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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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Stocks retreated modestly again this week, which marked the beginning of earnings season. The major averages lost ground during Monday's session after a drop in oil prices caused weakness among energy stocks that spilled over to the rest of the market, resulting in a 0.3% loss for the S&P 500. After the close, Alcoa released its quarterly report, which proved disappointing as the company missed sales estimates. The news pressured stocks at the open Tuesday, with a 3% drop in oil prices also taking its toll. The net result was an additional 0.8% loss by day's end for the S&P 500. The main averages managed to rebound modestly during the next session following the release of the latest Federal Reserve beige book, in which the Central Bank pointed to solid economic gains across sectors. The Nasdaq Composite closed 0.6% higher on the day. With weekly jobless claims data coming in worse then expected, stocks initially moved lower Thursday, but a late turnaround allowed the main indexes to recover all their intraday losses to finish almost unchanged. After the close, Google reported better-than-expected quarterly sales but missed its earnings target. If the news weighed on the tech sector Friday, the rest of the market was able to rise on positive economic indicators: consumer price inflation remained under control in March, while industrial production increased and consumer sentiment continued to improve. The S&P 500 gained 0.39% on the day to finish the week on a positive note.
The Nasdaq 100 (QQQ), Russell 2000 (IWM) and S&P 500 (SPY) respectively lost 0.53%, 0.56% and 0.62% on the week. All three ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 1.43% loss over the five-day span. The portfolio consists of the 5 top-ranked world ETFs as of March 25, which marked the beginning of the current 4-week holding period. Please note that since we have an active Classic Model Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the Classic Model "Description" page for all the details.
Our current Classic Model Cash signal and Turbo Model Buy signal remain in effect.
What
is the future of bonds?
This may sound like a strange topic for TimingCube,
who normally focuses exclusively on stock market timing!
But with the market being more hesitant lately, the economy still
under high pressure, and where every up or down move is triggered
by some piece of news or the lack of, our current Classic Model Cash
signal certainly makes a lot of sense. This situation may or may not
last, we have no way to tell, but we thought it would be interesting
to review again some of the investing alternatives while our accounts
are in cash.
Note
that an account may be in cash more often than we might think,
for example, many of us are restricted to a Long Only
strategy in our retirement plans. During Sell
signals, instead of going short, we have to sit in cash, typically
in a money market fund to at least earn some interest. The
same situation arises when we are lucky enough to have new
money to invest, e.g. the semi-monthly contribution to a 401(k)
plan, which we prefer to keep in cash until the next signal
is issued.
While money
market funds are known to be the vehicle of choice for risk averse
investors, bonds are often also referred to as a safe and well balanced
alternative to stocks. Since
almost every retirement plan and broker offers a number of bond
fund choices, many come to wonder why they would not be better than
the money market fund. The short answer is: it depends. Let's just
state clearly that at times bond funds can lose money.
Before we go much further we need to establish a base of understanding,
sorry for the experts. Contrary to stocks which represent ownership
in a company, bonds are debt instruments, or loans for which you
are the lender, if you buy the bond. The borrower is generally a
government entity (the U.S. government, states or municipalities)
or a large corporation. While they are often called fixed-income
investments because of the yearly interest rate they pay until maturity,
there are other variables that come into play. Their value fluctuates
with interest rates and, as stocks, with the laws of offer and demand.
Bonds come in many flavors of issuers, maturity dates, interest
rates, risk level, etc. Everything from rock solid treasury bills
to junk bonds. The same goes with bond funds and it is hard to generalize,
but one thing they all have in common is that your principal can
fluctuate up or down (unlike a money market fund or cash) and in
periods during which interest rates (also known as yields) go up,
bond funds tend to decrease in value.
The largest broad bond funds tend to be the safest. Two well-known
giants are the PIMCO Total Return Fund
(PTRAX) see Chart 1 below - and the Vanguard Total Bond
Market Index Fund (VBFMX), but there are many other ones that are similar, including bond
ETFs.
