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Turbo Model

Current Signal Performance

Turbo Signal
Trade Date
Turbo Model Returns (Long & Short Strategy)
Nasdaq 100
Russell 2000
S&P 500
  Classic Signal  
Trade Date
Classic Model Returns (Long & Short Strategy)
Nasdaq 100
Russell 2000
S&P 500

Market Update
A surge in Portuguese debt costs combined with a tussle over how much more austerity Greece is willing to endure in exchange for the next round of funding from its EU partners set stocks on edge Monday morning. A quick drop -1% for stocks brought buyers, however, pushing the indexes to only fractional declines. Tuesday, the last day of a powerful January, saw further profit-taking amid slightly less upbeat economic reports and a market that has been up 3 of every 4 days since the calendar year turned over. February began with another solid equity showing despite a weak report from tech retail heavyweight Amazon. Indexes kicked off the month with near +1% gains as the Russell 2000 small-cap index led the way upward. Thursday offered little action for the broad indexes as investors awaited Friday's monthly jobs report. The report blew the doors off, soaring past estimates, and sending stocks sharply higher to cap the week with gains approaching +1.5%.

Yet another good week for stocks with the S&P 500 (SPY) posting a +2.06% move upward. The Nasdaq 100 (QQQ) showed strength as well adding +2.73%. It was small-cap stocks that reaped the biggest reward from investors becoming more comfortable with the economic outlook and willing to take on more risk; the Russell 2000 (IWM) surged +4.05% higher.

The first week of this World portfolio cycle lodged a +2.55% rise. This portfolio is comprised of the top 5 members of our World Ranking from the January 27th ranking.

Both Classic and Turbo Models remain on Buy signals.

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Trend Timing School
Defensive 2011 creates value opportunities

January is always a peculiar month for stock investors. We see money flow into and out of the market as investors and portfolio managers reconsider their asset allocations. We hear the oft-repeated notion that what happens in January defines the market direction for the remainder of the year (works a majority of the time, but not enough to be a reliable signal). There are numerous theories and interesting tidbits, but little to really go on. For example, we have seen a tremendous mean-reversion trade in this just-ended January. Utilities, the star equity performer of 2011, lost money in January while market laggard Financials charged upward. Dividend stocks, which had rallied nicely in recent months, suddenly became a source of funds with investors knocking them down also in January. This week, we've seen breakouts among some true momentum stocks - a continuation of investors working their way across the risk spectrum.

The stage for this about-face view of risk was set a couple of months ago. The surge in utilities stocks created an unusual situation pushing that sector's valuations notably above their 15-year average. While this behavior is normal and reflective of a secular bearish period, investors/markets can, and will, get carried away. The table below is heavy on data, but is a fascinating study for those who like market information.

Chart 1: Utilities outrun their typical valuation as investors played defense in 2011
Utilities outrun their typical valuation as investors played defense in 2011

Utilities, highlighted in yellow, show both above-norm forward and trailing price-earnings ratios. Thus, investors have been willing to spend more per $1 of earnings for utilities than they have, on average, in the past. P/E ratios are indicative of sentiment - thus, the sentiment here is, "I'll take a safe dividend yield, thank you, at the expense of much forward growth opportunity." As investors piled into the safe havens (U.S. Treasuries were the best-performing asset class in 2011 despite offering almost no yield), the valuations of more speculative growth sectors fell well below norms. The red boxes below display how technology and healthcare have become woefully undervalued compared to their past 15-year history. To be sure, the past 15 years of technology earnings have been dramatic and some of these bellweather tech stocks have seen earnings maturation in recent years - thus, we might expect lower valuations going forward. Still, the gaps that have developed are substantial and crying out for value investors to take notice.

And so, perhaps, they have as the Nasdaq Composite has led the way forward in this rally and found itself in new high territory.

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FAQ of the Week
Question: How do you calculate the signal returns?

We very often get questions about the returns we publish. Here is an example detailing how the results are calculated.

Our source of historical data is Yahoo! Finance. They provide an 'Adjusted Close' price which takes into account dividends and splits.
We apply the same adjustment on the open price: Adjusted Open = Open x Adjusted Close / Close.

Let's look at S&P 500 (SPY) return with our Long & Short strategy after the Buy signal on 9/6/2011.

Chart 2: Sell signal example

Sell signal example

On 8/31/2011, SPY Adjusted Open price was: 124.46 x 120.82 / 122.22 = 121.06
On 9/6/2011, SPY Adjusted Open price was: 114.39 x 115.65 / 116.99 = 113.08

So our Sell signal return was:1 - (113.08 / 121.06) = 6.59% as indicated in column G (SPY L&S Return(%)).
For reference, a Buy and Hold strategy, column H (SPY B&H Return(%)), did produce a -6.59% return.

Warm wishes and until next week.

The TimingCube Staff
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