, I will post updates as necessary in this blog so that you can easily follow the changes in our investment strategy as they occur.

Yesterday’s fairly calm day in the market pushed our domestic Trend Tracking Index (TTI) through the upper range of the neutral zone (+1.50%) to a level of +1.73% above its long-term trend line.

As I mentioned in last Thursday’s post, I like to see that level supported for a few trading days to be sure that there is enough follow through buying to support this current trend. If this comes to pass, I will announce a new Buy signal on this blog the day it occurs. I will then ease into the domestic markets with about 1/3 of portfolio value, not all at once, but over a week or so. My no load fund/ETF selections will be based on those showing the strongest upward momentum numbers.

The international Trend Tracking Index (TTI) has improved but still remains -3.01% below its own long-term trend line in bear market territory.

As I am posting this on Tuesday morning, the markets are down sharply and, barring any sudden recovery, we may end up again back in the neutral zone below the +1.50% level. This potential buy may or may not materialize. I will keep you posted.

Market Watch reports that the Bank of England is to unveil a mortgage bailout:

Faced with rising mortgage rates that threaten to worsen a housing downturn, the Bank of England will unveil a plan Monday to allow banks to swap billions of pounds worth of mortgage-backed securities for British government bonds in a bid to thaw frozen credit markets, Chancellor of the Exchequer Alistair Darling said Sunday.

Darling denied that the plan, which bears similarities to the expanded lending facility announced by the U.S. Federal Reserve last month, is a bailout. Banks will borrow the gilts, pledging the mortgage-backed securities as collateral.

[Emphasis added]

If it walks like a duck and squawks like a duck, it most likely is a duck. Just as the Fed’s willingness to accept sub par securities in exchange for U.S. Treasuries, the Bank of England has chosen to go the same route.

The plan is expected to see banks forced to take a “haircut” on the value of the mortgage-backed securities in a bid to protect taxpayers should a bank be unable to repay and the Bank of England is stuck with the mortgage-backed security. Strictly as an example, banks could be allowed to post 100 pounds worth of securities in return for 80 pounds worth of bonds, economists said.

OK, so they try to build in a safety cushion, although that is not a sure thing yet. So far no one has been able to accurately determine fair market value for any of these pledged securities here in the U.S. or in England. At least, there is no public knowledge of it.

Here’s the rub. If the values are less at sometime in the future, the loss will be socialized, if there is a gain, it will be privatized by the Bank of England. That smells like a sugar coated bailout to me.

Last week’s rally, and the fact that our domestic Trend Tracking Index (TTI) is now within striking distance of a Buy signal, caused a number of readers to email with comments and questions.

Some old sayings such as “sell in May and go away” were quoted along with fears of whipsaws due to continued market volatility. Others were worried about economic fundamentals such as recession fears and large businesses like Citibank continuing to write-down massive amounts of losses.

What it came down to was the question “how can this market rally, when all other news is so gloomy?” Let’s look at some of the major concerns:

1. “Sell in May and go away.” Sure, that line is based on the fact that at sometime in the past this might have been a good decision, and I’m sure it will be again in the future. However, there have also been tremendous market rebounds, which lasted through the summer; so using that as basis for making investment decisions it simply not wise.

2. Yes, fundamentally, when you look at just about all economic data, a recession is said to have started a few months ago and, despite current market behavior, which is based on the fact that a bottom in financial assets has been reached, this up trend could very well reverse again.

Here’s were I differentiate between my view of the fundamentals and my investment methodology. My economic view currently supports a recession scenario, massive further write-downs, higher unemployment and a host of unknowns, all of them negative for the market.

However, that fundamental view and opinion has absolutely nothing to do with my investment decisions. I follow trends and when it’s time to move into the market, I will do so based on momentum figures. I simply accept the fact that I can have a different view of the world than my investment plan dictates, because with that plan I have removed the emotional and subjective factors.

Looking only at fundamentals creates such a huge number of variables which I can’t assess, so I simply remove most of them by strictly following price action via trends.

3. More write-downs are coming, that’s a pretty safe bet. The key is whether they come as a surprise to the market place (bad news) or are anticipated, because they turned out better than the worst scenario. For more on bean counter accounting in the case of Citibank’s $5 billion write down, see Mish Shedlock’s article “Digging into Citigroup’s numbers.”

4. Whip-saw fears. Last week I posted Whip-saw thoughts and offered some ideas as to how to handle them.

There is one absolute sure way for you to avoid any whip-saw signals: Don’t invest! Other than that you simply have to accept them as a part of doing business. The key is to keep the losses manageable. This is why I continue harping on the trailing stop loss.

Getting whip-sawed and becoming afraid, could be hazardous to your financial health. Let’s take a look at the following chart:

As you can see, in this scenario, a whip-saw signal was followed by the resumption of the major trend, which more than made up for the small loss taken. While things will not always work out as in this example, it demonstrates the fact that you need to remove all emotional and subjective decisions as much as you can.

No, it’s not easy, but all successful long-term trend followers have learned this “secret” and so can you. Remove as many variables from your decision making process and focus only on what truly matters: Where is the trend headed?

A week ago, MarketWatch featured an update on the Dow Theory, the oldest market timing system in existence. Editor Richard Russell made an announcement that he now believes that the stock market has been in a primary bull market since the early 1980s:

The lows of October 2002 and January 2008 therefore represent nothing more than “important secondary or cyclical correction-bottoms.”

How soon will the stock market recover its losses of the past six months and reach new all-time highs? Russell’s crystal ball is less clear in answering this question; he simply writes that it will happen “somewhere between 2008 and 2010.”

OK fine, so we’ve been in a bull market since 1980. You saw your portfolio drop some 50% during the bear market of 2000 – 20002, but hey, no big deal, because we were still in a long-term bull market. Knowing that, don’t you feel much better now?

It is totally irrelevant what you call this period; the fact is that it was not an uninterrupted up trend that would have justified you sitting on you bullish portfolio. While it is very easy to philosophize about it years later, as this article did, it does not address the pain and suffering most investors went through during the last bear market even if it now appears to be only a tiny blip on the radar screen.

Richard Russell calls these blips “nothing more than important secondary or cyclical correction-bottoms.” Maybe they are just that but, given the negative long lasting impact they had on most investors, they still need to be avoided at all costs.