I never did the traffic watch thing so cannot comment. I have however allowed pilots to fly with me while I ferry aircraft to contracts. They can do all the hands on, (I start the aircraft however---and if I am not comfortable with them doing it, I will also do the take off and landings).
They can log all the time they are flying---normally about 15 hours per ferry---but then again, I hold a CFI, so the issue does not come up. There is also no question as to who is "responsible" for the aircraft either. This matter was a matter for the NTSB law judges a few years ago, and is still used as precedent today.
Determining who is the PIC on a supposed training flight is a factual issue depending upon the stories of the parties involved. If a CFI gives, or agrees to give dual, then in the event of an accident or enforcement action for a violation, the FAA will probably go after the CFI, using the rationale in Walkup, below.
In determining whether the CFI aboard the aircraft was the PIC (in this case, subsequent to an accident, the CFI denied it) the judge in Administrator v. Walkup, 6 NTSB 36 (1988) said:
"... Similarly, the amount of time or whether the person is current and qualified would not in and of itself be dispositive. You could have a 15,000 hour Captain for one of the major airlines but if he's transitioning up to a 767, when he's being given instruction, he is still the student and the instructor pilot is the individual who is pilot-in-command of the aircraft." ...
"... Even if one is current and qualified, if you don't feel comfortable about doing particular types of maneuvers, whether its take-offs and landings or chandelles or whatever if you ask the flight instructor to check you out and to give you comments to improve your performance you are receiving flight instruction."
In perhaps the most important reasoning of the case (for CFI's), The judge in Walkup continued:
"... The mere fact of holding designation as certificated flight instructor doesn't mean that you are, ipso facto, pilot-in-command if you're aboard the aircraft. That is, possession of that certificate doesn't magically convert you into pilot-in-command as soon as you step aboard any particular aircraft, even if it is one in which you are type rated or current in. What makes the flight instructor the pilot-in-command is when he assumes that position as pilot-in-command by giving or agreeing to give flight instruction. "
This case is still valid precedent and has been cited twice since then in other NTSB certificate enforcement actions. Of course, the Walkup decision is for FAA/NTSB ADMINISTRATIVE action against a pilot. In the event of CIVIL action in tort against a pilot for negligence, the situation is much more bound on the facts (who was at the controls, who was the better qualified pilot, who was directing the flight, etc.). The result of a lawsuit in tort for the same event against a CFI pilot may be completely different from the NTSB finding, and often is, especially in a comparative fault or contributory negligence jurisdiction.
Assuming that neither pilot holds a CFI, they would have to share the logging of flight time. Now my brain hurts....