Follow TimingCube » Follow TimingCube on Facebook Follow TimingCube on Twitter Follow TimingCube on LinkedIn
Turbo Model
Classic Model




TimingCube In the News:

We just posted a new article entitled "Downturn worries? Create a correction alarm", by TimingCube co-founder Serge Dacic on our "In the News" page. The article appeared in the Monday May 10, 2004 issue of Investment News.

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.

Back to the Top of the page


Market Update
Inflation fears and interest rates continue to weigh heavily on the markets. For the past two weeks, major indices have failed to recapture any significant portion of the previous month's losses. This has caused a further degradation of the market's technical picture. Both the Nasdaq 100 and the Russell 2000 closed the week below their 200-day simple moving average (SMA), ending with losses of 0.45% and 0.88%, respectively. As for the S&P 500, it finished the week lower by 0.27%.

The inability of the market to rebound confirms that a new downtrend is in place and our active Sell signal continues unchanged.

Back to the Top of the page


Trend Timing School
Risks and Rewards

We have frequently written about how important risk management is to Trend Timing, including dedicated editorials on key tools and techniques such as (October 24, 2003), (January 23, 2004), (March 12, 2004). We now take a broader look at risk and risk management as perceived and practiced by Trend Timers.

Investment logic as well as empirical evidence suggests that higher risk comes with an opportunity for higher returns (or higher losses as the case may be). As soon as we invest in anything other than risk-free holdings like a savings account or U.S. Treasury bills, we are accepting some amount of risk on our capital in exchange for potentially higher returns. Every investor's challenge is to manage that ratio favorably in accordance with their own risk tolerance.

There are many different measures of risk such as beta, Sharpe ratio and others. We will spare you the formulas and calculations (which you can find on many sites such as Investopedia.com, the Motley Fool, or StockCharts) and instead try to concentrate on the concepts. Most risk yardsticks are really measures of volatility and standard deviation. This comes from the notion (flawed in our opinion) that an investment that performs consistently year after year (even with tiny returns) is better than one with large return variations from year to year. We do not believe that volatility by itself is bad, to the contrary, volatility is a key ingredient in achieving higher returns. Yes, just looking at traditional risk measures, the Trend Timing system exhibits a lot of volatility, which we gladly take any day in order to achieve the all important risk/reward ratio.

Although we thrive on volatility, compared to speculators and many traders who have much higher risk tolerance, Trend Timers are typically long-term, low-risk types.

We all need to determine our own risk preference, and how much we tolerate depends on many things such as age, financial objectives, income requirements, and time horizon. The real question we all need to ask ourselves is "how much am I willing to lose in order to achieve my investment goals?". In general, the higher the age, the lower the risk tolerance because most capital is used to generate current income and there is little time left to recoup potential losses. Being able to hang in there while we experience temporary losses is a prerequisite in obtaining the gains. It is important to remember that many Buy and Hold investors (according to most volatility measures, Buy and Hold is lower risk than a Long and Short strategy) cannot stomach the mounting losses during bear markets and bail out at or close to the bottom. As trend following Trend Timers, we do not have to stomach such disastrous losses because we know we would be switched to benefit from the falling market instead. In addition, we always have declines constrained thanks to the 15% trailing-stop Cash signal (30% with full margin). Depending on the investment vehicle and strategy used your actual losses could be higher or lower and there is no hard limit on how much stock investments could fall in a single trading day. Often, just knowing exactly what the maximum downside is makes all the difference in the world.

Looking at our "Results" page it is striking to notice that the strategy judged the riskiest by conventional wisdom - Long and Short with Margin - has consistently outperformed the less risky ones over most time periods, even on a risk-adjusted basis. The point we are trying to make is not that you should commit all your money to Strategy 4, but rather that often, investments which look the safest on paper turn out to be the worst when looking at risk-adjusted returns instead of risk alone.

In the end, we firmly believe that the biggest risk most investors face is the missed opportunity of achieving their life's wealth building dreams. Too many do not have the discipline to save, are afraid to start investing, fall off the wagon, or constantly chase the next best investment advice. Accordingly, providing you, our subscribers, with a non-emotional Model and the tools and the support system that helps you remain firmly committed is our first and foremost priority.

Overall, we believe that a central benefit of Trend Timing is that it helps us reach for dramatically higher returns with a known and very limited increase in risk which results in an optimal risk/reward ratio we can live with and profit from for years to come.

Back to the Top of the page


FAQ of the Week
Question: What is the problem preventing me from shorting some ETFs such as IWM?

The following scenario happened to many of us after the recent Sell signal: "I wanted to sell short the Russell 2000 ETF (IWM) and my broker told me that he does not have enough shares for the trade". This situation arises frequently with ETFs that have low liquidity.

The way a short sell is implemented is that your broker effectively borrows shares from a pool of shares owned by other clients. For safety reasons, the broker will only borrow a small percentage of the available shares to be sure he has enough available if many of these clients decide to sell their shares. To make a long story short - excuse the pun, unlike very liquid ETFs such as QQQ and SPY, IWM shares are currently in very short supply so they are very difficult to short. And you should know that even if your trade went through, your broker usually reserves the right (read the short selling small print) to force you to cover the short at any time he needs the shares back. Short covering is the action of closing the open short position by purchasing shares and returning them to the broker. If you are in need of a refresher on short selling, read the November 7, 2003 Trend Timing School editorial entitled

The bottom line is that you are better off avoiding shorting illiquid shares altogether. If you still want to achieve the effect of shorting the Russell 2000 index, we would recommend buying the Russell 2000 inverse or double inverse mutual funds offered by ProFunds: SHPIX or UCPIX.

Warm wishes and until next week.

The TimingCube Staff

Back to the Top of the page


Follow TimingCube » Follow TimingCube on Facebook Follow TimingCube on Twitter Follow TimingCube on LinkedIn

   Turbo Model
   Results
 
   Classic Model
  
   Site Map
   Glossary

TimingCube® is a registered trademark of Fraser Partners, LLC.
Disclaimer/Terms of Use    Privacy Policy
©2001- Fraser Partners, LLC
  All Rights Reserved.