Mark Hulbert of MarketWatch wrote an interesting story about the Dow Theory issuing a Sell signal at last Tuesday’s (8/14) close.

According to the article, the editor of one of the three Dow Theory newsletters said ‘yes.’ This fact will certainly not make headline news on Wall Street since in principle it goes against the all too ingrained Buy-and-Hold mentality.

The Dow Theory was introduced over a 30-year period at the beginning of the past century in editorials in the Wall Street Journal. While it is subject to a wide range of interpretation, because it was not specific enough, the rules for its use can vary widely.

My point is that even almost 100 years ago some smart individuals realized that there is a time when not being in the market might be a good thing for the safety of a portfolio. Why it has not become a standard by which financial markets operate can only be attributed to other facts. My guess is that it would not serve the best interest of the majority of brokerage firms, and their armies of hundreds of thousands of sales people, who are transaction based, meaning they need to be in the market to peddle product all the time.

If Charles Dow were alive today, he most certainly would have completed the work he started, especially after realizing the negative impact a bear market can have on the value of a portfolio. My guess is that he could have been the most vehement opponent of Buy and Hold and may have provided a much needed objective sense of reasoning in an unreasonable self serving investment world.

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

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

A quiet but positive bullish week had all major indexes gaining solidly.

Our Trend Tracking Index (TTI) for domestic funds/ETFs recovered and has now moved to +2.85% above its long-term trend line (red) as the chart below shows:



The international index also moved to +1.64% above its own trend line, which puts it back on the positive side.



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

Yesterday’s market bounce, although on low volume, was a step in the right direction. It’s too early to tell if this is the beginning of another uptrend or just a head fake. Many traders are still on vacation and will not be back to their desks pushing buy and sell buttons till after Labor Day. Until then, any moves to the upside or downside may not have much meaning.

The Trend Tracking Indexes (TTIs) are now situated relative to their long term trend lines as follows:

Domestic TTI: +2.30%
International TTI: +0.46%

As you can see, the International TTI recovered and barely broke back above its long term trend line. To avoid a whipsaw, I will hold off making any commitments in that arena until I can better determine if this is a sustainable trend or simply sideways action.

I am looking at some sector opportunities and may make some investments in those areas that have best withstood the recent sell off.

I like some of Paul Farrell’s articles. While I can’t for the life of me agree with him on his investment strategies (hold your coffee house portfolio through any market condition), he wrote a fine piece called “Meltdown ‘inside’ Wall Street’s brain.”

He outlines the self-serving and brain washing acts that come with Wall Street’s manipulation, which I have touched on before in various posts. He offers “seven rules (out of 25) for bull-and-bear predators in a ‘brutal, manipulative’ world.”

While it’s a fun read, his conclusion that you must “redefine the rules of engagement and play the game by your rules,” will leave you wondering what the rules are that you should play by.

In my view, it’s certainly not the trap of Buying and Holding a coffee house portfolio blindly through the next bear market. That would be falling into Wall Street’s self serving trap of staying with a losing investment no matter what. Since most investor’s use mutual funds as their preferred investment tool that means you are still paying the company that loses money for you.

If your preference is ETFs, you won’t be paying anybody, but if you’re ignorant of trends you have nobody to blame but yourself when you get mauled by the bear, unless you have a disciplined exit strategy in place that you will actually execute.

Yesterday’s market activity had no effect on our investment plans despite the ever present volatility. I am in still in a holding position waiting for the markets to decide on future direction before making any further adjustments.

The Trend Tracking Indexes (TTIs) are situated relative to their long term trend lines as follows:

Domestic TTI: +1.47%
International TTI: -0.74%

I did liquidate a few of our tax-free closed end fund holdings since some of them had declined beyond what is acceptable, which was caused by the credit crunch (interest rate gyrations) from the subprime fallout.

CNNMoney featured an excellent article called “Why the private equity bubble is bursting.”

It recaps the insane leveraged buyout fever of the past couple of years which caused some unintended consequences while fueling the stock market rise into record territory. It’s well written and gives you a better understanding of why the bubble is bursting.

There is some focus on the effects of the subprime debacle and why hedge funds will be hit in a big way as the final paragraph explains:

“The biggest losers, though, are likely to be the swashbuckling hedge funds that gorged on high-yield debt and did it in the most reckless way possible. To amp up their returns, they borrowed heavily to buy the bonds of already highly leveraged companies. That’s piling risk on top of risk in a rickety structure that a slight bump can topple. Wall Street firms promoted the practice. Not only did they sell high-yield bonds to the hedge funds, they also lent them money through their prime brokerage arms to buy the bonds on margin. It wasn’t uncommon for the funds to borrow 80% of the price of the loans. With that kind of leverage, for example, they could earn 18% or more owning bonds with a nominal interest rate of 10% or so.

The same leverage that magnified their returns will multiply their losses, with potentially dire effects. Here’s what the worst-case scenario might look like: As the hedge funds get margin calls from Wall Street, they’re forced to dump their holdings of loans and bonds to raise cash. The glut of distressed debt for sale crashes prices and pushes yields to towering levels. Then everyone holding high-yield debt, from Asian banks to small investors with money in junk-bond mutual funds, will take a horrendous pounding.

What we’re seeing here is simply sanity returning to the market. And as always in the aftermath of a bubble, sanity returns the hard way.”

The entire article, while lengthy, reads like a science fiction story and will definitely make you realize that, based on the bursting of the private equity bubble, the stock market may very well be the next victim. It’s hard to see at this time where the fuel for another rally will be coming from.

Recent violent market activity could possibly indicate the end of the uptrend, but we will wait to be sure, via the guidance that our Trend Tracking Indexes provide, before taking final measures to protect our portfolios.