Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively gained 1.70%, 2.02% and 2.57% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 2.37% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of December 31, which marked the beginning of the current 4-week holding period. 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.
There appears to be a lot of complacency among market participants as Investors Intelligence reported Wednesday a very high bull-to-bear ratio among advisors, saying that it is "in the dangerous area". Also, since the market resumed its climb in early December, the typical price/volume patterns that our Model identifies during bullish phases have been notably absent. Our current Cash signal therefore remains in effect.
After a decade of following ETFs, we are certainly
gratified to see the ETF industry in full bloom these days
with assets having recently passed $1 trillion. After years
of viewing ETFs as a niche tool for investors, even some
of the large brokerages have come around to embracing them.
For example, Schwab last year launched its own in-house
ETFs and now offers regular commentary about them. ProFunds
appears to have successfully weathered the storm over presumed
tracking problems in leveraged ETFs. The negative compounding
that occurs in leveraged ETFs is a cost of doing business
in those high-beta vehicles and something we wrote about
for years. Discovering there is a mathematical "challenge"
when investing in leveraged ETFs is, in our view, little
different than realizing that option values don't really
march 1:1 with their underlying securities. It's a question
of being educated in what you invest in.
Speaking of education, we have always found Ed Easterling's
work to be insightful and informative. So we were doubly
pleased when the New York Times recently printed one of
Ed's seminal charts in a very compelling format. Understanding
this chart can be depressing for some, but we find it further
justification for our style of investing - e.g. why buying
and holding stocks in hopes of earning 10-12% per year doesn't
really deliver for many investors.
Chart 1: Ed Easterling's Chart
(click on the image to enlarge)
Ed's chart provides a different layout of investment return
history than the standard chart showing growth of one or
more dollars building up to the sky. Those charts tend to
mask the day-to-day volatility that we all experience in
trying to gauge the wrestling match between bear and bull.
To read the matrix, you start at the left and go across
to the right how ever many years you wish. The resulting
color of the box represents the actual "real"
or inflation-adjusted return that a buy-and-hold investor
would receive from stocks over that time. The commentary
on the chart is focused on a 20-year investment horizon,
highlighted by a string of boxes running diagonally left
to right down the matrix. In reading the matrix, green is
good, red is bad, gray is mediocre. One quickly sees a whole
sea of gray when looking at the investment returns with
gray representing an annual real return between 3 and 7
percent.
Perhaps most striking about the matrix is how little green
shows up and how much red. Indeed, it's very rare to find
a 20-year period where stocks delivered a real return of
greater than 7%. Of course, toss an average inflation rate
of 3% on top and you get the 10% nominal return from stocks
that we often hear about.
The other key finding on the matrix comes from the heavy
amount of red. These longer-term red areas where real returns
are below 3%, and flat-to-negative over some periods, occur
when an investor places their investment during a secular
bear market. As with any return formula, where you start
carries a whole lot of weight. Investing during a secular
bear market offers you years of spinning wheels in the sand,
years on a return treadmill where you feel like you're working
hard to make your money grow, but ultimately have little
to show for it. This was the case in the last secular bear
market of the 1960s and 70s - shown as the big red splotch
in the middle of the matrix. As we know all too well, we
have just lived through one of these "lost" decades
and reside somewhere in the middle of another secular bear
market - note the red at the bottom of the matrix for the
recent history. It's disheartening to see that had you invested
in the stock market beginning in 1990, rode that terrific
bull through that stellar stock decade, you would now have
dropped those returns back to mediocre or worse.
Are our investments doomed to mediocrity? Of course, we
think not. Certainly a simple dollar-cost averaging approach,
which anyone with a 401k plan is likely following, helps
at least average out the bad times with the good and insure
that you achieve the long-term average. Further, we believe
that it's not all that difficult for investors to avoid
most of the heart-stopping swooshes downward that stocks
occasionally deliver. Just missing these really bad times
will dramatically improve your return and turn your personal
investment matrix to a healthy shade of green.
Enjoy and learn from Ed Easterling's excellent matrix. But
realize that it's not hard to do much, much better. And
you're in the right place to do so. Our objective over the
past decade has been to inform, educate, and guide your
investments to a healthy state. We are not always perfect,
but unquestionably will deliver for you returns that insure
you experience no lost decades or mediocre 20-year investment
results.
Proshares recently launched a couple of volatility-based
ETFs - symbols VIXY for the short-term on and VIXM for the
mid-term version. We will likely talk more about volatility
ETFs in a future weekly. For now, a simple answer is that
volatility-based ETFs have been a mixed bag. These products
seek to offer a way to buy the VIX indicator. VIX measures
stock market volatility. The VIX will go up typically when
stocks become volatile, which is most pronounced when they
are falling. Thus, in theory, you would buy the VIX ETFs
as a way to bet that stocks will be falling - as a way to
short the market, in effect. The problem has been that the
first products built on the VIX did not behave as some investors
expected. The ETNs on the VIX released last year or so by
Blackrock, the owner of iShares (they call their ETNs "iPath"
and, for some reason, have a separate website for them).
The short-term VIX ETN, symbol VXX, suffered from bad bouts
where it did not track the VIX very well. We have found
that the mid-term vehicles perform much better. As a hedge,
they are not as efficient as just buying an inverse stock
index ETF. They are very volatile - e.g. the VIX itself
if down 8.5% so far in 2011. But with caution and for investors
who are very actively watching and managing their portfolio,
the mid-term VIX ETFs/ETNs offer another way to play the
short side of the stock market, or at least the short side
of investor psyches.
Warm wishes and until next week.
The TimingCube
Staff
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