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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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After four
consecutive weeks of losses, stocks managed to move higher over
the five-day span. Debt-related issues affecting several European
countries continued to weigh on the markets Monday, causing
all major indexes to finish the session in the red, as illustrated
by the 0.9% loss incurred by the S&P 500
. Stocks were able to rebound the next day on reports that European
governments would help Greece overcome its debt issues. Wednesday's
session turned out to be a quiet one as the snow storm affecting
the East Coast resulted in light trading and left the major
averages little changed. After initial weakness early Thursday,
stocks rallied to finish with solid gains on fewer-than-expected
weekly jobless claims and news that Germany and other European
nations formally agreed to come to Greece's rescue, therefore
reassuring a worried market. Strength in semiconductors helped
the Nasdaq Composite
gain 1.4% on the day. Disappointing consumer confidence data
and news that China would tighten lending requirements negatively
impacted stocks Friday morning, but the main indexes managed
to reverse course to finish the day either in the black or with
only modest losses.
Please note that U.S. markets will be closed Monday in observance
of Presidents' Day.
The Russell 2000 (IWM)
, Nasdaq 100 (QQQQ)
and S&P 500 (SPY)
respectively gained 2.95%, 1.81% and 1.29% over the five-day
span. All three ETFs are located below their 50-day exponential
moving average (EMA) but remain situated above their 200-day
EMA.
For its part, our World portfolio outperformed
its U.S. counterparts this week with a gain of 3.29%.
The portfolio consists of the 5 top-ranked world ETFs as of
January 29, 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.
Our current Cash
signal remains in effect.
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Trend Timing School |
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A
reminder about pullbacks and corrections.
With the stock market having entered into its first real pullback
of the cyclical bull market that commenced officially last summer,
we thought it might be worthwhile to talk a bit about market
pullbacks and corrections. It is in large part because of corrections
and bear markets that we embrace our trend timing system. If
the market just marched ever upward, investing would simply
be a task of determining which investment will rise fastest
with perhaps a nod toward how much volatility we care to endure.
We know markets do not go straight up forever. Thus, we can
gain an additional edge by understanding the key phases of a
bull market: up legs, pullbacks, corrections, and contrast these
with the real bear market that inevitably follows one day.
We all understand and like the 'up leg' segments of the bull
market, but often what determines our ultimate profits is what
we do in between the spurts, namely during pullbacks and corrections.
Our ability to recognize pullbacks and corrections is critical
because on the one hand we want to let the bull run and stay
with the Buy signal
as long as profitable. But we do not want to suffer the losses
of a major correction, or worse, of a bear market. It has become
standard practice to consider any stock market decline around
10-20% as a "correction" within a generally uptrending
market; less than 10% marks a "pullback", greater
than 20% is referred to as a "bear market", though
all these definitions are intended as approximations rather
than strict rules. Remember that all bear markets begin as mild
pullbacks and corrections. It's obviously not until the dust
has settled and we reflect on what has transpired that we know
the true nature of the market's decline.
The stock market is not an exact science and it cannot be fully
assessed by any single simplistic indicator or metric. Just
like our Model, which detects trend changes and issues the signals
by examining a multiplicity of indicators, a correct reading
of the market should always be based on an array of detectors.
We know we can employ a simple technical analysis tool to help
tell bull and bear markets apart. As shown below, the respective
movements of the 10-day and 200-day exponential moving averages
(EMAs) and in particular their crossover points, generally do
a very good job at detecting bulls and bears.
A couple of points about the chart:
- cyclical bull markets deliver several visits between the
10-day and 200-day moving averages. These will resolve in
favor of the prevailing cyclical trend, at least until that
cycle ends, which we will not know at the time, sad to say.
But we should get multiple bouts of market weakness before
a true change in trend. This current correction is only
the first of the current cycle; thus, most market watchers
anticipate an eventual resumption of the bull market
- though the chart's high level view suggests the 10-200
crossover as a near perfect indicator, a closer examination
reveals that there are periods where it will take a bit
more fortitude. As an example, in 1990, Iraq invaded Kuwait
sending oil prices shooting higher. This occurred at a time
when the economy, unemployment, and the health of the nation's
financial system were already in a weakened state. The market
fell hard and fast, easily penetrating the 200-day moving
average and falling a good 12% below it. Few investors would
be able to sit through this two-month period of angst.
Study of the markets over the last century has provided ammunition
for numerous books and theories. Here are some of the 100-year
statistics for bull markets:
- There have been about 21 bull markets in 100 years
- On average, bull markets last 33 months and repeat every
5 years
- The average gain during the bull market is 115%
- Similar figures exist for corrections and pull-backs as
well
While providing some interesting glimpses at history, such statistics
do very little to help the investor. Why? Because the standard
deviations are so enormous, one cannot extrapolate and draw
similar conclusions about present market conditions with any
degree of accuracy.
What really helps us stay on the right side of the market through
as much of the bull run as possible is to understand the bull
market psychology. This psychology is marked by a general feeling
of improving economic conditions ahead. Markets tend to want
to resume their predominant trend. Thus, in a cyclical bull
market, pullbacks and corrections are viewed as good opportunities
to buy on weakness, and a healthy cleansing process to keep
the market from becoming overly excessive. Since there are many
more pullbacks than there are corrections, and many more corrections
than bear markets, there is safety in staying the course. Thus,
we typically will benefit by assuming that a pullback favors
a renewal of the uptrend instead of a deeper correction; and
that a correction carries better odds for resumption of the
bull rather than to degenerate into a full fledged bear market.
As usual, with the Model watching our backs, we do not need
to do anything until the next signal is generated. In the meantime
we find comfort in the fact that we see each pullback and correction
for what it really is, a healthy process that usually paves
the way for another leg higher. As for that 1990 period where
the 10-200 crossover did not come through for investors? Though
not live at the time, our Model suggests that the indicators
we use would have issued a Sell
signal in July and returned to the market in late October, thereby
profiting from this temporary, albeit frightening, market correction.
With the S&P 500
having recently hit a 9%+ loss during the current pullback and
very near its 200-day moving average, many believe there is
little downside remaining, at least in percentage terms. Whether
that is true or not, we know that our signal will light the
way when a new trend emerges.
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FAQ of the Week |
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Question:
I read that some ETF trades will be free?
Fidelity Investments recently announced that they will cease
charging for trading in 25 of the most popular iShares ETFs.
This is a huge advantage for investors who use the iShares suite
of ETFs as it will essentially make most of their trades commission-free.
Fidelity has already implemented this change for online trading.
They do so in response to an announcement last year by rival
Charles Schwab & Co. offering a handful of free in-house
ETFs. These are big steps forward for the brokerage industry
in recognizing the popularity of ETFs with investors and has
opened a new front in competing for their business. Since we
have long been proponents of the advantages of using ETFs, we
certainly applaud these changes. One minor note with Fidelity's
offer is that the ETFs will not be considered as collateral
for margin until 30 days after purchase. Here is the list of
ETFs affected by Fidelity's new trading policy:
Warm wishes and until next week.
The TimingCube
Staff
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