Below is a video by Peter Navarro which explains how he uses a select group of international exchange traded funds to better help him time trades in the domestic market, in particular, the S&P 500 (SPY). The three international indexes he follows include the FXI (following 25 large and liquid Chinese companies, sometimes called the Dow of China - betting that as China goes, so goes Asia), the IEV (following the S&P Europe 350 Index), and the ILF (following the S&P Latin America 40 Index).

While I have not back-tested these specific indexes for providing leading signals, the video does remind us of the benefits of looking at other data for helping one to spot trends and even forecast movements in domestic indexes. A number of years ago I was engaged in some research that was looking to see if the S&P 500 could be used to help predict trends in various international indexes. After all, the feeling was that as the U.S. goes, so goes the rest of the world - or so we assumed. As our research progressed, and we began doing correlation studies, principle component analysis, information-based data mining, and everything else we could throw at the problem, it became clear that in many instances we had it backwards. The international indexes were more predictive in helping forecast the U.S. market. While some of these correlations broke down over time, it nonetheless helped send the message that we could not assume that the U.S. markets were always driving the world markets, or that the influence was always consistent, in either size or direction. While this is more clear today, and less of a surprise, it still seems as though few traders and investors use such information. The three international ETFs mentioned above are a good place to start your own studies.

Actively managed mutual funds have done well this year, rising 9.9% through June 10, compared to the S&P 500, which was only up 5.3% over the same period (see WSJ article). This comes after a year in which the average stock fund was down 38.9%, dropping 1.9% more than the S&P 500. What is causing the out-performance? It appears to be growth stocks, which are up approximately 11% this year, compared to less than 1%gain for value stocks. Many widely-held tech stocks, such as Apple (AAPL), Cisco Systems (CSCO), Google (GOOG), Hewlett-Packard (HPQ), and Microsoft (MSFT) have helped juice returns. Nonetheless, even with the current out-performance, active funds are still losing business to index funds as investors continue to remember their poor fund performance in 2008 (really poor in some instances).

According to a recent WSJ article, in the wake of the recent Madoff and Stanford scandals, hedge fund investors have been requesting their money back at an increased pace over the last few months. Morgan Stanley analysts are forecasting that assets under management could fall by another 30 percent before the year is over. This follows an already 20 percent decrease at the end of 2008, reducing total hedge fund AUM to below $1 trillion. The withdraws are getting large enough that some funds are now left with only illiquid assets, most of which have to be sold at depressed prices. Increased selling has certainly help pressure the market recently, and will likely continue to do so if the hedge fund redemption forecasts from Morgan Stanley are correct. Having the DJIA fall to 6,000 and the S&P 500 fall to 700 would certainly seem more likely under such intense and systematic selling.

Although the DJIA and S&P 500 were each down over 10 percent in January, the Credit Suisse / Tremont Hedge Fund Index was up 1.09 percent (also see Investment News article). The January returns were the first time the index was up since May 2008. Top strategies for the month were convertible arbitrage (returning 5.72 percent), dedicated short bias - no surprise (up 3.69 percent), multi-strategy (up 3.35 percent), and global macro (up 2.33 percent). Managed futures took the biggest hit for the month, falling 0.56 percent.

There is an old market rule of thumb that states as "January goes, so goes the year." Often the January Indicator pertains to the first five days of January, other times to the entire month. This year it may not really matter. As it turns out, this is the worst January on record for all of the major indexes, except the Nasdaq - and even the Nasdaq is nothing to write home about. The DJIA was down 8.8 percent, the S&P 500 was down 8.5 percent, the Nasdaq was down 6.2 percent, and the Russell 2000 was down 11.0 percent. The Dow Transports, which are used by some as a barometer and forecast for movement in the industrials and the broader market, was down a whopping 16.0 percent. Certainly, not an encouraging start to the new year.

On the lighter side, at least this weekend we have the Super Bowl to enjoy, along with the Super Bowl Indicator to watch - which states that "a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in the stock market for the coming year, and that a win for a team from the old NFL (NFC division) means the stock market will be up for the year." Given the market action over the last six months, even those market participants that think technical analysis is irrelevant, and indicators are just plain silly, may be saying "Go Cardinals." Yes. I know. I am grabbing for straws.

Note (update): Not that it matters, but apparently the Steelers and Cardinals are legacy teams from before the NFL’s merger with the AFL. Therefore, according to the SB indicator it should be a good year for stocks regardless of who wins the game. Of course, if you are investing based on this indicator, then maybe you should move your money to Treasuries (well, then again .....).

