TimingCube - We take what the markets give - market direction,mid-trade,new signal,index blend,international diversification,long-term investors

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

Increased selling pressure and the overall worsening of the market tone caused our Model to issue a Sell signal after the close on Wednesday. The negative market action clearly shows that investors are worried about the combination of higher oil prices, rising interest rates and inflation and just keep selling into any rally attempt. From a technical standpoint, the picture has worsened too: the Dow Jones Industrial average, the S&P 500 and the Russell 2000 all finished the week below their 50-day exponential moving average (EMA). As for the Nasdaq Composite and the Nasdaq 100, they both closed the week below their long-term 200-day EMA, a negative sign. After briefly dipping below the 2000 level on Friday, the Nasdaq Composite managed to recover a few points but still closed at its lowest level for the year, undercutting the previous low hit on January 24. Another index we like to watch, the SOX semiconductor index, also sported negative action: after leading the market higher in February, it turned back down this week and finished below both its 50-day and 200-day EMA.

The Nasdaq 100 lost 1.41% on the week. As for the Russell 2000 and S&P 500, they finished 0.68% and 0.87% lower, respectively. The Sell signal that is now in force means that we have moved to Quadrant 2, defined as a Bull/Sell combination (please refer to our December 19, 2003 Weekly Update for more information on Trend Timing quadrants).

Trend Timing School

We take what the markets give

Since we trade so infrequently, a new signal usually brings a sense of closure and excitement. Signals are also a good time to take stock of our investment methodology and assess how we fared with the most recent trade. How did we do? Did we implement our selected strategies and execute our trading in a timely fashion? Did we overly concentrate our holdings in one investment and fail to diversify? Did our portfolio as a whole underperform because we failed to commit sufficient funds? How can we improve in the future? These are the type of questions all of us should ask ourselves from time to time, and major market turning points provide us with the perfect opportunity to go through this process.

For many of us doers, the signal at last provides some action. The moment we have been waiting for has finally arrived and we get to close out our existing positions and open new ones corresponding to the new market direction signaled by the Model. A sense of closure and relief comes from the fact that, as we complete the trade by liquidating our positions, we actually realize gains which we can then officially enter in the books. Until that point, any intermediate results are only paper gains which do not really count. Long term investors know that watching intermediate results too frequently or too seriously only serves to exacerbate our emotions by getting overly excited or frustrated. Looking at interim paper gains as real acquired wealth inevitably causes disappointment when some are given back by the time a trade is closed out. Since no investment system can reliably and consistently call market tops as they occur, giving back some paper gains is inherent of any investment system, unless one sells too early.

For new subscribers who joined us mid-trade, or older subscribers who somehow missed the previous signal or failed to act on it, this new signal is a rare and exciting chance to jump in and get synchronized with the predominant market trend - which is now down. If you have not yet acted on the new signal, do not put it off. The ideal time to trade is at the market open on the trade date (the day after the signal is issued). If you missed it by a day or two, do not panic, but the longer you think it over and hesitate, the less likely you are to actually take action. If you second-guess the signal you will inevitably get frustrated and lose out. As motivation, remember that Sell signals are when Trend Timers have the opportunity to move substantially ahead of traditional Buy and Hold investing.

As far as assessing our performance during this last signal, a good place to start is the old saying "any winning trade is a good trade". During Buy signals our investments move up and down in tandem with the markets, unless we apply leverage with margin strategies 2 or 4, and Trend Timing essentially delivers the same performance as Buy and Hold. As always, how much we gain depends largely on what we invest in. Looking at our three primary U.S. indices, the Russell 2000 led the way, as it has for the last couple of years, with a gain of 6.12%. The S&P 500 had a very good showing for large caps by ending a close second with a 5.87% gain. Lagging at the back of the pack, the Nasdaq 100 eked out a 0.97% gain. While many of us are not quite satisfied with single digit gains (or fractional ones for the Nasdaq 100), it is worth pointing out that both the Russell 2000 and S&P 500 returns represent annualized gains of over 15%, which is nothing to sneeze at (a 15% annual return rate doubles your money in five years).

Another pertinent observation is that those of us who yielded our oft repeated recommendation to diversify, not only across U.S. investments but internationally fared better (see for example the October 22, 2004 "Index blends" and November 12, 2004 "International diversification" articles). Not only did all of the international indices we track in our TimingCube Reports do better than their U.S. counterparts, but the corresponding ETF investment vehicles which incorporate the respective currency strength/weakness versus the U.S. dollar did substantially better. For example, EWQ which represents the French market returned 14.32%, while EWU (UK) and EWG (Germany) returned 13.42% and 13.08% respectively. You can find alternative ETFs for diversification in the What to trade? section of the "Resources" page, and track their performance by plugging the ticker symbols in the "Performance by individual security or index" section of the "Results" page.

On our end we continuously assess our Model in search of ways to enhance it. It is fairly obvious that our trend following system has not done as well recently as we are used to. Given that markets have been going essentially nowhere since December 2003 by staying in a relatively narrow range, we can be satisfied by the returns achieved during this past trade. What we know for sure is that such trendless markets do not last forever, and in the meantime we are happy to take what the markets give us.

FAQ of the Week

Question: Does the signal apply to any funds, sectors and the like?

The signal applies to broad market indices, such as the Nasdaq 100, Russell 2000, S&P 500, or indeed many international indices. Sectors and individual industry segments are a different story, as they may not be correlated with the overall market. Some segments such as energy or precious metals are well known to go their own way. What you can do is check the correlation for your index/ETF of choice by entering the corresponding ticker in the "Performance by individual security or index" section of the "Results" page.

Warm wishes and until next week.

The TimingCube Staff