Signal Performance as of
Pushed by a batch of positive economic news, stocks continued their
ascent this week. Market action remained largely restrained the first 3
days of the week as investors simply waited for the latest Federal
Reserve's decision on interest rates. The Fed announced Wednesday
afternoon that it was cutting the funds rate by 25 basis points, from
2.25% to 2%, and also hinted that it may pause for some time before
deciding if rates need to be cut further. Investors did not immediately
cheer on the news, but did so the next day, also comforted by the fact
that the economy did not fall into recession in the first quarter, but
instead grew by 0.6%, as the government announced. As a result, Thursday
turned out to be a great day for the markets, with the Nasdaq Composite
powering up 2.8% on heavy volume. It is interesting to note that there
is some sector rotation going on: tech stocks, semiconductor companies,
retailers and even financials have performed very strongly of late. On
the other hand, with the Fed implying that interest rates may have
bottomed, the dollar got a boost, which in turn knocked down previous
leaders such as agriculture, oil, materials and commodities-related
stocks. On the employment front, the Labor Department released a
better-than-expected jobs report Friday morning: employers only cut
20,000 payrolls in April, much less than the 75,000 economists had
anticipated. The unemployment rate also fell to 5%. These numbers show
that the economy is in better shape than first thought and may be able
to avoid a deep downturn. If stocks initially moved higher on the news,
they retreated partly on profit taking Friday, still capping another
strong week for the markets.
The Nasdaq 100,
S&P 500 and
Russell 2000 respectively gained 3.30%,
1.15% and 0.53% over the 5-day span. The S&P 500 has now joined the
Nasdaq 100 by finishing the week back above both its 50-day and 200-day
exponential moving averages (EMAs). As for the Russell 2000, it remains
situated in-between its 50-day and 200-day EMAs.
For its part, our World Index Ranking portfolio
gained 2.70% this
week. The portfolio consists of the 5 top-ranked world indexes
as of April 25, which marked the beginning of the current 4-week
Our current Buy
signal remains in effect.
Fed to the rescue
With their latest rate cut this week, the Fed's aggressive
easing campaign since September of 2007 has brought the target
Federal Fund Rate down from 5.25% to 2%. With unusually large
as well as unscheduled emergency rate cuts, the Fed has apparently
been successful in convincing investors that it will do what
it takes to keep the economy from falling into a recession.
Even more important than the rate cuts are the Fed's unprecedented
liquidity injections and their demonstrated willingness to
intervene forcefully in the private sector to bail out any
financial institution that may get in trouble. The visible
result: Wall Street heads higher on unbridled optimism about
the credit crisis being under control. It is no surprise that
the most recent stock market low established on March 17,
2008 coincided with the last-minute bargain buyout of Bear
Stearns by JPMorgan with a little help from the Federal Reserve.
Even the moribund U.S. dollar has regained some strength lately.
Normally, lower interest rates can weigh on a nation's currency
as traders transfer funds to countries where they can earn
better returns. Since the middle of March the dollar has rallied
in the face of lower Fed rates indicating that currency traders
now believe, however temporarily, that the Fed succeeded in
averting a major liquidity crunch induced financial panic
and a severe recession.
To top it off, the government just released the preliminary
GDP numbers (Gross Domestic Product, which measures the economy's
growth) for the 1st quarter of the year which at
+0.6%, just like the 4th quarter of 2007 (what
are the odds?), proves irrefutably that the economy has not
entered recession territory. Never mind that a large part
of the numbers was driven by government deficit spending,
inventories growth and a very optimistic inflation assumption
of 2.6%. While 0.6% growth is really no growth at all, seemingly,
nothing could curb the market's confidence.
While it is extremely hard to see clearly through tears of
enthusiasm and jubilation, a few calmer minds have noticed
that the last few weeks have been extraordinary in the historical
context. The Fed has been forced to take measures that have
not been employed since the Great Depression and, but even
more ominously, it had to take actions that have never been
used before, period.
The Federal Reserve which has traditionally been the overseer
of banks and the monetary policy has unilaterally redefined
its role. It has anointed itself the protector of Wall Street.
While the masses swallow the media spin hook, line and sinker,
many industry insiders are trembling. They know just how scared
the Fed is because this time around, the very fabric of our
financial and monetary system is hanging in the balance. More
than one financial expert has labeled the Fed's actions as
crossing the financial Rubicon. For anyone in need of a Roman
history refresher, according to Wikipedia.com the phrase "crossing
the Rubicon" refers to any people committing themselves
irrevocably to a risky and revolutionary course of action
- similar to the current phrase "passing the point of no return".
Specifically, the Fed has created two new lending facilities
for primary dealers and facilitated the Bear Stearns/JPMorgan
merger with a special loan of $30 billion seen by many as
outright monetization of worthless credit derivatives. Since
the establishment of the Term Auction Facility (TAF) in December
2007 to provide greater liquidity to the system it has increased
in size several times, and in March the Term Securities Lending
Facility (TSLF) was created to provide Treasury securities
to primary dealers in exchange for a wide array of qualifying
securities for a 28-day term. Many see the Fed accepting an
ever wider array of qualifying securities and believe that
these are revolving loans which are for all practical purposes
never going to be reimbursed, or only with much cheaper dollars
way down the road.
The fact that the recent Fed policy changes took place without
any of the normally mandated discussions with Congress and
no formal public disclosure explains why the average investor
is oblivious to the dangers. For now, the market consensus
is that the Fed has become the invincible knight battling
the evil forces conspiring to undermine the U.S. financial
system. One by one it successfully defeats them all. There
does not seem to be a menace that the Fed's panacea, massive
injections of liquidity, cannot overcome. History and experience
do not apply anymore because we live in a new era in which
the rules are different and in which actions bear no consequences.
Or do they?
How did TimingCube performance stack-up over the last 12 months?
There are plenty of performance details on our own "Results"
page, but for once we decided to go find the answer where, together
with some 660 other timing services, our performance is independently
As it turns out, the TimingCube
World Index Ranking Long/Short strategy, with
a 12 months return of 29.16%,
was THE top performer of all the non-leveraged
diversified strategies tracked (see Chart 1 below).
Chart 1: TimingCube
World Index Ranking Long/Short 12-months return (Courtesy TimerTrac.com)
This also compared favorably to the market as a whole as exemplified
by the S&P 500
which lost 10.77% over the same time frame. In fact, our preferred
strategy led by quite a margin, especially when you consider
that TimerTrac imposes a 30-day delay on TimingCube
results (at our request, so as to not give away our signal),
which means that while we ranked ourselves against 12 months
returns for competitors, ours were actually for the 11 months
from 4/30/2007 to 3/31/2008.
To complete the picture, TimerTrac's results for our Long
and Short strategy applied to the Nasdaq 100
was 5.16%, and for the World Index Ranking Buy and Rebalance
strategy it was 7.70%. These third party findings corroborate
that, at least for the last 12 months, both our Trend Timing
and our Momentum models worked to beat the broad market but,
more importantly, that when the two models are combined their
performance has been unbeatable.
Warm wishes and until next week.
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