A few days ago, MarketWatch had a story featuring the editor of the Mutual Fund Strategist Newsletter, Holly Hooper-Fournier, saying that 16 of the firms 17 timing models are “currently issuing a buy signal.”

She further noted that, unlike some timing models, the ones used by her firm remain bullish on international and emerging markets investments.

Hmm; I find it hard to believe that any model would issue a buy signal at this juncture in the market given the run up we’ve had over the past 10 months. While I don’t speculate on future market direction, I think that, looking at the big picture, we are closer to a market top then a market bottom.

The danger is that the investing public (who reads stories like this) looking for a point to enter the market, might be tempted to throw caution to the wind and put all available investment dollars to work at once.

A smarter way would be to use my incremental buying process and only expose one third of the total portfolio at first and, upon a 5% gain, commit another one third increment and so on. This will help avoid to possibly buying in at the top of the market and, when used together with my recommended sell stops, will reduce the risk tremendously.

Just because a newsletter you follow issues a buy signal does not mean you have to jump in 100%. Commit a portion you are comfortable with and, if things go your way, add more. You’ll definitely sleep better at night.

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

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

The bears got the upper hand this week and pulled the major indexes off their lofty perch.

Our Trend Tracking Index (TTI) for domestic funds/ETFs is now positioned +4.58% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +7.21% 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.

It’s no secret that new ETFs are being brought to the market as fast as sponsors can obtain regulatory approvals. I have touched on this before that having all these investment choices available does not mean you should jump on the band wagon and buy any new offering.

MarketWatch had a piece on the pitfalls and potential problems when investing in markets that are thinly traded. For one, if an ETF has trouble attracting enough inventors, you can be sure that the expense ratio will be higher. Additionally, the bid-ask spread may widen to a point where liquidating a position may turn a profit into a loss.

I for one will stick to using only well traded ETFs with heavy volume so that liquidating a large position won’t be a problem when the markets head back south eventually.

As I mentioned in my weekly updates, there always seem to be a variety of ever changing factors that have driven this market to its current highs. One, we have not touched on, is the increasing debt big and small investors are using to leverage their investments.

The WSJ reported that margin debt, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.

For obvious reasons, I’m personally not in favor of using leverage to increase returns. However, this risky technique has enabled many large players (hedge funds) to leverage their buying power by not just acquiring more stocks but also swallowing up entire companies. This is simply an indication that rampant speculation is alive and well.

To make it easier to borrow money and reduce the chances of a margin call, the NYSE launched a pilot program with eight brokerage firms that allows them to assess the portfolio as a whole. So, if one part of the portfolio goes down but the other part goes up, the investor won’t necessarily get a margin call.

Under the financial industry’s old rules, investors who wanted both to buy shares in a company and use so-called options contracts on that stock, to guard against an unexpected drop in the value of those shares, would have to put up separate collateral for both the stock and the option. If the shares dropped in value, the customer might get a margin call, or request for additional collateral from a broker, to cover the price of the shares, even if the value of the option had increased.

With any type of leverage, a normal market correction can easily turn into disaster if many investors have to cover margin calls, which will accelerate selling and worsen the downside effect. The longer this goes on, the worse the eventual outcome.

That’s why you continuously hear me harping on the importance of following a sell stop discipline. When the market trend reverses, leverage will be a killer, while at the same time the exit doors will get very crowded.

Last week’s solid rebound rally happened despite higher oil prices and interest rates. Generally speaking, interest rates and stocks tend to move in tandem, which has not been the case lately. Take a look at the chart below, which shows the iShares Lehman 20+ Year Treasury Bond ETF (TLT), vs. the S&P; 500:



Notice that the gap between the two has been widening since the end of 2006, which means that, as interest rates rose, bond prices fell. Long-term, this is not sustainable as stock investors at a certain point will switch to higher yielding and safer bonds (as in ‘perceived’ safety) from the more volatile stock market environment.

While there is no exact number in regards to a desirable bond yield for investors to make the switch, my point is that an adjustment will happen; the timing is just unknown. That can either be in the form of lower interest rates (good for stocks) or lower stock prices (higher interest rates), the former which would be more desirable.

The good news is that, when using trend tracking, we don’t have to concern ourselves with the “when” and “why” since our exit strategy will tell us when it’s time to take some chips of the table.

With Standard & Poor’s recent downgrading of some of the subprime loans, this question comes to mind: Will continued problems in that area, like more downgrades or defaults, have a negative effect on stocks and subsequently mutual funds and ETFs?

MarketWatch had a story on that subject, which made the case for a potential spillover into stocks. I have to agree with it, but the timing is very uncertain. Once Wall Street traders focus more attention away from the lucrative M&A; business and get done with evaluating the earnings season in the next couple of weeks, they may just look for other things to dwell on.

Subprime problems certainly might take center stage especially if the downgrading continues. I liked Peter Schiff’s (Euro Pacific Capital) quote best when he said in regards to subprime loans that “if lenders themselves call them liar loans, why should we think they’re boy scouts?”

This debacle is far from being over, and it pays to have a strategy should the stock market become the whipping boy of the subprime fall out. Depending on the severity of the outcome, it can certainly derail this enthusiastic rally in a hurry; however, those with clearly defined exit strategies may be in a position to avoid serious portfolio damage.