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Signal Update |
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Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
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World |
U.S. |
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Nasdaq
100
(QQQQ)
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Russell
2000
(IWM)
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S&P
500
(SPY)
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Market Update |
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Markets
experienced a sizable rally this holiday-shortened week, despite
an initial trading session that saw stocks lose ground amid
growing tensions in the Middle East and between India and Pakistan.
Of the main indexes, the Nasdaq Composite
was the hardest hit as it lost
1.3% Monday. Stocks reversed course the next day, after the
Treasury Department announced that it would provide $5 billion
to General Motors' troubled financing arm. Also encouraged by
a better-than-expected reading for the Chicago Purchasing Managers
index (PMI), investors reacted by sending the markets higher,
with all major averages posting gains in excess of 2%. Wednesday
marked the last trading session of the year. Stocks were able
to close 2008 on a positive note by posting modest gains on
the day. Still, 2008 will be remembered as one of the worst
years ever for the market: the Nasdaq Composite suffered its
worst loss on record last year with a 40.5% plunge while the
S&P 500's 38.5% annual loss was its third-biggest. As for the
Dow Jones Industrial Average, it plunged 33.8% in 2008, its
worst showing since 1931. Obviously relieved that 2008 was over,
investors returned from the January 1 holiday with a positive
mood to send stocks significantly higher Friday, despite the
worst reading ever for the ISM index of manufacturing activity
in December. The Nasdaq Composite gained 3.5% during the session,
capping a strong week for the markets. It should be noted, however,
that the rally occurred on very light volume, which casts doubts
on its sustainability.
The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY)
respectively gained 5.62%, 6.52% and 6.65% on the week. All
3 ETFs have now crossed back above their 50-day exponential
moving averages (EMAs) but remain located well below their 200-day
EMAs.
For its part, our World portfolio posted a
5.91% gain this
week. The portfolio consists of the 5 top-ranked world ETFs
as of December 5, which marked the beginning of the current
4-week holding period. The World portfolio
is being rebalanced today, as the current 4-week holding period
is now over. Please note that since we now have an active Cash
signal, the World approach calls for selling
your holdings if you follow the "Long Only"
or "Long and Short" strategy. Only if you follow
the "Buy and Rebalance" strategy should you
remain invested in the top 5 ETFs, as the strategy calls for
staying invested at all times. Please go to the "Our
Service" page for all the details.
Our current Cash
signal remains in effect.
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Trend Timing School |
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Method
to the madness
2008 is behind us, and many are thankful! Most of us have many
things to be grateful for, good health, family and friends,
a home, a job maybe, because there are many who don't have these
basics this year. Still, many investors are more than happy
to close the door on what has officially been declared the worst
stock market year since the 1930s. We read in the financial
press that $7 trillion of shareholders' wealth was wiped out,
and that is just in U.S. markets. Confirming once again that
world economies and markets remain strongly coupled, most foreign
stock exchanges experienced much the same in what will surely
be remembered as the crash of 2008. In fact, some of the preceding
bull market darlings and high flyers, emerging markets like
Brazil, China, India and Russia, have lost between 55% and 72%.
The year also delivered record levels of volatility with daily
swings of better than 5% common place and most indexes even
registered a double digit day! The straight losses of the buy
and hold investor were exceeded only by quantitative systems
which got tripped up by the unprecedented volatility and experienced
repeated whipsaws and went against the market for most of the
year.
There was no place to hide in 2008. No geography, no industry
sector and no asset class were spared. Real estate and banking:
down. Energy and commodities: way down. With the exception of
the long U.S. Treasuries which have been on fire in the last
few weeks, bonds have been a big disappointment too. There was
nowhere to turn for safety, except cash. As trend timers, we
are very grateful for having been in cash during the worst of
it and for now having that cash available to invest in the profitable
trends we trust 2009 will bring.
As 2008 came to a close just two days ago we need a little more
time to take a final tally, so we are planning the now traditional
"Year in review" edition for an upcoming Weekly Update. Instead,
we will take this time to look forward to the opportunities
and pitfalls 2009 brings and review some of the key principles
and strategies we use to bring some method to the madness of
markets.
Here are some important elements of the method:
- Not
to fall for the temptation of predicting what the market
is going to do next (or believing in market predictions
of others). This time of the year you can read everyone's
projections for 2009: "2009 stock markets: Nowhere to go
but up" or "Much more economic pain seen in 2009". No one
can tell with any accuracy what the future will bring
- Use
an unemotional, unbiased, trend following mechanical model
for guidance and emotional support (we hope)
- Avoid
all major corrections and bear markets and, for those seeking
higher risk/reward, profit from them by implementing a Long
and Short strategy. While we do not attempt to
time every little pullback or even every correction, our
model should continue to protect us from the major ones,
even if it is with a Cash
signal...
- Limit
drawdowns. When a new signal is issued, a 9% stop from the
entry point protects us during the most vulnerable phase.
However, once our investment has grown by 7% or more, it
makes sense to ratchet-up the trailing stop to 15% so that
the decline required to trigger a Cash
signal remains at 9%, as with our original Cash
signal. Once our current position has gained 15% or more,
we are only giving back paper gains, not losing real money
as on entry
- Soften
exposure to any one market or index through diversification.
We have encouraged diversification even amongst various
U.S. indexes because they represent different facets of
the domestic stock market. We also have been strong proponents
of spreading internationally and focusing on the strongest
markets
As some
use this season to make New Year resolutions, may we suggest
to commit, or re-commit, to a long term, all-weather investment
strategy? And to stay disciplined and be patient. Remember
that capital preservation is the first objective of any wealth
building program. Happy and Prosperous 2009!
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FAQ of the Week |
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Question:
Do you recommend +/- 3x leveraged ETFs?
No, we do not generally recommend such highly leveraged investment
vehicles to our subscribers. Note that we are not religiously
opposed to leveraged ETFs as we have even suggested some profitable
ways to exploit them (see "How
can leveraged ETFs reduce my costs?"), but we are
of the opinion that ordinary investors, and we include ourselves
in that number, should for the most part avoid leverage, and
if they really must, they should keep it to a ratio of no more
than 80/20 non-leveraged/leveraged.
In case you are not familiar with the topic at hand, 2x leveraged
ETFs have been around for years, but in November, Direxion
funds became the first to offer 3x funds. These funds seek
to achieve 3 to 1 daily exposure to their respective benchmark
indexes. If their index goes up 1% they go up 3%, or down 3%
for the inverse fund. All of them come in pairs that include
a bullish (+3x) and a bearish (-3x) fund.
The reasons we do not generally recommend broad use of these
highly leveraged funds are:
Warm wishes and until next week.
The TimingCube
Staff
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