No Load Fund/ETF Tracker updated through 5/20/2010

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

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

During one of the more volatile weeks on Wall Street, the major indexes lost 4-5% with major support levels now having been broken.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains above its trend line (red) to the upside by +1.29% (last week +2.57%) keeping the current buy signal intact. The effective date was June 3, 2009.



The international index broke below its long-term trend line by -4.72% (last week -1.25%). A Sell Signal was triggered effective May 7, 2010. We are no longer holding any positions in that arena.

[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Bouncing Off The 200-day Moving Average

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Yesterday, the markets deteriorated sharply at first with the S&P; 500 finally finding support at its 200-day moving average of 1,101, which turned out to be the low of the day. The support level held for the time being, and we bounced off and ended up closing only 0.51% lower.

It could have been far worse, as major selling would have set in had this level been violated. As it stands right now, this bounce gave us a little breathing room, but there is a good chance that this level will be tested again.

The culprit for the continued selling spree came in form of an announcement from Germany last night as they set in place specific rules to ban naked short selling of stocks of key banks and European Government bonds.

As we’ve seen in 2008, when similar bans were introduced here in the U.S., the downward trend was stopped temporarily, but eventually momentum continued fast and furious to the downside causing heavy losses. We’ll have to wait and see if things will play out the same in euro-land.

With yesterday’s action, our domestic Trend Tracking Index (TTI) moved a little closer to its long-term trend line, but still remains 2.12% above it, which means that technically we’re still in bullish territory.

I would consider the current period neutral and a time of transition. In other words, directional momentum has changed and most of our sell stops, with the exception of some sector funds, have been triggered. This is not the time to be a hero and add new positions hoping for a rebound, since downside risk is simply too great.

Should the 200-day moving average on the S&P; 500 (~1,100) not hold, there is no way of knowing how far south this market can go. As long as the situation in Europe does not show any signs of improvement, or at least better unity in combined efforts, we have to live with the current volatility and the distinct possibility that this bull may turn into a bear.

S+P 500 Heading Towards The 1,100 Level

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The Euro got hammered yesterday giving our long positions in UUP a nice pop. That’s about the only positive that can be said about the market. The S&P; chart looks like a black diamond ski slope and price action seems to be headed towards the 1,100 level.

With many professionals watching the 200 day moving average on the index (1,101) for directional clues, we are now within 20 points of breaking below it, which would be a bearish sign and most likely accelerate the downward trend.

Our domestic Trend Tracking Index (TTI), which moves slower than the S&P; 500, has now moved within 2.36% of breaking below its own long term trend line. Long before this happens we will have been stopped out of our remaining equity positions.

While it’s always possible that the 1,100 level may function as support and trampoline the markets higher again, I would not hold my breath. Fundamentally, the news out of Europe is anything but encouraging, with daily surprises on the menu, so be sure to watch your sell stops and execute them when necessary.

We’re currently in an environment where it’s better to be safe than sorry.

Who Is Affecting Who?

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Reader John had this question regarding the interaction of world markets:

The markets in China, Japan and Europe all trade and close before ours. I’ve often wondered if the trading on our markets is affected by the results in these other markets, like an “early warning system”. I would like your opinion on this, realizing that’s there is no absolute “yes” or “no” answer.

This is one area where I have not found any consistent relationships. Sometimes they react to our previous day’s events, and sometimes they don’t; very rarely are they front runners. Even watching the futures at night is not a guarantee that the markets will open in the direction futures trading indicates.

Last Sunday night was a good example. The Asian markets were down sharply, and the domestic futures pointed to a lower opening with the Dow trading down 120 points. When the markets actually opened, we were bouncing around the unchanged line with no clear direction apparent until later on.

While I have not measured this exactly on a day to day basis, from my general observations, the overnight effect one market has on the others appears to be totally random.

Limited Risks And Limited Returns

Ulli Uncategorized Contact

A new type of fund called “target band” fund is supposed to smooth the ride on Wall Street as MarketWatch submits in “Putting a speed limit on risk and return:”

We have target-date funds. We have target-risk funds. We have absolute return funds. And now — just in time for this year’s market volatility — introducing “target band” funds.

Target band funds use options to place a “collar” on a portfolio’s losses and gains. They’re not available to the masses just yet, but Kent Smetters, president and founder of Veritat Advisors, plans to roll out these funds — which are now in beta testing — this summer. If ever there was a time for such funds, especially for those want to preserve wealth and have some certainty around their portfolio outcomes, now would be it.
…

In the case of Veritat Advisors, Smetters is creating a family of funds that would offer investors the chance to put targets on, or a band around, how much they might lose or make in any given year. Investors, for example, will get to choose whether they want to lose no more than 10% and make (currently) as much as 12% (the TB10), or lose no more than 20% and make as much as 25% (the TB20).

Smetters will do this by investing in the Standard & Poor’s 500-stock index and then using a zero-cost collar. He’ll be buying out-of-the-money, one-year puts for downside protection and selling out-of the money, one-year calls that will pay in full for the put. Here’s how Smetters describes it: “Veritat Advisor’s ‘Target Band 10%’ protects against losses above 10% by overlaying the S&P; 500 with one-year option contracts,” he said. “This insurance is funded by forfeiting positive gains above a certain threshold, currently about 12%. The performance of the client’s account, therefore, is effectively ‘banded’ between a loss of 10% and a gain of about 12% per year.”

