TimingCube - The benefits of perspective - market gyrations,industry sectors,market pullback,trend reversal,drifted higher

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQQ

Note: QQQQ returns are included for continuity sake.

Market Update

After starting the holiday-shortened week with a big drop caused by inflation fears and higher oil prices, markets turned around on Thursday to post back-to-back sessions of solid gains and finish the week higher. Both the Dow and S&P 500 closed at their highest level of the year. The S&P 500 is now only 2 points away from the 52-week closing high it reached in December. All major indices are also solidly above their 50-day exponential moving average (EMA), with the exception of the Nasdaq 100, which rests just below it. The SOX semiconductor index continues to outperform, which bodes well for the rest of the market, as we explained two weeks ago. Of the three major indices we follow, the Russell 2000 had the best showing this week, gaining 1.17%. The S&P 500 and Nasdaq 100 also posted good gains, finishing 0.81% and 0.76% higher, respectively.

There is no change for us this week and our current Buy signal consequently remains active.

Trend Timing School

The benefits of perspective

Instead of a bang, 2005 started with a whimper and the broad markets declined for most of January. Although most indices have generally drifted higher since the intermediate lows reached during the closing week of January, many of us selectively remember the most recent highs achieved last December, and are tempted to interpret recent market behavior as a downtrend. Against our better judgment, relatively small market drops such as the one we experienced last Tuesday (-1.37% on the Nasdaq Composite) seem to register far higher on the Richter scale of our emotions than the higher gain realized since then. As with all observations, the conclusions we derive from watching the stock market depend greatly on our point of view.

In Trend Timing, short-term market gyrations revealed by daily, weekly or even monthly developments can be highly counterproductive and misleading. Someone who is too involved in the details and news to look at the market situation as a whole can't see the forest from the trees. Looking at Chart 1 below, we see the contrasting 2005 year-to-date performance of various indices as expressed by their tracking ETFs. Of the three indices we commonly report on, the worst was clearly the Nasdaq 100, with QQQQ losing 5.76% so far this year. On the other side of the spectrum, the large-cap stocks in the S&P 500 have decisively moved ahead, with SPY closing at a new bull market high today. You could of course have done better if you had anticipated, for example, that the U.S. energy sector and IYE would advance an impressive 21% in less than two months. Had you been less clairvoyant and bet instead on the Internet sector and HHH, you would now be down by over 20%. Ouch! This serves as an important reminder that our Model represents the broad market and that specific industry sectors can behave quite differently. Also, as we frequently like to repeat, diversifying in a blend of broad market indices always beats trying to pick the winning horse.

While those of us mostly invested in the QQQQ (or HHH) feel the pinch, especially new subscribers who entered the markets near the December highs, the current market pullback is mild. It does not qualify as a correction (defined as declines of over 10%) and it certainly does not meet the criteria of a trend reversal. This goes to prove that short periods of observation, even a couple of months, are much better at rattling our emotions than at establishing a trend. Taking a longer perspective, such as the 6-month view in Chart 2 below, reveals that even the Nasdaq Composite, despite being the weakest index we track for the current signal, is still in a solid uptrend. Per our definition (see the October 31, 2003 Trend Timing School article) the current picture squarely places us in bull market territory, in Quadrant 1 to be more precise. While the Exponential Moving Averages (EMA) shown in the graph and the Quadrants do not play a direct role in our Model, they provide us with a good view of where we are in the market cycle.

We cannot predict what the markets will do next, but by following the predominant trend we will remain in Buy mode until our Model triggers a signal change when the trend decisively turns down, as indicated by repeated downward market action accompanied by increasing volume. In the meantime, if we absolutely have to watch the markets, let's remember that the longer perspective is emotionally and financially more rewarding.

FAQ of the Week

Question: Have you changed your original method of investing from ETFs to options?

Absolutely not. You can rest assured that we have not abandoned ETF investment vehicles, or bull/bear mutual funds for that matter. Option strategies have been introduced as one more alternative in our investment arsenal. Our individual circumstances and preferences vary wildly and we realize that trading in options is not for everyone or every account. We certainly do not favor one method over the other, nor do we believe that options are better investment vehicles.

In the pages of our Web site we strive to present the information in a complete and impartial manner, including advantages and disadvantages of the respective approaches. Each of us then needs to consider the choices, ETFs, mutual funds, and options, and decide which are most effective, comfortable and practical for our own situation.

Warm wishes and until next week.

The TimingCube Staff