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Current Signal Performance |
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Classic Signal
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Trade Date
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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What the Fed tooketh away last week, the Fed gaveth Monday when Ben Bernanke reminded investors that he was still concerned about the sustainability of U.S. job growth. The collective sigh of relief among investors that their drug of choice - the Fed's ultra-low interest rates - was not being limited sent stocks up sharply with the small-caps jumping almost +2%. Tuesday was a quiet digestion of the strong Monday move with little change in the markets. Investors looked to book quarterly profits Wednesday as little news was offered. Continued weakness in energy and materials shares pushed markets down -1% before buying in financials pared losses. A situation that reversed in Thursday's session as financials led the way down. Once again, buyers emerged to keep losses modest. The final day of the quarter saw some buying keep the profit-takers at bay. Most indexes ended the day roughly near the flat line to cap the best quarterly performance for stocks in three years.
Another week in which the bulls managed to fend off some selling attempts and deliver green. The S&P 500 (SPY) added +0.83% while the Nasdaq 100 (QQQ) completed a perfect quarter of 13 consecutive weekly gains with a +0.98% rise. The Russell 2000 (IWM) has been decidedly less impressive, trading in a tight fashion for two months now and a +0.16% change this week.
The inaugural week of the current World portfolio cycle, fully stocked with domestic index positions, rose +0.72%. This portfolio is comprised of the top 5 members of our World Ranking from the March 23rd ranking.
Both Classic and Turbo Models remain on Buy signals.
Repetition is the key to learning
With stocks off to a very strong start in 2012, we want to make
sure everyone understands where the current run of our Turbo Model fits in the broader context of the Model's backtested results. We
have noted over the past month how stocks typically run for about
8-10 weeks before succumbing to some form of rest, either in the
form of sideways trading to digest the move, or a reversal in the
other direction to some degree. The Nasdaq Composite
is beyond that 8-10 week
window, having extended its run well into a third month of joy.
The trajectory of that move is somewhat unusual, but more normal
in the context of the very long period of back-and-forth trading
that preceeded it. Still, we want to remind Turbo adherents that
the backtest of the Model shows an average of only one such +10%
trade per year, rarely more. The exceptions occur during crash periods
where the market's swings are abnormal. Turbo trades with returns
of +15% or more occur less than 1 time out of 100 trades. Looked
at another way, the current +20% return on this Turbo signal from
December is only the 4th such trade in 13 years and almost 650 trades.
We are in rarefied air here on this Nasdaq 100 trade.
The normal mode for Turbo is a series of singles and doubles, with
the average return being just north of +1% for a trade and the vast
majority of trades being less than a +/- 3% result. Those singles
add up, of course, which is what gives Turbo its stellar compounded
return over time. Our expectation, based on history, would be that
once the current trade comes to an end, Turbo will return to knocking
out a series of those smaller returns, which could easily generate
another +10-20% return over the ensuing few months.
We obviously do not know what the future holds here, and are happy
to have our signals light the way. We couldn't be happier that Turbo
(as well as Classic) has done its job and got us on board for the
market's move up. We do reiterate that being happy with your profit
is a good time to consider taking some profit. We know that mark
is different for everyone. And following the signal, full-bore,
until its conclusion is a perfectly fine way to proceed. Just understand
that this is a somewhat unusual situation for Turbo.
Question: Are ETNs safe?
Exchange-traded notes (ETNs) are debt instruments that track indexes.
They are an alternative structure to an exchange-traded fund (ETF).
ETFs and ETNs are usually very similar in behavior for the average
investor. They track the index they were built to mimic, holding the
same securities as the index, or at least some facsimile thereof.
The question comes up now because of a high-profile blowup of an ETN
tracking a volatility index. We just last week wrote about the potential
dangers of investing in volatility-focused ETFs because of the pricing
problems that can arise. This week, an ETN backed by Credit Suisse
suffered a massive 50% drop over a two-day span. The ETN had built
up a huge premium over its underlying index as money poured in. When
money pours in, the ETF/ETN manager should buy more of the underlying
index/asset. In some rare cases, however, there is not enough supply
of the underlying index/asset to support the sudden inflow of demand.
This creates a situation where the price of the ETF/ETN shoots higher,
becoming disconnected from the price of the underlying index. The
money is flowing into the ETF/ETN and not making its way into the
index, in this case. The Credit Suisse ETN (symbol TVIX) shot higher
to trade at a huge premium. Credit Suisse resolved the premium by
issuing new shares, thus increasing the underlying supply, and bringing
the price in line with the underlying index/asset. This caused the
premium to quickly evaporate and the ETN's price to plunge.
Premiums and discounts to underlying asset value are usually the province
of closed-end funds where shares are limited. The limited availability
of shares leaves the price vulnerable to supply and demand swings
as a price variable in addition to the changes in the value of the
portfolio of assets held. In some ETFs, such as high yield bonds,
the limited supply of the underlying asset also leads to premiums
and discounts. But these are usually held to +/- 1%. Credit Suisse,
it seems, was unprepared for the surge of funds into TVIX with the
result being a disastrous trading scenario where price lost connection
in a big way with the index. Credit Suisse has egg on its face and
an SEC investigation on its doorstep as a result.
The lesson here is that narrow niche ETF/ETNs can carry additional
risks. It's important to understand what you are buying. Check the
premium/discount to net asset value (NAV) on the issuers website,
see what the normal premium/discount range is, and beware if the premium
is out of the norm.
Warm wishes and until next week.
The TimingCube
Staff
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