TimingCube - 2004 Year in review - Part 2 - 2004 results,Wilshire 5000,compounded losses,Russell 2000,trendless range

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQQ

Note: QQQQ returns are included for continuity sake.

Market Update

There are better ways to start a year! Markets just experienced their most significant pullback in weeks. All kinds of reasons can be given to explain the drop, from oil prices to dollar behavior to inflation concerns, but the fact is that such pullbacks are inevitable after a long multi-month market rise like the one we have just experienced. Most of the damage occurred on Tuesday before indices stabilized somewhat to finish the week in the vicinity of their 50-day exponential moving average (EMA). It is no accident that the 50-day EMA comes into play here: most often in a bull market, when a pullback hits, indices find support right around their 50-day EMA before bouncing back. If you check a chart of the Nasdaq Composite, you will see that the pattern occurred 5 times during the 2003 rise. Will it happen again here? Of course, we have no way to know for sure, but odds favor a rebound as markets are now in oversold territory. For the week, the Nasdaq 100 and S&P 500 respectively lost 3.47% and 2.12%. The Russell 2000 fared much worse, losing 5.89%. This clearly shows that investors rotated money out of small-caps stocks into their large-cap counterparts.

Next week marks the beginning of the earnings season. There will be plenty of corporate news to move the markets. Despite this week's negative action, our current signal remains a Buy.

Trend Timing School

2004 Year in review - Part 2

From a purely emotional standpoint, the 2004 results were somewhere between mediocre and disappointing. Positive gains ranging from 4 to 26% depending on strategy and index are not so bad by themselves, but when compared to previous years' returns they looks paltry. As Trend Timers we have gotten spoiled rotten, and the year 2004 was simply not satisfying. The broad market ended the year not much higher than where it started, as exemplified by the Wilshire 5000 gain of 10.85%, and what happened in between was a range bound roller coaster. Trendless markets are not where a trend following system usually shines but we can be pleased that our Model held its own with the market averages and, as usual, be happy to take what the market gives.

Many trading systems triggered by the shorter and more frequent 5 to 10% reversals we experienced this year got whipsawed into compounded losses. So did many individual investors who tried to anticipate the market's next move based on financial, economic or political factors. Only a few specific segments of the market such as microcaps, energy, and gold, managed to outperform the broad markets.

A calendar year is but a time window into our long-term investment plan. Through the end of April 2004 we were at the tail end of a Buy signal that lasted over a year and returned between 27% and 51% unleveraged, depending on the index. Yet, from January through November the broad market remained in a trendless range. The downward turn which triggered the April Sell signal failed to develop into a strong move. The Sell signal did its job of protecting us against a serious fall but it also resulted in small losses ranging from 0.44% for the S&P 500 to 3.52% for the Russell 2000 . Our October Buy signal was triggered right before the election and U.S. markets proceeded to rally afterwards, salvaging small yearly gains for most indices.

In hindsight, since the year ended up slightly higher for the broad market, the Long Only strategies, including Buy and Hold fared best this year. The best strategy of all for most indices was our Long Only with Margin. The worst strategy this year was Long and Short which was even beaten by perennial laggard Buy and Hold.

The big surprises came in the form of our overall winners and losers. For unexplained reasons, Japan's Nikkei 225 index took over from last year's German DAX as the market most correlated with our Model. While a Nikkei Buy and Hold strategy would have returned a modest 12%, the returns when applying our signals ranged from 18% for Long Only to a very impressive 62% with Long and Short with Margin. In fact, when looking at the Nikkei with our new TimingCube Chart (you can access a preview of this new feature from the top of the "Results" page, or you can just see the chart by clicking on the link above) we can see that our 2004 signals almost perfectly coincide with the Nikkei's top and bottom. In stark contrast, Hong Kong's Hang Seng index seemed to be almost inversely correlated with our Model this year, with the April signal hitting almost perfectly at the year's bottom point.

2004 at a glance

Number of signals	2
Best strategy	Long Only with Margin
Worst strategy	Long and Short
Best U.S. index	Russell 2000
Worst U.S. index	Philadelphia Semiconductor
Best international index	Nikkei 225
Worst international index	Hang Seng (best in Buy and Hold)

In conclusion, although 2004 results were less than many of us had come to expect, they were gains and maybe most importantly, the Model's guidance helped us stay the course and not be buffeted about by the winds of emotion and uncertainty. And on the bright side, markets cannot be long in resuming their trendy ways.

FAQ of the Week

Question: What is your market forecast for 2005?

Sorry, but we do not believe in forecasts and neither should you.

Inevitably, this is the season for forecasts and predictions. This time of year every financial guru, pundit and talking head has a detailed outlook of how markets will behave in 2005, where they will be at the end of the year, and why. Trouble is that no one can reliably and consistently predict where the markets are headed, and this is why at TimingCube we never attempt to do so. Guesses and opinions don't count, however well educated they may be. Yes, we understand that there are myriads of indicators and techniques that say the markets are oversold or overbought, undervalued or overvalued, bound to drop or rise, but the missing and most important investing ingredient is to know when. This, in the Trend Timing school of thought, can only be known reliably by observing the markets themselves and detecting trends and changes in trends as they actually occur.

The entire premise of Trend Timing is that a trend remains in effect until it changes. This is why we can relax and let our Model keep us on the right side of the market.

Warm wishes and until next week.

The TimingCube Staff