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

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

Worse than expected economic news handed the bears a win for the second week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs held above its trend line (red) by +2.48% (last week +2.30%) and remains in bullish mode.



The international index has now broken barely below its long-term trend line by -0.36% (last week -0.17%). A new Buy Signal was triggered 7/23/10 with the effective date being 7/26/10.

Be sure to use my recommended 7% trailing sell stop discipline, should you decide to participate in this new uptrend. An outright sell signal will be issued once the trend line gets pierced by -1.00%.



[Click on charts to enlarge]

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

I’ll be traveling today and will not have a chance to write the daily commentary. Regular posting will resume with Friday’s week ending analysis.

The markets headed higher yesterday accelerating right out of the starting blocks without hesitation.

The 1,100 level on the S&P; 500 proved to be overhead resistance again, and we sold off that number in the afternoon as the rally faded on low volume, but it kept the major indexes on the plus side by over 1%.

While this rebound, after five days of losses, pushed the S&P; 500 back above its 50-day moving average by a slight margin, much more upward momentum is needed to restore faith in that this rally is nothing but another head fake.

Supporting the upside move were decent earnings news by Wal-Mart and Home Depot along with strength in manufacturing and less worry about Europe as Ireland was able to sell some $2 billion in bonds without any problems.

I would not read too much into any market moves until after Labor Day, since many Wall Street players are on vacation, which lowers the volume and exaggerates day to day activity. I expect this range trading to continue.

Yesterday’s early morning sell off was met with some bottom fishing, the markets rallied, fell back and ended up just about unchanged.

Bonds continued their upward move, gold (incorrectly quoted above) gained almost 1% while oil dropped again. We’re still in no man’s land as far as domestic equities are concerned, which makes it a moot point to take any new positions here.

The best news of the day was the fact that the markets did not fall apart after a weak opening. Overall economic news included a weaker than expected Japanese GDP, slowing domestic manufacturing orders and low builder sentiment, which simply confirms that there is not a lot of growth potential out there.

The economy is faltering albeit at a slow pace, which means that bulls and bears will still have to battle it out before a winner can be announced. Right now, bond funds/ETFs are the place to be as they seem to display the only clearly definable upward trend.

With the bursting of the credit bubble, and the so far unsuccessful attempts by the Fed to reignite inflation, a deflationary scenario a la Japan seems to be a real possibility.

In any economic environment, there will always be investment areas that will benefit by displaying upward momentum. ETFtrends had some thoughts on the topic in “ETFs to Tame the Deflation Monster:”

Deflation appears to be posing a bigger and bigger risk to markets and investors should know how to deal with this market condition with exchange traded funds (ETFs) if it becomes a reality.

• iShares Barclays 1-3 Year Treasury (NYSEArca: SHY)
• WisdomTree Dividend Top 100 (NYSEArca: DTN)
• ProShares Short S&P; 500 (NYSEArca: SH)
• ProShares Short MSCI EAFE (NYSEArca: EFZ)

While these ETFs may present some good selections for a deflationary environment, they should not be used indiscriminately. First, you have to make sure that their trend is up by verifying that they have broken above their respective trend lines.

Second, while you may be right with your ETF selections long-term, you can always be wrong short-term due to changing market conditions and temporary trend reversals. Consequently, it is important that you employ my recommended sell stop strategy to protect your assets from unforeseen setbacks.

Disclosure: No holdings in above ETFs

Over the past year, much has been written in the mainstream media about the potential for a bond bubble bust. Those who have bet on that scenario by shorting treasuries have suffered big losses as the bond rally, supported by lower interest rates, has actually gathered steam.

The wild card was the fact that, as I posted yesterday, we only had a stimulus induced recovery and not one based on true demand for goods and services. As a consequence, interest rates continued their downward spiral as bond prices rallied and the economy slowed.

The question now is what could bring this bond rally to an end?

The obvious reason would be a real pickup in economic activity, which would cause interest rates to rise over time. While possible, I simply can’t see it happen given the current back drop.

Through my lens, we are far more likely to see further weakening in GDP during the second half of this year as opposed to a recovery. The Fed even has said this much and, while the bond market has caught on, the equity market still has not gotten the message. Once it does, increased downside risk will come into play, and a move back into bear market territory is a distinct possibility. That would translate into low interest rates staying with us for the foreseeable future.

Another factor that eventually could bring this bond rally to an end is the continued tremendous borrowing appetite of the U.S. government to finance its ever rising deficits. With no serious deficit reduction efforts in place at this time, those who buy our bonds may eventually demand higher rates of returns due to increased risk causing bond prices to falter. While this may be years away, it should be a concern nonetheless.

Some have argued that inflation will eventually cause interest rates to go up, but that scenario is very unlikely as the odds are increasing that we will moving into a Japan like deflationary environment.

Then there is always the unknown event that can wreak havoc with any of the above. From a practical investment point of view, and to guard against the unforeseen, I treat our bond holdings just as I do equities. I follow their trends and use a trailing sell stop (5% for bond funds) to be executed should the need arise.

We are living in a very uncertain economic environment with no clear direction recognizable on the horizon. No one can predict the future, so it pays to be cautious by using a sell stop discipline, just in case things turn out opposite of what you had anticipated.