Some leading technical analysts are continuing to be worried about the major indexes potentially falling another 30 percent. Ralph Acampora believes that if the DJIA falls below the low of 7,552.29 it reached on November 20, that it could fall further to 6,000 (see Bloomberg article). John Murphy also believes that the November lows represent "a very, very significant area," since this is near the point where the market began to recover when the bear market ended in 2003. If we are to break these levels, the trend is expected to become very negative. Recent market action has not been encouraging. Louise Yamada expressed similar concern during an appearance on Fast Money late last year, where she also expressed concern that the DJIA could fall to 6,000. She had successfully predicted before the recent sell-off that the Dow could fall to the 8,000 range. Just last month, her website posted the following:

"The overall market picture still looks troubled. Both the S&P 500 and the DJIA have seen each recent rally (and potential bottom evidence) fail at a slightly lower peak. This progression of lower highs is evidence of supply -- price cannot rise to a slightly higher level because supply is being sold into the rally. ...... The recent pattern of sellers entering into each rally is characteristic of a downtrend, i.e., the failure of the rallies to get above the prior peak. In the study of supply and demand, which is the basis of technical analysis, this pattern represents aggressive supply. Contrarily, in a bottoming process or in an uptrend, higher lows are followed by higher highs, representing aggressive demand. .... Now, however, there is a confluence of sectors rolling over together, which is problematic. The majority of stocks are showing topping patterns."

Technicals are never the whole story, but they certainly help you to know where you have been, and how much trouble you may have getting to where you want to go. The data is certainly not encouraging for the bulls.

The option strategy of buying stock and then writing call options against it - known as buy-write - is still generating some of its highest premiums in over 20 years (see WSJ article). By using a hypothetical version of the strategy using the BMX index as a comparison, the CBOE found that a buy-write strategy would have produced an 8.1 percent gross monthly premium in November, topping the second highest recent premium of 7.1 percent generated in October just a month earlier. Since June 30, 1986 until the end of October, 2008, the strategy has generated an average annualized return of 9.2 percent, while the S&P 500 index produced a return of 8.7 percent over the same time period. While volatility will not always be as high as it is now, nor will it always generate healthy option premiums and a nice return over the S&P 500, even an average 0.5 percent extra return over more than 20 years starts to look pretty good - not to mention compounds into some significant cash.

For those a little intimidated by option strategies, keep in mind that with a buy-write strategy your obligation for the written call is covered by owning the stock (a covered call). Therefore, you don't have the same potential "infinite" loss that scares away many investors from writing options. Of course, there are downsides. Besides the fact that your long position could decrease in value, an additional downside is that your long stock position could be called away if the stock produces a significant move - causing you to potentially leave some money on the table. Nonetheless, the strategy forces a sell discipline, which for many is the most difficult part of investing. For instance, if a 3-month call has an exercise price that is 20 precent away from the current price of the long stock position, then the stock could be called away once its price rises more than 20 percent in 3 months. Certainly disappointing when the stock moves much more than 20 percent, but you still lock into 20 percent (plus the premium) in 3 months or less. Not bad in my book. In the mean time, the premium provides additional downside protection, just in case you end up not picking a winner. For those interested, some additional information on buy-write strategies can be found here, here, and here.

Banks are continuing to ask for more collateral to back past hedge fund lending, causing more funds to liquidate their positions (see WSJ article). When added with investor redemption, bank-induced liquidation is forcing hedge funds to step-up their deleveraging. Such selling is continuing to put pressure on the market, generating more requests for bank collateral and investor redemption, in what amounts to a catch-22 that continues to spiral the market downward. Such selling has been occurring for a while, as funds have been unwinding exposure to financial and energy stocks, both of which continue to suffer as crude oil continues to drop, and the credit crisis continues to unfold. While Hedge Fund Research recently reported that the level of hedge fund market exposure has decreased by one-third over the last year, I suspect that this still may not be enough. As mentioned by Antonio Munoz-Sune, head of the U.S. for fund of funds EIM: "The combination can take anyone down." Unfortunately, it is difficult to tell where we are in the hedge fund closing and deleveraging process, with many hedge funds still appearing to use every rally as an opportunity to sell. I suspect that until we see the VIX approach more normal sub-30 levels, stop seeing the DJIA and S&P 500 Index post intra-day percent swings in the high single digits, and see crude oil stop falling in price, it is unlikely that the market will stop feeling the effects of hedge fund selling, allowing for a long-term and lasting rally. Like most bottoms, we won't know for sure that it has occurred until we see it in the rear-view mirror, but I will be watching the VIX, the price of crude oil, and the Dow Jones and S&P 500 index percent swings for clues.