This week’s hot topic has been the fact that many over-eager investors are trying to find a way or some reasoning to re-enter the market on the assumption that a bottom has been made. Reader Joao emailed me prior to the election and had this to say:

I keep reading your blog with great interest. Observing your index graphs and TTIs, two questions have sprung in my mind:

2) If the market has a knee-jerked upward reaction, by the time it has approached the TTI line it will have gained (quite) significantly from current levels (30% or so). Maybe it then hits the TTI line and reverts down (like it does with a 200 d MA in a bear market) …. and a short-medium term ‘trading’ (or investing?) opportunity has been missed. The question is whether you don’t have/use (or have tried with) a “faster” indicator that may provide some shorter term indication of direction, even at a higher risk of not being as reliable as your TTI line?

The short answer is “no;” I don’t have a “fast” indicator. I believe that trying to enter the market at a level that some consider cheap may work during pull backs in bull markets, but are a very dangerous road to travel on when in bear market territory.

As we’ve seen, October had several rebounds of +10% or so, yet we ended the market down by almost -17% (S&P; 500). I sure like to know how those bottom pickers fared during that month.

Of course, the subsequent move higher had everybody giddy and feeling good, but now again, reality has set in and took the legs right out from under the rebound. In my view, you have to control your ego more than anything else and accept the fact that trying to pick a bottom is an exercise in futility. More often than not will your decision have a negative effect on your portfolio.

If you are trader vs. an investor then you can make different decisions, some which may be designed to take short-term profits. I mentioned before that this is a market for aggressive traders and not for investors.

This bear market has just started and, in a way, reminds me of the year 2000, when the initial sell off took the market down sharply but not as severe as this time. Several rebounds caused several whipsaws back then.

This year, the break through the trend line accelerated sharply and buy-and-holders were hit hard and fast. To me, as a trend follower, this current situation is preferable. Why?

Because of the rapid drops, we have sunk way below the trend line and are somewhat immune to sharp bear market rallies. I mean this in the sense that they did not quite have the power to generate another buy signal quickly because the distance from the TTI to its trend line was simply too great.

As a result, time will be on our side in that the trend line (red) will be slowly dropping every week while TTI index itself will be slowly rising as the markets recover over time. Depending on market activity, they may meet somewhere in the middle or possibly in the lower third.

This assumes that this bear market has a ways to go, because I simply can’t see that the cause of the current economic situation will be resolved in a few months. Bear markets, once in motion, simply take time no matter what the underlying reasons were which brought about the downturn.

Decide if you are a trader or an investor. If you’re the latter, you should not touch this market until there is clear evidence that the trend has in fact reversed.

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

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

A tug of war between bulls and bears ended up as victory for the bears.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -15.43% thereby confirming the current bear market trend.

The international index now remains -23.53% 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.

As I mentioned yesterday, once the election is over, reality will most likely set in—and it did.

Wall Street hates uncertainly and at long last the election outcome is now a cold hard fact. And so are the economic conditions we are in, which may justify sharp bear market rallies, but not necessarily a return to a bullish scenario.

In yesterday’s post, I referenced the impatience of many investors eager to determine a market bottom and ready to jump back in. Reader Doug had this to say:

History tells us that when bear markets end, something like 40% of the rally is in the first few months (can’t remember the exact number).

So, indeed, one should not be “amazed” at the eagerness of sidelined investors at this stage of the market’s performance.

Unfortunately, eager investors expect some “V” type of recovery, so that they can pick a bottom and ride the gravy train up into the stratosphere. Along those lines, they forget that a bottom may not necessarily be in place when they think it is as was clearly evident by the activity in October.

We are in a bear market which, according to my work, started on 6/23/08, when we went to all cash. Bear markets don’t end with a bang to the upside; they end with slow and inconsistent moves until prices eventually break out to higher levels. Sudden and violent upside moves are always suspect.

Who is to say that what we saw in October was the bottom? Some respected economists see another 20% to 40% downside potential, which presents a serious problem for those who eagerly engage in the fine art of bottom fishing. Why? Because most will simply not believe that lower prices are possible and therefore will not work with a sell stop discipline. Once that bear continues, the cost of ignorance will have caused further portfolio damage.

In my view, you are far better off letting this bear run its course to exhaustion before making any purchase decisions. The idea is to jump aboard once a long-term trend can be identified, even if it means entering at a higher price.

Besides the technical aspects, take a look at the daily news menu. Does it look like we have turned the corner economically, have strong job creation along with all the other items that let us look forward to an environment of higher stock prices in the next few months?

If you can identify some of these things, please share them with me, because I sure can’t see any fundamental or technical reasons confirming that we’ve seen a market bottom already.