The 3-year chart of the PIMCO fund below clearly shows that the
bond share price can drop substantially at times. Worse, and not
shown on this chart, are times, like the late seventies and early
eighties, when long interest rates zoomed to over 18% and bonds
were in a desperate bear market.
Chart
1: PIMCO Total Return Fund compared to the S&P 500
The stock market and bonds often move in opposite directions although
this is not always true as you can see on Chart 1. During
stock market declines, bonds are seen as a safe haven and their
prices go up as a function of increasing demand. But then there
are also times when they move in the same direction, as it has been
the case for almost two years now. The stock market has been recovering
from the 2008's financial crash, and at the same time, the bond
market has been flourishing in an environment where interest rates
are kept close to zero (the Fed's QE2 bond buying program was of
course one of the main drivers behind this bond rally).
The general feeling is that this situation will not last very long.
As we wrote in the "Weekly Update" from last December, the bond market seems to be ripe
for a correction, at least from a technical analysis stand point.
As illustrated on Chart 2, the 30-year U.S. treasory bond
yield curve is on the upper band of a multi-decade descending channel,
warning of downward pressure. Nonetheless, the yield on a 30-year
U.S. treasury bond is still attractive at above 4.50% compared to
any money market fund, the problem of course is more the risk of
depreciation of the bond itself.
Chart
2: Long-term Treasury yields trending down
The reason TimingCube
does not recommend bond funds is that our Models do nothing to
predict the future of interest rates. When we issue a Sell
signal for stock market investments, long-term interest rates could
be going down (and bond funds would be best), or they could be going
up (and then money market funds would be safest). In the present
situation, interest rates have no much room on the down side, so
the safest approach would be to keep your cash in a money market
fund. The more adventurous could even consider playing against the
bond market. ProFunds and Rydex have bond funds that use derivatives
to move in the opposite direction of the 30-year Treasury bond,
i.e. they make money when rates go up (like the ProFunds Rising
Rates Opportunity fund
(RRPSX) and the Rydex Juno Investor fund (RYJUX). There are even ETF alternatives to these funds as mentioned in
the FAQ below.
Question:
Are inverse bond ETFs available?
While in theory bond ETFs can be shorted as a bet on rising interest
rates, word has it that your broker will likely "not have any shares
available to short", not so much because there aren't any but because
individual investors are routinely shut-out of the shorting opportunity
by institutions and the broker's in-house trading desk. But, thanks
to Profunds and Direxion there are now inverse bond ETFs available.
Inverse bond ETFs present the same advantage over bond mutual funds
as their equity counterparts. Namely, they trade like stock and their
expenses are lower than their mutual fund counter-part (about 0.65%
- 0.95% versus about 1.50% for mutual funds).
Here is a list of inverse bond ETFs coming in various maturity terms
and leverage:
Ticker |
Fund |
Leverage |
Expense
Ratio |
Issuer |
|
TBF
|
ProShares
Short 20+ Year Treasury
|
-1x |
0.95% |
|
TBX |
ProShares
Short 7-10 Year Treasury
|
-1x |
0.95% |
|
TBT |
ProShares
UltraShort 20+ Year Treasury
|
-2x |
0.95% |
|
PST |
ProShares
UltraShort 7-10 Year Treasury
|
-2x |
0.95% |
|
TBZ |
ProShares
UltraShort 3-7 Year Treasury
|
-2x |
0.95% |
|
TYBS |
Direxion
Daily 20 Year Plus Treasury Bear
|
-1x |
0.65% |
|
TYNS |
Direxion
Daily 7-10 Year Treasury Bear
|
-1x |
0.65% |
|
TYO |
Direxion
Daily 7-10 Year Plus Treasury Bear 3x
|
-3x |
0.97% |
|
TMV |
Direxion
Daily 20 Year Plus Treasury Bear 3x
|
-3x |
0.97% |
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Warm wishes and until next week.
The TimingCube
Staff
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