The best time to utilize the ranking system is at the beginning of a buy cycle, right after trend lines have been crossed to the upside. In other words, we are looking at bear market territory in the rear view mirror and therefore are approaching the trend lines from a level below.

In the context of the ranking food chain, reader John had this question:

And when I get stopped out, do I then buy the top rated M-rated ETFs on your list as a replacement?

The short answer is yes and no. The current bull market, which started according to my trend tracking approach on 6/3/2009, is now some 15 months old. During this period, we have seen stunning rallies and tremendous market collapses.

More recently, economic news reports have been negative with the major indexes now hovering below their respective long-term trend lines, while our domestic Trend Tracking Index (TTI) still hovers in bullish territory by +2.01%.

In other words, our domestic TTI is now approaching its trend line from a level above and not from below. Sure, if you are an aggressive investor, you can pick some of the few domestic funds that are still ranked positive by the M-Index.

However, if you look at their respective positions, relative to their long-term trend lines (column %M/A), you’ll find that they are all in negative territory. That means, despite our domestic TTI still being bullish, the funds/ETFs listed in the StatSheet are predominantly bearish.

If you are looking to invest in this environment, the domestic market nor the international one, are not the areas to focus on. Sector and Country funds, along with bond ETFs, offer far better momentum numbers at this time.

Again, you need to be the aggressive type to establish a position right now. If you do, my suggestion is to always drop down the rankings by a few notches so that you don’t get stopped out unnecessarily. The higher the ranking, the higher the volatility! That is why I recommend the use of a 10% trailing stop loss for Country and Sector funds/ETFs.

If you get stopped out, you need to reevaluate as to what area, if any, momentum has shifted to. If momentum numbers approach zero, or are negative, this is not the time to try to be a hero and engage in bottom fishing. Wall Street is littered with bodies who were convinced that “the market simply can’t go any lower.”

Today could prove to be another difficult one as the weekly report on jobless claims is on the agenda. Any more signs of a deteriorating job market could send the major indexes lower.

As I posted yesterday, the early selling ran into some support at the S&P; 500 1,040 level, which turned out to be the low of the day. A close below would be another sign of bearishness and would bring 1,000 level into play.

If the markets make it through today’s jobless claims numbers without too much damage, we may still face a severe headwind on Friday when the GDP second quarter estimates are released. If more evidence of a slowing economy surfaces, this market has no other way to go but down, which will bode well for all bond holdings.

Positive numbers are definitely needed to put a floor under this month’s sell off, which has the S&P; 500 down by -4.3% so far.

As has been the norm, the home sale decline was greater than economists expected. However, that is simply a consequence of artificially trying to stimulate housing markets in this case via the now expired tax credit program. Housing will now have to stand on its own two legs, unless Stimulus 2.0 is being created.

Expect to see similar results with upcoming reports in those areas of the economy that received a healthy dose of Stimulus 1.0.

The good news was that the markets did not close at their intra-day lows as the chart shows, although the Dow barely hung on to the psychologically important 10k level—at least for the time being.

Our international Trend Tracking Index (TTI) had peeked into bear market territory during the past few trading days. Today, it clearly pierced its long-term trend line to the downside, thereby generating a Sell signal. The effective date for tracking will be today, August 25, 2010. This brings to an end a rather short international buy cycle (7/26/10-8/25/10), which is actually the shortest in past 21 years of its existence.

As of today the TTIs stand as follows:

Domestic TTI: +2.05%
International TTI: -1.39%

Again, bonds were the beneficiary of this downturn. It remains to be seen if the market, as measured by the S&P; 500, will find support at the 1,040 level and shoot back up to the 1,100 resistance point. My guess is that any further negative news will have us testing 1,000 before we will see 1,100 again.

Track and execute your sell stops, if you still own any equity positions.

While the losses were manageable, trading activity was nevertheless a sign of uncertainty about the future status of the economy. Bonds were the beneficiary again, as they have been for most of this year, with questions about the recovery causing yields to sink almost on a daily basis.

Very light volume, along with the summer doldrums, and many traders being on vacation, may keep the major indexes stuck in a range during the remaining trading days until Labor Day. Barring any surprising positive news, the fears about a fading global recovery will be foremost on traders’ minds causing the bond rally to continue.

Again, just like with any position, a sell stop for bond ETFs/funds is essential. Personally, the number for me is somewhat smaller than for equities, as I prefer to use 5% on a trailing basis using closing prices only.

Main stream media has been out in full force predicting the imminent demise of the bond rally. Since the media are usually 100% wrong with their assessments, it is safe to assume that there is more room to the upside, especially if the economy tanks.

Good economic news (or some Black Swan event) could end the bond rally, which is why we have a sell stop discipline in place; this helps us not to have to make emotional investment decisions and/or listen to silly predictions.