Relief that the election mud slinging is finally over may have contributed to yesterday’s solid rebound, although some sense of reality may set in once the results of the Presidential race are known, which they were not at the time of this writing.

Equally important will be the Senate results to see if there are any shifts in power.

Historically, the rally was surprising as MSN Money reported:

In each of the six election days that the U.S. stock market has been open since 1984, stocks have barely moved. The biggest gains: 1.1% for the S&P; 500 in 1984 when Ronald Reagan won reelection over Walter Mondale and 1% for the index in 1996 when Bill Clinton defeated Bob Dole for a second term.

The New York Stock Exchange was closed on all election days through 1968 and presidential election days from 1972 through 1980.

Of course, hopes are high that the market lows made in October will represent the long awaited bottom. While I have my doubts, it does not mean we can’t go higher from here, but it’s questionable whether this will actually turn into a major trend reversal out of bear market territory.

Our Trend Tracking Indexes (TTIs) improved as well and are situated in relation to their long-term trend lines as follows:

Domestic TTI: -13.13%
International TTI: -20.79%

Based on some emails I have received, I am amazed about the lack of patience some investors are showing. They are itching to jump back in with both hands, although we clearly remain in bearish territory.

Given the volatility we have witnessed over the past 6 weeks, and the trouble this has caused equally for those with long and short positions, you’re better off waiting for the right signal rather getting whipsawed around. I will elaborate more on that in the next few posts.

In a recent post, I said that in order to get out of a hole, you need to stop digging first. My solution, although admittedly not a perfect one, was for those who held on to losing positions to sell 50% and put a 5% sell stop under the balance.

An opposing view was featured in MarketWatch titled “The high price of panic.” Here are some highlights:

If you didn’t see the market’s meltdown coming, you have plenty of company. If you’re selling now, it’s probably too late.

Missing those days can be hazardous to your wealth.

Sure, the market always seems to make a bottom right after you finally break down and sell all of your holdings. However, this can be a two-edged sword. If you’re down already 40% for the year, my belief is that it is better to lighten the investment load by 50%, unless you can convince yourself that another 20% drop won’t bother you, if it happens.

Nobody has the answer as to the duration and severity of this bear market. However, if I were a buy-and-hold investor, I’d personally prefer to err on the side of caution rather than seeing my already sharply reduced portfolio take another hit; even if that means participating with only 50% if the markets rally from here.

While I strictly follow technical indicators for my trend tracking decision making process, this might be a good time to look at general fundamentals as well. Just about all economic indicators are pointing south confirming my belief that there is more to come on the downside although wild swings to the upside may very well temporarily cloud that picture.

Reader Don had an interesting experience in that he is a trend follower by heart but also wanted to experience the other (dark) side of investment life by splitting his portfolio and going both ways; trend following and buy-and-hold.

Here’s what he had to say:

I subscribe to Al Thomas, read your blog, and get your weekly update.

What a great, invaluable service you provide. There is really no excuse for anyone to be sitting in a 40% down position. You give your information free, and one just has to go with the TTI. How hard is that? I have one account that is in cash and another that has 20% buy and hold in ETFs. I wanted to experience buy and hold through a bear market. It feels lousy, but I have stayed the course. It is down thousands of dollars.

So it is little wonder that most people use buy and hold.

In theory, holding an investment over the long-term sounds fine and good, but there are a couple of other issues to consider.

First, emotionally most investors are not prepared to handle any sharp downturns. Sure, they are getting sold on the idea that the market always comes back. OK, if that is so, then why are just about all investors incredibly upset about seeing their portfolios taking a haircut of some 40% this year? That fact should not really matter if you’re convinced that the market will come back at sometime.

Here’s where theory and practice clash big time. Before a loss actually happens, investors can theorize all they want as to how they will ride out any potential downturns. Once disaster strikes, they find out that they were not prepared to take the hit after all.

That brings up a second issue, which I have touched on many times before. If you take a portfolio hit of some 40% that means that you have to earn some 66% on the remaining balance just to break even.

How long will that take?

If the market cooperates, maybe 5 years or even longer. In other words, you will be wasting the next 5 years of your financial life to make up losses you should have avoided in the first place. Since your financial life is considerably shorter than your physical life, the impact can be severe.

It’s interesting that during the last bear market of 2000 – 2002, I received the same sounding emails and calls as I am getting now. Investors are upset because they feel mislead by the usual investment garbage of asset allocation and Modern Portfolio Theory (MPT), which did nothing to protect their capital. Not only that, it wiped out years of profits putting most investors severely behind in their investment/retirement goals or forcing them to extend their work life.

But hey, in the really long-term, the markets will come back, so there is nothing to be concerned about. Yeah right! Following that theory, we can all retire about six years after we have died.