In the old days, sophisticated investors might have referred to this as a version of portfolio insurance. But portfolio insurance, according to Smetters, has negative connotations. What’s more, it’s not really what he’s creating at all. “Unlike previous attempts at ‘portfolio insurance’ or ‘stop loss’ orders, the TB10 risk management system does not rely on markets remaining liquid,” he said. “All of the TB10 protection takes the form of absolute contracts that are backed by the Chicago Board Options Exchange.”
…

As for whether target band funds will sell? In a world where investors buy target-date funds and target-risk funds and absolute return funds, the short answer is yes. However, just as happened with those funds, a bit of investor education will be in order. And explaining how target band funds work without getting too deep into the weeds could be a challenge, according to Sullivan, who — in the interest of full and fair disclosure – also sits on Veritat Advisors’ board of advisors.

The other issue has to do with human behavior. Investors say they would be happy to buy a fund that puts a band around their returns and losses. They’ll soon get a chance to actually do what they say.

[Emphasis added]

Leave it up to Wall Street to come up with a fancy new product. To me, it seems like a bad idea to be limited with upside gains of 12% while having a downside risk of 10%. That’s not a good risk reward ratio.

Here’s how we accomplish the same thing but with unlimited upside potential using trend tracking.

Upon executing the purchase of an investment, we immediately establish a trailing sell stop point of 7%. In other words, as prices rise, the stop loss point rises as well. This essentially fulfills 2 functions:

1. It limits our losses in case the trade goes against us, and

2. It locks in our profits if prices continue to rise until the trend ends when it bends, and we get stopped out.

It couldn’t be any simpler; your downside risk has been clearly defined and your
upside potential is limited only by the duration of the major upward trend.

Sunday Musings: Revisiting The 1,000 Point Plunge

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The NYT reports that “Computer Trades Are Focus in Wall Street Plunge:”

Investigators seeking an explanation for the brief stock market panic last week said Sunday that they were focusing increasingly on how a controlled slowdown in trading on the New York Stock Exchange, meant to bring about stability, instead set off uncontrolled selling on electronic exchanges, Graham Bowley and Edward Wyatt write in The New York Times.

It was an unintended consequence of a system built to place a circuit breaker on stocks in sharp decline. In theory, trades slow down so that sellers can find buyers the old-fashioned way, by hand, one by one. The electronic exchanges did not slow down in tandem, causing problems, according to two officials familiar with the investigation. (The Street also named a Chicago company that services hedge funds as being behind some of the unusual trading, a charge that the company denied.)

That could mean that the computers first flooded the market with sell orders that could not be matched with buyers. Then, just as quickly, many of these networks withdrew from trading. The combined effect might have set off a chain reaction that sent shares of many companies spiraling during the 15-minute frenzy.
…

It is not known exactly what caused the initial sell-off in the blue chips, but investigators say the earliest sign of trouble they have found was a sudden drop in the value of a futures contract on the Chicago Mercantile Exchange, based on the Standard & Poor’s 500-stock index. That pushed down a broad array of stocks in that index, all of them traded on the New York Exchange and other major exchanges, and sent many stocks on the New York Exchange into slow mode.

Ever since computerized trading became dominant in the nation’s stock markets in recent years, market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets. This appears to have happened last Thursday, when stock prices plunged and the Dow Jones industrial average fell roughly 600 points in a few minutes.
…

Investigators are now focusing on the events of last Thursday, when several hundred stocks on the Big Board, including five major stocks that make up the Dow — Accenture, Procter & Gamble, 3M and two others — went into slow mode.

This decision forced a switch to slow-motion trading as traders on the floor tried to arrest the decline by manually seeking out bidders. But that did not work, because trading shifted immediately to broader markets controlled by computers, where the plunge continued.

Regulators and the exchanges continued over the weekend to review the tapes from the millions of trades made last Thursday. The investigations are looking at what effect the decision to halt trading in these stocks in New York had on broader market confidence — and on algorithms used by computerized traders.

The scale of the shutdown on may have been a new phenomenon for these computer systems. They may also have been programmed to shut down in such a cataclysmic moment of stress, which would have had a further cascading effect in withdrawing bidders from the market and putting further intense downward pressure on prices.
…

The S.E.C. has been warned in recent months by market participants, publicly traded companies and other regulatory agencies that the lack of coordination between trading platforms, as well as the expansion of high-speed trading in alternative markets, has furthered systemic risk, encouraged regulatory arbitrage and increased opportunities for market manipulation.

The staff of the Financial Industry Regulatory Authority wrote to the S.E.C. in April that “no single regulator has a full picture of all trading activities in the U.S. equity markets.”

[Emphasis added]

While this is very interesting, it remains to be seen if the S.E.C. will now actually step forward and address this issue to prevent a recurrence in the future. The people who were most hurt in this one day breakdown were those who had placed their sell stops ahead of time and got filled at far away (undesirable) prices.

Why? Remember, you can place a sell stop at a limit price but, once that price has been reached, your order becomes a market order and who knows what price you will get in a fast moving market. I discussed these issues and others in “Front Runners.”

This is one of the reasons why I have been harping on using day-ending prices only to determine whether your sell stops have been triggered or not. If they have, only then should you place the order to sell the next day after the market has opened.

This eliminates front running and getting caught in a huge market downdraft. There are only a few things you have control over when investing; this is one of them, so use it and increase your chances of not falling prey to vagaries of Wall Street.