Signal Performance as of
It has been
another volatile week for the market, but the major averages
did not move much overall. Fueled by technology and energy stocks,
markets were able to erase early losses Monday to finish solidly
in the black. Opposite action could be observed Tuesday: stocks
started strongly on news that Warren Buffett's Berkshire Hathaway
company was offering to insure up to $800 billion in municipal
bonds. The major indexes could not sustain their gains, however,
and the Nasdaq Composite
reversed to close the session with a modest loss. Stocks did
much better Wednesday, posting strong gains after the latest
retail sales report showed a 0.3% increase versus the 0.3% decline
that had been anticipated. The markets were unable to build
onto their momentum Thursday and instead declined sharply to
relinquish all of the previous session's gains. The negative
tone was attributed to comments Ben Bernanke made to the Senate
Banking Committee. The Fed chairman warned of a worsening economy
and more write-downs to come from major financial institutions.
Investors did not like what they heard and decided to sell.
Disappointing economic news was released Friday morning: regional
manufacturing contracted in the New York area and the University
of Michigan survey on consumer sentiment fell to its lowest
reading since 1992. Stocks fell on the news but a late-day surge
helped cut losses and even allowed the S&P 500
to finish the session with a fractional gain.
Please note that US markets will be closed Monday in observance
of Presidents' Day.
The Nasdaq 100
and Russell 2000
posted an identical 0.37% gain on the week. The S&P 500 did
better, with a 1.40% increase. All three indexes remain located
below both their 50-day and 200-day Exponential Moving Averages
For its part, our World Index Ranking outperformed
its U.S. counterparts this week with a gain of 2.16%.
The portfolio consists of the 5 top-ranked world indexes as
of February 1, which marked the beginning of the current 4-week
holding period. Please note that since we now have an active
Sell signal, the World
Index Ranking 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 indexes, as the strategy calls for staying invested
at all times. Please go to our "Our Service"
page for all the details.
Our current Sell signal
remains in effect.
ins and outs of shorting
For a publication that pioneered Trend Timing and advanced the
art of "Long and Short" investing (we say art
because if it was a science our trading win/loss ratio would
be 100%! ),
we admittedly spend very little time discussing the short side
of the equation in these pages. One of the founding principles
of Trend Timing is that faithfully following the trend will
enable us to profit in both up and down markets. For us, going
short when markets act like they are headed for a serious decline,
or at least cashing out until the uptrend resumes, comes naturally.
While this notion is deeply ingrained with long term subscribers
of our service, it goes against everything most financial media,
money managers and financial advisors preach. Despite the classic
Wall Street cliché about buying low and selling high, we easily
forget that timing the markets is not a mainstream approach.
As most things do in the stock market, the popularity of timing
evolves in cycles. In the absence of any bear market or even
severe correction since 2002, buy and hold proponents, and followers,
have been reaching cyclical highs. Even the very rationale for
shorting the markets is obscured by time, and by a chronically
long-biased financial media. Today we will attempt to rectify
All of this is predicated on two investment truisms
successful wealth building plan depends as much on avoiding
losses as it does on generating gains, and
stock market will continue to go through cycles of successive
bulls and bears, both cyclical and secular, as they always
we all believe that shorting the market is more risky than
being long the market. As it is often the case, when looking
at historical facts and figures to assess the relative risk
of being long and short the stock market, it turns out that
popular wisdom has it backwards. History clearly shows that
downward action tends to be much more swift and explosive
than upward movements. Markets drop further and faster than
they rise. It is as if the laws of gravity worked to accelerate
and amplify downward spurts. Maybe this is why there is no
bullish equivalent to the word "crash".
Looking at the 13 bear markets between 1929 and 1999, the
buy and hold investor would have lost an average of 39% and
waited an average of 5.2 years to recoup her/his money. That's
the average. The worst of them was the 1929 crash with an
87% loss and over 25 years to breakeven. During the most recent
bear market, a buy and hold investor in the Nasdaq Composite
Index would have lost 74% from the September 2000 peak to
the October 2002 bottom. And today, that same investor would
still be down 55% from that peak. And we should never forget
that it takes double the work to recoup losses (a 100% gain
is needed to recapture a 50% loss), and instead of wasting
time just getting back to the starting point, the 100% gain
should have doubled your money.
One may argue this particular bear market was different because
of the tech bubble, or that it could not happen today, but
in the end the evidence indicates that we are due for another
bear, probably sooner than later.
We know that during bear markets the majority of stocks and
stock funds go down, worldwide. Even by seeking the best of
the best as you would with the World Index Ranking
"Buy and Rebalance" strategy, you may still
be holding the markets which lose the least.
For us, the data is overwhelming, and the only conclusion
we can reach is that we do not have enough time in our wealth
building plan to risk a setback of such a magnitude. The only
obvious solution (besides giving up stock market investing)
is to avoid significant declines at the very least, and profit
from them if possible. The way to profit during market declines
brings us back to shorting.
Shorting is betting that the market is going to go down, and
this is what we do with the "Long and Short"
strategy during a Sell
signal. In this day and age we have the luxury of being able
to buy an inverse ETF (read and bypassing all the nasty details
related to the mechanics of shorting). For an example of how
to short the market the easy way, with inverse and double
inverse ETFs, read the February 1, 2008 FAQ of the
Week. For those of you who care about the nasty details
of short selling, we have included the following paragraph.
Put simply, short selling is the opposite of "going long"
or buying a stock. An investor borrows shares of stock from
a broker and sells them. He is said to have a short position
in that stock. The shares come from the broker's own inventory
or from another customer. When the stock is sold the proceeds
are credited to the investor's account. In order to make a
profit the short seller hopes the price of that stock will
go down so that the shares owed the broker can be replaced
at a lower cost. The open position is closed at some point
in the future by purchasing shares and returning them to the
broker. This is called short covering. The profit on the transaction
is the price at which the stock was initially sold minus the
price paid for the replacement shares, minus any fees, interest
and dividends. Of course, if the price of the stock went up
between short and cover, you'll have a net loss.
We don't know how long and how far down the current decline
will go or if it will develop into a full fledged bear. As
Trend Timers we can look at the concepts of timing and shorting
the market under a very different light. Rather than perceived
risky tactics, they are the key ingredients in reducing real
market risk, helping us keep our emotions in check, and allowing
us to stick with our wealth building model for the long run.
How is momentum trend following?
Many of our long term subscribers are well versed in the trend
following nature of TimingCube's
directional model which seeks to identify the predominant up
or down trend of the broad stock market. Frequently, when we
present the momentum model embodied in the World Index
Ranking, the fact that it too is fundamentally trend
following comes as a surprise. By measuring the relative strength
of various market indexes over various periods, up to many months,
momentum model identifies the markets with the strongest up
By itself, the World Index Ranking model is
an always long proposition and the Top 5 always represent the
markets with the strongest up trends, regardless of the general
direction of the broad market. The "pure" "Buy
and Rebalance" strategy, by upgrading every 4
weeks to the latest Top 5, seeks to always follow the strongest
Of course, for the portion of your investments which you invest
using the strategies relying on the directional model, such
as "Long Only" and "Long
and Short", the current Sell
signal has you in cash or short the Nasdaq 100
Warm wishes and until next week.