Based on recent emails, I can tell you that while a lot of readers are following my recommended Buy/Sell discipline, some of them are not. It would be interesting to know, how many of the current 18,000 readership is in tune with my approach and how many simply view it as another form of entertainment.

With the recent market turmoil, it pays to have a plan in place which will serve as a guide to your actions and allow you to make better investment decisions, while at the same time preventing a serious portfolio haircut should the bear market continue.

This point was brought home when I read MarketWatch’s “Keep the faith,” which focused on investors having trouble maintaining their confidence in the stock market and the economy:

Between the housing bubble, credit crisis, inflation worries, concerns over the weak dollar, the potential for the economy to drop into a recession, a stock market that seems more anxious in falling than rebounding, and more, it’s hard to believe an investor could have any faith and confidence left.

While having confidence is a good thing, it does nothing for you when it comes to your investments, unless you have a specific plan in place to deal with the uncertainties thrown at you by the economic upheaval. Unless you don’t mind becoming a repeat victim of the 2000 – 2002 bear market, you better replace blind confidence with realistic thinking about where the market is at and where it might be going.

The story goes on to suggest six reasons why you should be confident in today’s environment. While I don’t agree with most of what’s written, you may want to read them anyway. However, the bottom line refers to the same old numbers of what the stock market has returned over the past 5 years or over a lifetime.

Nowhere will you find the most important data, which is the negative effect the last bear had on more recent returns during this century. If you have accumulated substantial assets over your lifetime, and you are now somewhere in your 50s or older, don’t believe the baloney about diversification and long-term stock market returns. If a bear market has the potential to cut your portfolio value by 50% or so, that’s what you should be directing your attention to by making plans accordingly.

While no one knows whether the bear will turn out that ugly or not, you better be prepared other than simply keeping faith in the fact that over the very long term 9% returns have been accomplished. When you’re in your 50s, your time frame has been shortened considerably, and a 50% portfolio loss will have far more of an impact on your financial life than when you were in your 30s.

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

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

Continued volatility moved the major indexes with not much to show for.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -0.56% thereby confirming the current bear market trend.



The international index now remains -7.08% below its own trend line, keeping us on the sidelines.

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

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.