That was the question new newsletter reader Jack asked yesterday as we were discussing my trend tracking methodology.

As an experienced investor, he was looking at all the fundamentals that can drive the markets ranging from corporate deal making to stronger than expected earnings and outlooks. Oh yes, and the revised forecast from Thomson Financial changing their S&P; 500 1st quarter earnings projections from (only a few weeks ago) 3.3% to over 8%.

Nevertheless, Jack was trying to figure out what the market might do next based on fundamentals. There is an easy answer which is that ‘nobody knows.’ The markets are so complex and intertwined that no individual, no matter how sophisticated his computer system may be, can analyze all facts in such fashion that he could come to a definite conclusion as to what the market will do next.

As an investor, Jack simply has to come to terms with the fact that “he does not know and never will.” However, one thing is for certain that all known fundamental facts are immediately reflected in the price of the underlying security.

This certainty has become the basis of trend tracking. We can measure where the ‘major’ trend in the market is. It can only go up, down or sideways. That’s it. Jack needs to accept that he does not have to drive himself crazy by following every bit of news information. He simply needs to be on the correct side of the trend.

That will allow him to establish his investment positions and provide for contingencies via an exit strategy. If he does just that, he will sleep much better at night and will be in control of his investments as opposed to the other way around.

So, how high will this market go? I have no clue, nor do I care to guess.

I can’t believe that this could actually be true. A story in the Money section of the NY Daily News features a new series of ETFs called StateShares that allow you to buy or sell portfolios based on 21 state specific stock indexes. Each of them contains some 50 issues. There will also be a composite of 500 stocks available based on these state indexes.

In other words, if the mood strikes you, you can be long California and short Texas. No, I really didn’t make this up. Had the date of this story been April 1st, I might have caught on quickly, but April 30th?

To me it seems like a glorified gambling attempt; I simply can’t see where having these types of ETFs would add value to an investor’s portfolio.

Am I missing something?

Investor’s Daily had an interesting article about the performance discrepancy of oil ETFs. In a previous post, I alluded to the fact that some segmented ETFs can easily stray from their stated benchmark, and that you can’t always be sure what you’re buying.

It appears that this happened to 2 oil ETFs, namely OIH and USO. You would think that if the price of oil goes up, so would any ETF tracking that sector. Apparently, that’s not a guarantee. Look at the chart below:

If you thought that Magellan was a behemoth of a mutual fund, think again. It just got dwarfed by the mother of all funds, American Funds Growth Fund of America, which weighs in at a hefty $165 billion in assets.

Normally, I wouldn’t even pay attention to this fund, since it has a front load of 5.75%, but an article at Motley Fool’s website made me wonder if this bloated condition might have an adverse effect on performance.

The article cites a number of amazing stats showing that this fund actually outperformed the S&P; 500 over a longer term basis. I did a quick 5-year comparison in the chart below and confirmed the findings.



Of course, the fund hasn’t always been this large, so looking at its past may not be as accurate for the present. Only time will tell.

What tickles me though is that there is currently a big debate going on as to the benefits of indexing vs. the use of actively managed mutual funds. This article sure is a feather in the cap for the folks who promote the actively managed funds, although the index people are trying very hard to come out on top.

I can tell you already that neither one is right, but I will be weighing in with more detailed opinions in future posts after finishing Larry Swedroe’s book on the subject.

It has happened again. Every so often a new book appears on the market that depicts impending gloom and doom. The latest one is Peter Schiff’s ‘masterpiece’ called “Crash Proof: How To Profit From The Coming Economic Collapse.”

Schiff, who owns an investment company, has been predicting bad economic things for a while and has been frequently quoted in Orange County (California) newspapers. He took his prediction of a severe real estate collapse to heart a few years ago, sold his house and relocated somewhere in the mid-west, where he is now ‘renting’ and ‘raving.’

In an interview with MarketWatch he says the severe real estate downturn is underway and the “mother of all recessions” is to follow.

While I don’t pay much attention to any kind of prediction, it brings up the question as to what you can do to weather an economic downturn, and a subsequent bear market, should both ever come to pass.

First, a downturn does not start with a bang overnight. It starts with a slow deterioration of stock prices followed by the occasional rally attempt. You can be fairly sure that, once prices have been pushed down and the media (or your broker) tells you this is ‘a great buying opportunity,’ the party will be over.

Second, if you follow my trend tracking methodology, and monitor your trailing stop loss points, you are automatically limiting your downside risk. There is no need for you to guess what the markets might do. If you get stopped out, great; it’s time to take profits and look for other opportunities. Our momentum tables will tell us if there are areas that buck the recession that might offer investment possibilities.

Bottom line is: Stay away from any kind of predictions. Wall Street is littered with dead bodies who at one time in the past decided that they could look into the future.

Motley Fool had an interesting observation on ETFs, one that I have touched on before. New ETFs are being brought to the market as fast as regulatory approvals can be obtained.

It’s been my philosophy to let each ETF accumulate about 1 year’s worth of price data before I would even consider it. The reason is that I personally like to be able to identify a trend so I can determine whether this ETF is going up, down or sideways.

However, just because you have 1 year of data doesn’t mean that it’s time to jump in. Many new ETFs are covering a tiny market segment, which is of not necessarily of use to most mainstream investors.

The article “ETFs Derailed” brings up another important point about the (ridiculous) segmentation of ETFs. It cites examples that in obscure areas of the market, like oil, ETFs can bring about a wide divergence from their stated benchmarks. In other words, you can’t be really sure what you’re buying and how closely you are following a stated index.

There is no problem with main stream ETFS tracking their indexes, such as SPY, QQQQ and DIA, among many others. But with small esoteric ETFs, this apparently can’t be guaranteed.

As always, buyers beware!