As you know from my weekly newsletter and published articles, as well as this blog, my investment preference is the use of a methodical and mechanical approach to investing, which eliminates emotional and irrational decision making.

Trend Tracking (or trend following) has had its share of supporters for a long time, some who have amassed huge fortunes via fairly simple but successful trading approaches based on nothing else but measuring prices, breakouts and the resulting long-term trends. Over the last 20 years, with the advancement of computers and programs, many of the systems have been automated to enable the user to easily scan entire world markets for certain investment criteria in only a few minutes.

Can such an investment methodology using a trend following approach be taught to others?

Author Michael Covel’s book “The Complete Turtle Trader” features the story of Wall Street legend Richard Dennis, who made a fortune by investing according to a few simple rules.

Convinced that great trading was a skill that could be taught to anyone, he made a bet with his partner and ran a classified ad in the Wall Street Journal looking for novices to train. His recruits, later known as the Turtles, had anything but traditional Wall Street backgrounds; they included a professional blackjack player, a pianist, and a fantasy game designer among others.

For two weeks, Dennis taught them his investment rules and philosophy, and set them loose to start trading, each with a million of his money. By the time the experiment ended, Dennis had made a hundred million dollars from his Turtles and created one killer Wall Street legend.

In this book, Michael Covel tells their riveting story with the first ever on the record interviews with individual Turtles. He describes how Dennis interviewed and selected his students, details their education and experiences while working for him, and breaks down the Turtle system and rules in full. He reveals how they made astounding fortunes, and follows their lives from the original experiment to the present day. Some have grown even wealthier than ever, and include some of today’s top hedge fund managers.

Equally important are those who passed along their approach to a second generation of Turtles, proving that the Turtles’ system is reproducible, and that anyone with the discipline and the desire to succeed can do as well as—or even better than—Wall Street’s top hedge fund wizards.

It’s a fascinating story and supports my view that most investment advice provided in the media or promoted via Wall Street is nothing but fluff without substance and designed to have entertainment value, but not much else.

As this book outlines, using a mechanical, computerized approach to systematic investing has tremendous advantages; I believe that it’s the way of the future because it gets investors away from the mindless self serving Buy and Hold promotions. It’s a must read for today’s investor.

A couple of days ago, I posted about the obvious as to who eventfully will have to foot the bill if the Fed’s guarantee of JP Morgan’s purchase of Bear Stearns’ assets should prove to be a losing proposition.

MarketWatch featured a follow up story about the Fed’s partnership with JP Morgan. Here are some highlights:

The Federal Reserve has gone into business with J.P. Morgan Chase & Co. by taking effective ownership of $30 billion of the most toxic waste on Bear Stearns’ books.

For many analysts, the fundamentals of the transaction remain unchanged: gains on Wall Street are privatized while losses are socialized.

The last sentence pretty much sums it up. If there are losses, the taxpayer will take the hit, if there are gains, the government will keep them.

Looking at the big picture, however, I feel like I’m stuck in this dichotomy: On one side, in a capitalistic society, a failing enterprise should be allowed to fail and the market place will sort things out without any government intervention or involvement.

On the other side, you could make the argument that if a failing enterprise, such as Bear Stearns, with its non-transparent assets and financial intertwinement with many banks and other institutions, poses a potential risk of causing the financial system to collapse, then intervention might be warranted.

The speed, with which the Fed stepped in to lend a helping hand, makes me believe that we were close to a financial collapse with a potentially incalculable domino effect, which was avoided for the time being.

The question in my mind remains as to whether an intervention is justified given the circumstances as described. What’s your view?

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

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

Aimless meandering would describe this week’s market activity with 2 of 3 of the major indexes ending up lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains now -0.73% below its long-term trend line (red), which means we are in bear market territory.

The international index dropped to -7.02% below its own trend line, keeping us in a sell mode for that arena as well.

Ever since the Fed provided an assist in bailing out Bear Stearns, I’ve been wondering who might be really on the hook if things go bad. The Fed in essence guaranteed some $30 billion of Bear Stearns’ questionable assets in order to persuade JP Morgan that this purchase was the right thing to do.

Bloomberg reports as follows:

Even as the Bush administration insists it won’t risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.

The Delaware company will liquidate the assets over 10 years, with JPMorgan absorbing the first $1 billion in losses, with the Fed bearing any that remain. Any such losses would hurt the Fed’s balance sheet, and ultimately the taxpayer, because they would reduce the stipend the Fed pays to the Treasury from earnings on its portfolio. The dividend was $29 billion in 2006.

Sure, there is always the remote possibility that Bear Stearns’ assets can be sold at the full value they were guaranteed. However, judging by the amount of garbage subprime assets still floating around the world, chances are much greater that they are either worth less or even worthless.

