What's new this week?

Another installment of our founder and President Frank Minssieux' trend-following column was published in TheStreet.com this week. (Note that the list of past public mentions of TimingCube can be found on the "In the News" page.)

 TheStreet.com
The Right Way to Diversify - Read the article here
October 5, 2006
By Frank Minssieux
In his latest column Frank discusses how trend followers can use diversification techniques to boost investment performance instead of the traditional risk management.

Signal Update Current Signal Performance as of Signal Type Trade Date Index Return since issued Nasdaq 100 Russell 2000 S&P 500  Market Update It has been a week which saw stocks post strong gains and the Dow Jones Industrial Average make history by finally closing above its January 2000 high. After retreating Monday in the continuation of last Friday's weakness, the major averages stabilized Tuesday and then vaulted higher the next day after Federal Reserve Chairman Ben Bernanke made positive comments about the shape of the economy. The gains were broad-based and occurred on expanding volume, showing that institutional investors are grabbing shares and fueling the continuation of the rally that started early August. Stocks were able to build on their momentum by moving higher again Thursday. A weaker-than-expected September employment report provided the perfect excuse to take profits Friday. The markets closed slightly lower as a result, but by and large managed to retain most of their weekly gains. The Nasdaq 100 and Russell 2000 respectively gained 1.86% and 1.96% on the week. For its part, The S&P 500 closed 1.03% higher. All three indexes still rest above both their respective 50-day and 200-day exponential moving averages (EMAs). Our Buy signal remains in effect.  Trend Timing School Stagflation Also known as the "s" word, stagflation is a dirty word on Wall Street, and most economists would rather avoid using it altogether. A word you will never ever hear in the mouth of a government official. Yet, however reluctantly, a growing number of economists have been getting increasingly nervous in the face of mounting evidence of slowing growth and rising inflation. They argue that, despite the recent pre-election window dressing, with the combination of higher oil and commodity prices, rising rates and a nose diving housing market, a recession is nearly certain. And a growing minority is predicting a prolonged stagflation era. If true, this would hurt the dollar and bring about a bear market, both of which are threats to our wealth. The word stagflation comes from the combination of stagnation and inflation. Quite simply, stagflation is a period combining the twin perils of slow economic growth and price increases, or inflation. The best historical example of stagflation occurred during the 1970s. The period was dominated by major world economies going through deep recessions, soaring unemployment and double digit inflation and interest rates. Oil prices shot up dramatically as the 1973 oil crisis unfurled and culminated in the Arab oil embargo, and again in 1979 during the Iranian revolution. The geopolitical situation and Middle East tensions which existed in those days are not very different from what we have today, at least in terms of the odds favoring much higher energy prices. During the seventies, as the effect of rising inflation accumulated, interest rates went through the roof. The rate on a six-month certificate of deposit (CD) rose to over 15%, but if you consider that inflation approached 15%, the real rate of return was quite meager. Rising interest rates and higher cost of credit took their toll on individuals and businesses alike. With the economy going nowhere, corporations were struggling to adjust to a low growth environment in which costs constantly rise but price increases are throttled by competitive forces. Increasing costs and decreasing business activity led to lower corporate profits, which in turn resulting in stagnant company valuations. Not surprisingly, the stock market went nowhere. The Dow Jones Industrial index ended the decade less than 4% from where it started. While flat for a decade and agonizingly frustrating for buy and hold investors, the period was not without its opportunities for astute timers. The Dow Jones experienced some serious up and down trends during the period which swung it from down 30% to up 30% from the flat line. Today, the fear is that with creeping inflation, only made worse by an explosion in money supply, the Federal Reserve after a short break will be forced to resume raising rates and force an additional drag on an already slowing economy. If you believe the current 5.25% is high enough, remember that the Fed Rate once reached a high above 22% in 1981! Just imagine where your Adjustable Rate Mortgage would be then. We would be remiss not to point out that the flip side of this story is that the Government and a fair number of well respected economists argue that on the contrary the economy is not headed for a recession but is transitioning to a slower but sustainable expansion, the proverbial soft landing. We do not know if stagflation or soft landings lie in our future, but we know it is dangerous to ignore history and, just in case, we want to be prepared and know exactly what must be done to protect our wealth from the threat of inflation. What really interests us with our Trend Timing wealth building approach is not how many more dollars are in our accounts but how much more we can buy with the money we have. This means we have to overcome the negative impact of inflation on our investments. Of course, for any money you want to place in income generating debt instruments, there are many sorts of inflation-linked securities, CDs and bonds that are issued by various corporations and government entities. For our part, the trend following approach we implement relates to the stock market and not debt instruments. Trend Timing lets us avoid the losses associated with the inevitable bear markets, or even profit from them. Also, the World Index Ranking allows us to benefit from the strongest markets, wherever they may be.  FAQ of the Week Question: Should I shift my investments to the Dow Jones Industrial? For much of the week the financial media have been going wild about the Dow's record highs. They are screaming "change in leadership" and point out that other indexes are still far below their highs, with everyone flogging the Nasdaq Composite for still standing at less than 50% of the high it set during March of 2000. Yes, the new all-time highs the Dow Jones Industrial Average index is setting lately are impressive but they can be misleading as indicators of relative performance. Looking at Chart 1 we can see that in absolute terms, for a buy and hold investor, the Dow Jones Industrial is outperforming the Nasdaq Composite so far in 2006, at about 10% versus 4%. Amongst U.S. indexes the Dow Jones clearly has the strongest momentum according to our World Index Ranking. It is worth noting that all of the difference occurred since May and can be attributed to the Dow holding-up better during the summer decline. However, when timed with the signals of our current Model, the positions reverse with the Nasdaq Composite returning 20.05% with a Long and Short strategy versus 18.85% for the Dow Jones. In contrast the Russell 2000 heads the class with 29.14%. Chart 1: Dow Jones Industrial versus Nasdaq Composite 2006 year-to-date performance For buy and hold investors, shifting to the relative safety of the 30 blue chip stocks in the Dow Jones Industrial can be wise at the end of an economic and stock market cycle because they are expected to outperform other indexes during bear markets, or more precisely to lose less. For us Trend Timers, having the luxury of down side protection that comes with Sell signals, we do not have to resort to seeking the index which will lose the least and can concentrate on the ones most likely to provide the best timed results. Nevertheless, diversification is always a good thing, and if you believe that we are nearing the end of a market cycle and want to play it conservative, you can certainly include the Dow Jones in your mix. Warm wishes and until next week. The TimingCube Staff