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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
Stocks bolted higher to start the week as Greek passage of a deeper austerity plan encouraged speculation. Sellers attacked the early gains, though buyers stepped in to contain any material declines and ultimately leave indexes holding fractional advances for the day. A weak retail sales report early Tuesday gave some pause pushing the S&P 500 back under the key 1350 level. However, it was bank stocks, not retailers, who dragged down the stock indexes through most of the day until a final 30-minute surge brought them back to even at the finish. A surprise move by the Bank of Japan overnight sent the Yen down sharply boosting the U.S. dollar in the process, which pulled down international stocks and some commodities. The Fed's wind machine, a strong boost to stocks since November, eased somewhat Wednesday when minutes from the most recent Fed meeting showed little enthusiasm for another round of quantitative easing. This unnerved stock investors leading to losses, though still only around -0.5-0.7%. Apple shot as high as $520+ per share before dropping back below $500. The S&P 500 once again failed to hold above 1350. But Thursday was the charm this week. A series of positive economic reports, in particular on the two-headed monster of this sluggish recovery: jobless claims and housing activity, kickstarted stocks on a steady move higher with all indexes delivering a +1.0-1.5% gain on the day. After those fireworks, Friday delivered a quiet pre-holiday mood with little new information to drive a change in positions. Weakness in Gilead (GILD), a significant component of the Nasdaq 100, pushed that leading index lower Friday while other large-cap indexes notched fractional advances.

The Nasdaq 100 (QQQ) continued its winning ways for 2012 - nary a losing week yet for the index which managed to dollop on another +1.54% this week. The S&P 500 (SPY) put on the same gain for the 5-day run. The Russell 2000 (IWM) offered slightly more pop gaining +1.87%.

The third week of the current World portfolio cycle provided a +1.51% advance. 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
The coming pullback

Stock investors have shaken off the Eurofears that gripped them last fall and have embraced a worldview where U.S. economic growth is edging higher, Europe is getting no worse, and emerging markets/Asia are rebounding. That worldview, you will notice, does not include anything about the U.S. budget/deficit/funding issues that will be the talk of the next few months. Oddly, this more benign/optimistic worldview comes in a quarter where growth in corporate profits has actually declined for the first time in several periods. Such is the emotional component of investing - seeing what we choose to see, ignoring that which we do not.

But we're not quibbling now. Our Classic and Turbo signals sensed the change in tone, hopped on board, and have delivered us some nice gains to begin the year. We talked last week about some of the recent similar periods in stock markets where a sharp rise has occurred. Today, we're looking at a broader and more 'downside' perspective - namely what the stock market typically offers us in a correction. For we know that a correction of some sort will one day arrive on our doorstep. We don't know what will trigger investors to decide that the rally party is over for awhile, but we do know they will return to the fear side of the equation at some point. Our data last week suggested that recent sharp rallies have offered +20% returns over a roughly 10-week stride. In that context, the current rally still has some legs left, though the bulk of the gains would appear to be behind us - at least before a more noticeable pullback clears the way for another run, if investors' bullish fever persists further in 2012.

Stock markets, on average, deliver a -14% pullback at some point in a given year. During secular or even cyclical bullish periods, these pullbacks are often less than -10%, while during bearish periods they routinely offer double-digit losses approaching -20% or greater.

Chart 1: The severity of intra-year declines reflect the market's broader tone

The severity of intra-year declines reflect the market's broader tone
We see also from Chart 1 above that the past few years have delivered hefty drops to unnerve investors. The environment present during the recent years has not obviously changed. Thus, we would expect a pullback this year to register somewhere around -15%. Of course, such a decline can happen very quickly, as witnessed last August when the market fell -10% in a few heart-stopping days. The year prior, 2010, we had the "flash crash" and subsequent decline. It's entirely possible that the rather more blissful worldview that investors currently embrace will not encounter anything like what we've seen the past couple of years. Still, the odds favor a greater than -10% drop and, given the sharp runup in share prices thusfar, one would expect that drop to be somewhat just around the corner unless this market slows down and digests its largesse in a more measured way sometime soon.
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FAQ of the Week
Question: Can you tell whether a particular signal is better or worse, stronger or weaker?

Our Classic and Turbo Models speak in a very clear and simple language of Buy, Sell, or Cash (in Classic's case). The output is not shaded in any way to give us a sense that we are looking at a long, strong trend ahead, or just a brief burst of a trend. We did not know, for example, that the current signals were likely to deliver double-digit returns. We do recognize it would be nice to know what the prognosis is for a given signal. To that end, we can incorporate other indicators into our work to give us a better sense what might be to come. For example, we track a multitude of signals from a wide variety of sources, some developed internally, some not. When those signals are all speaking in the same key, we figure that's a pretty strong sign. Additionally, we can look at how we arrived at where we are. If that journey was a long period of stagnation where prices built into an ever-tightening wedge, odds are reasonable that the ensuing market move is likely to be a stronger one. Such was the case back in December, as investors were worn out from a months-long series of volatile trading periods, yet prices had failed to cave in to the degree we might have expected. Money had been flowing out of equity mutual funds and into bond funds for a long time, despite very low interest rates and yields. Thus, one could easily argue the stage was set for a burst upward. And so here we are now posing the related question of how a signal's "strength" changes over time. We know that Turbo only delivers a >10% return every 3 out of 100 signals. We know further that Turbo only delivers a >15% return less than 1% of the time, or once out of every hundred signals. Thus, we are approaching pretty rarefied air for Turbo here. Signals have delivered +20% and much more at times. Will this be one of those times? How strong will this signal be? We don't know. We're just enjoying the ride and monitoring the road very closely at this point. Our counsel is always: if you're pleased with your gains, sell.

Warm wishes and until next week.

The TimingCube Staff
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