In that case, an unwanted tax payer bailout would be complete. Maybe with proper juggling of the books or new and creative accounting rules, the Fed can postpone the inevitable “coming clean” for a few years.

OK, here are the latest headlines from yesterday:

1. Consumers’ confidence plunged to a 5-year low on worries over rising inflation and fewer jobs

2. Prices of existing single family homes dropped 11% in January from the same month in 2007

3. Consumer expectations for the future were at a 34-year low

You’d think that with news like that, the markets would have been heading south in a big way, but no dice; the major indexes held remarkably steady and some even gained. If you find this confusing, you are not alone. It just shows you the value of trying to look at news events, or fundamentals for that matter, and arriving at a conclusion as to how the markets are supposed to react.

I quickly learned over 20 years ago, that I had absolutely no ability to take information such as the above and make a reliable forecast as to where we might be headed. This is why my focus is on trends, which I reduce to numbers I can measure and work with.

Reader G.H. had this to say about yesterday’s post:

“If you had eagerly initiated a short position at that time, you are not a happy camper at this moment.”

Yep, count me in this group. My SOPSX has not performed well. In my defense it was a decidedly small position and will not open much of a wound should I have to sell at a loss.

The reader is right about the war going on between what should be happening in the markets and what the powers that be are manipulating for the benefit of the markets.

I’m suspecting that we could soon see a buy signal triggered in domestic markets. And why not, just look at some of the about faces that have surfaced in the last few days. Mish has revealed that his advisory practice has “gone net long”!! And I read today in the Orlando Sentinel a column by an ordinarily bearish commentator that Orlando is poised to be in great shape for an economic recovery as everywhere South of Orlando falls into the abyss. Never mind that Orlando has 24 months of housing inventory on the market. It seems we’re now trying to talk our way out of a recession no one seems to think we ever entered.

There is no doubt that since I began following the TTI’s and the advice on this forum I’ve gained more and lost less than I would have done on my own. But I must say, given the recent mysteriously uncommon circumstances surrounding Bear Stearns among other things, if in fact a buy signal does occur, I’m afraid that I’m just going to sit this one out for awhile. I’ve mis-placed my dancing shoes.

As of yesterday, the domestic TTI has now crawled above its long-term trend line by a scant +0.29%. As I pointed out two days ago, not only do I want to see a clear break above the +1.50% level, I also like to see some staying power of several days above that number, before I am willing to commit to domestic equity funds/ETFs. We’re still several large rallies away from this target, nevertheless, I personally would not go as far as G.H. suggested and sidestep this potential trend change.

Why? I witnessed this very thing in 2003 when a well known large advisory firm, which shall remain nameless, overrode its own buy signal and remained on the sidelines as the new bull market unfolded. Talk about a professional with egg all over his face…

However, your personal comfort level and risk tolerance should always be your guide when it comes to your investment decisions. Right now, cash is king, so let’s revisit my entry point thoughts if and when we actually get to that moment of truth.

As was widely expected, there was some follow through buying yesterday as a result of last week’s rebound and the major indexes moved higher. One reader had this to say in regards to my post last Sunday titled “Controlling The Urge:”

The market these days seems like the patient on the table alternating between irregular heartbeat and flat line. Helicopter Ben applies the paddles and revives it for a few days, but then disease takes hold again. No damn way I’m placing bets either way…

That’s actually a good way of putting it, because we’ve had the dance around flat line (trend line) for quite some time now and a directional break-out is not yet apparent. Here’s where the Trend Tracking Indexes (TTIs) stand as of yesterday:

Domestic TTI: -0.22%
International TTI: -7.18%

The international TTI still remains deep in bearish territory, while the domestic TTI is getting closer to crossing back above to the upside. Just a slight crossing above does not constitute a new upward trend. I need to see some staying power as well. In my advisor practice, I use a trading band of 1.5% above and below the trend line, which needs to be pierced first before I commit to either the long or short side.

Remember, just a couple weeks ago, the domestic TTI dropped to -1.64% but did not stay at that level for more than one day before reversing. If you had eagerly initiated a short position at that time, you are not a happy camper at this moment. Again, the use of this trading band will (hopefully) avoid some of those whipsaw signals, which happen during times of uncertainty.

This cautious view is further supported by the momentum figures in my weekly StatSheet. Out of 184 domestic ETFs, only the Dow Jones Transportation (IYT) has crossed its own long-term trend line to the upside, while out of the 615 domestic no load funds I track, only 5 have barely moved into bullish territory.

From my vantage point, more follow through is needed to make sure that this is not just another head fake.