TimingCube - Bull markets, pullbacks, and corrections - bull market,pull-backs,corrections,bear market,trend changes

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At the risk of sounding repetitive, today's Weekly Update marks yet another anniversary, but much more significant this time around.

Our active Buy signal is exactly one-year old, today!

It was issued after the market close on April 2, 2003 and many of us traded accordingly the next day. Anniversaries always bring back various memories and emotions, and many are thinking "Yes, I remember where I was when I received the Buy signal. I placed all my buy orders that same evening for execution at the following morning's open price."

These were exciting times, full of potential and promises. A more tangible reason to celebrate the first anniversary of an investment position is that, at least in the United States, there is a significant tax advantage between long-term capital gains (security held over a year), and short-term capital gains (security held less than one year). We are not tax advisors but we know that our short-term gains are taxed at our respective marginal tax rate, while long-term gains are taxed at a flat 15%. For many this can be a difference of 10% or more, BIG help we can all use.

For those of us with the majority of our investments in tax-deferred retirement accounts, we don't pay taxes until we start withdrawing so we just have to be content with the impressive one-year results since we bought at the open on April 3, 2003: (39.21% for the Nasdaq 100, 60.37% for the Russell 2000, and 29.47% for the S&P 500).

But enough reminiscing, back to the serious business of weekly updating!

Signal Update

Current Signal Performance as of

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

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
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

It's been a great week for the markets, capped with big gains on Friday thanks to a much better than expected employment report. If you needed proof that the bull market is alive and well, here it is. Trading volume jumped on Friday, a clear sign that big institutional investors are now re-entering the market. Subscribers who followed our Buy signal and bought on recent weakness have experienced significant gains since the middle of last week. Earnings season is just about to start and the news is expected to be good, as the economy keeps improving. The Nasdaq 100 finished the week 5.29% higher. The Russell 2000 gained 5.33% to close at a new 52-week high. As for the S&P 500, it gained 3.05%.

Although now one-year old, our current Buy signal is still going strong and remains active.

Trend Timing School

Bull markets, pull-backs, and corrections

While we are in a bull market, and we know markets do not go straight up forever, we might as well gain an additional edge by defining and understanding the key phases of a bull market: up legs, pull-backs, corrections, and contrast these with the real bear market that inevitably follows one day.

We all understand and like the 'up leg' segments of the bull market, but often what determines our ultimate profits is what happens and what we do in between the spurts, namely during pull-backs and corrections. Our ability to recognize pull-backs and corrections is critical because on the one hand we want to let the bull run and stay with the Buy signal as long as profitable, but we do not want to suffer the losses of a major correction, or worse, of a bear market. Always remember that all bear markets begin as mild pull-backs.

The stock market is not an exact science and it cannot be fully assessed by any single simplistic indicator or metric. Just like our Model which detects trend changes and issues the signals relies on a multiplicity of indicators and the presence of several confirming factors, a correct reading of the market should always be based on an array of detectors.

In the we presented the very distinct psychologies of bull and bear markets but also introduced a simple technical analysis tool to help telling them apart. Using this definition, the respective movements of the 10-day and 200-day exponential moving averages (EMAs) and in particular their cross-over points, generally do a very good job at detecting bulls and bears. There are many other definitions and detection methods. Today we review one of the simplest techniques which can also provide a somewhat more practical point of view, namely "defined ranges". The technique simply defines percentage bands from the most recent high to differentiate pull-backs from corrections, and corrections from bear markets. The following numbers are the ones we like from our own experience, as always simple works best, but there are many diverging opinions as to what the exact cut-off numbers should be.

	% off the most recent top
Pull-back	0 to 10%
Correction	10% to 20%
Bear market	20% and more

Study of the markets over the last century has provided ammunition for numerous books and theories. Here are some of the oft stated 100-year statistics for bull markets:

There have been about 20 of them in 100 years
On average, they last 33 months and repeat every 5 years
The average gain during the bull market is 115%

Similar figures exist for corrections and pull-backs as well. While providing some interesting glimpses at history, and endless trivial pursuit material, such statistics do very little to help the investor. Why? Because the standard deviations are so enormous, one cannot extrapolate and draw similar conclusions about present market conditions with any degree of accuracy.

What really helps us stay on the right side of the market through as much of the bull run as possible is to understand the bull market psychology - such as "the bull mostly wants to resume its predominant upward trend" or "pull-backs and corrections are good opportunities to buy on weakness", or "corrections are healthy for the bull" - and in turn trust the probabilities because they work in our favor. Since there are many more pull-backs than there are corrections, and many more corrections than bear markets, there is safety in staying the course. In a pull-back the odds favor a renewed up-leg instead of a deeper correction; during a correction the likelihood is better for resumption of the bull than to degenerate into a full fledged bear market.

As usual, with the Model watching our backs, we do not need to do anything until the next signal is generated. But in the mean time we find comfort in the fact that we see each pull-back and correction for what it really is, without excess anxiety.

FAQ of the Week

Question: Do you issue intraday signals?

No, we do not look at intraday data. TimingCube's Model is run at the end of each trading day using market close data. If a new signal is issued, it will be posted on this Web site and accessible by subscribers at the Signal by Phone number by 7:00 pm ET that same day. Subscribers are also notified of the signal change by e-mail.

Warm wishes and until next week.

The TimingCube Staff