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FirstAlert(tm) Daily 3/31: Your Mutual Fund Manager May Now Be A Market Timer

- Analytical Commentary -

March 31, 2010 (FinancialWire) (By Dr. Joe Duarte) — If you’ve been scratching your head about the steady, and somewhat predictable performance of exchange traded mutual funds (ETFs) such as the S & P 500 SPDR (NYSE: SPY), maybe you should be looking at what’s inside your good old-fashioned mutual fund, such as the ones used in many 401-k plans.

A steady advance in the stock market is due to one thing, and one thing only: steady buying, such as the steady buying that is the hallmark of mutual fund managers. These deeply pocketed guys often made decisions based on orders from a committee or a group of managers.  And in the old days, they used to look at good old-fashioned investment criteria, such as valuations, company managements, and earnings and sales performance of each individual company that they put their money into.

But lately, especially after the subprime mortgage crisis and the ensuing implosion of the markets and the global economy, there are indications that things might have changed. In fact, mutual fund managers are reportedly relying on technical analysis a lot more than they used to. And technical analysis is all about the trend, and timing the markets, which makes exchange traded mutual funds natural vehicles for investing, since they are a ready made portfolio. In other words, instead of doing a lot of homework on individual companies, all you have to do is buy an ETF that fits your needs, and that is trending higher. If your manager has seen the light, this may well be what he’s been doing lately.

According to CNBC.com: "The debate over whether buy-and-hold investing makes sense in such an unpredictable market has made its way the mutual fund arena, where managers are increasingly turning a skeptical eye toward the traditional strategy." In fact, it's possible, although it’s hard to prove, that the increasing number of ETFs, and the higher trading volume that is seen in them on a frequent basis, is a direct result of money managers timing the markets and using them as their trading vehicles. According to CNBC.com: '"There's certainly more interest in tactical allocation. We've seen a growing number of funds doing that," said Russ Kinnel, director of fund research at Morningstar. "Part of the reason ETFs have grown is that they are catering to people who don't want to buy and hold."'

What we're seeing is a natural adaptation to market timing based on the intermediate term. Mutual funds are now likely to be using moving averages, support and resistance levels, and relative strength indicators as part of their strategies, rather than relying on valuations and other fundamental data as their major analytical tools.

That answers the question as to why this market has been trending steadily and why the 20- and 50-day moving averages have been reliable support levels and entry points since the market bottomed in March 2009.

What should be of concern to individual investors is whether this is now going to become the trading method of the mutual funds who wield large amounts of capital on a regular basis. In other words, what trends up for a long time, can also trend down for a long time.

So far, this market has been extremely textbook from a technical standpoint. What should work has worked, since the March 2009 bottom. That means that investors should be paying attention to a time when what works now, is no longer working.

Mutual funds are reportedly market timers and by default, trend followers. That explains why this market has been so comfortable for those of us who use that kind of trading methodology.

The last two rallies and corrections have conformed to very straight forward analysis. Now that the market looks to be looking to enter some sort of consolidation, it will be very important to see how it acts.

If what has worked over the last several months, from an analytical standpoint, stops working, it will signal that fund managers are no longer following the market timing model.

However, if the market remains orderly, based on traditional technical models, the trend toward timing and trend following will be intact.

[Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte. Additional insight and commentary from Dr. Joe Duarte (http://www.joe-duarte.com/), can be found by visiting Dr. Joe Duarte’s “Market I.Q.’ (at http://www.joe-duarte.com/free/order_choices.asp), Duarte’s “Intelligent Forecasts” (at http://www.intelligentforecasts.com), as well as by reading Duarte’s books (available via http://www.amazon.com/), which include “Market Timing For Dummies”, Successful Energy Sector Investing," "Successful Biotech Investing", "Successful Energy Sector Investing” and "After-Hours Trading Made Easy" (co-authored by Duarte). In addition to regularly contributing to Investrend Weblogs (http://www.investrendweblogs.net/jduarte/), has logged many appearances on CNBC and is a frequent radio guest. One of CNBC's original Market Mavens, Dr. Duarte has been writing about the financial markets since 1990. He is a featured columnist on Stockwatch.com. His articles and commentary have been featured on Marketwatch.com, Barron's, Smart Money, Medical Economics, and in Technical Analysis of Stocks and Commodities magazines. In 2003, Doctor Duarte received second place, in the professional section, of the Medical Economics Investment Challenge with a 12-month return of 42%.]

The FirstAlert(tm) “Money Index” is an indicator of the depth of market direction or indirection. While not always including the same stocks, the combined NYSE, NASDAQ and AMEX 25 Most Actives and combined NYSE, NASDAQ and AMEX greatest Percentage Losers and Percentage Winners (weighted against pure monetary loss/gain) indicate the direction in which the mass of money is flowing, as well as the general focus of the market. The most recently published FirstAlert(tm) Money Index Synopses are accessible via FinancialWire.net (at http://www.financialwire.net/?s=index+synopsis). The data providing the basis for the FirstAlert(tm) Money Index is provided courtesy of Stock Smart, and complete Stock Smart charts and closing summaries are directly accessible via a dedicated Investrend.com webpage (at http://www.investrend.com/fa-index).

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Today in History: The Kingdom of Great Britain ordered the port of Boston, Massachusetts, closed in the Boston Port Act in 1774. Commodore Matthew Perry signed the Treaty of Kanagawa with the Japanese government in 1854, opening the ports of Shimoda and Hakodate to American trade. The Intercollegiate Athletic Association of the United States (later National Collegiate Athletic Association) was established in 1906 to set rules for amateur sports in the United States. The United States took possession of the U.S. Virgin Islands in 1917 after paying $25 million to Denmark. Daylight Savings Time went into effect in the United States in 1918 for the first time. The 14th Dalai Lama, Tenzin Gyatso, crossed the border into India in 1959 and was granted political asylum. Actor Brandon Lee was accidentally killed in 1993 during the filming of “The Crow.” Netscape released the code base of its browser in 1998 under an open-source license agreement, thus creating Mozilla Foundation, a non-profit corporation to oversee the development of Mozilla.

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