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Turbo Model
Classic Model




Signal Update
Current Signal Performance as of
Signal Type
Trade Date
Index
Return since issued
Nasdaq 100
Russell 2000
S&P 500
QQQQ

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
QQQQ

Note: QQQQ returns are included for continuity sake.

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Market Update
Stocks moved markedly higher this week, buoyed by lower oil prices and a tame inflation report. It has been a powerful advance, as illustrated by the fact that the Nasdaq Composite has now risen for six consecutive days. The April core Consumer Price Index (CPI), which excludes volatile food and energy costs, was released Wednesday and came in flat. The number was better than expected and helped alleviate recurring inflation concerns, sparking a big up day for the markets. On the technical front, the picture has clearly improved: all major indices closed the week above both their 50-day and 200-day exponential moving average (EMA). Further, the Nasdaq Composite's 10-day EMA has now crossed back above the 200-day EMA, meaning that per our own definition, we are now in bull market territory. We have therefore moved to Quadrant 1, defined as a Bull/Buy  combination (please refer to our December 19, 2003 Weekly Update for more information on Trend Timing quadrants).

All three major indices we follow performed very well this week: the Nasdaq 100, Russell 2000 and S&P 500 respectively gained 3.91%, 4.71% and 3.05%. Needless to say, the week's action has gone to reinforce the active Buy signal we issued on May 11.

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Trend Timing School
Hedge funds DIY

For most of us hedge funds are shrouded in mystery, and except for the occasional news stories - often of the sensational or scandalous type - we know very little about them. The general impression we have is that they can generate great profits, they are very risky, they use derivatives, and only rich people can invest in them. The reason for us to care nevertheless is that, despite their reputation, hedge funds as a group have historically performed better than the stock market at lower levels of risk for the lucky few. And for the rest of us, there is Trend Timing as our very own "do-it-yourself" (DIY) hedge fund.

Hedge funds have been around for over 50 years but, by design, still very little is known about them by the public at large. The truth is that, in exchange for only allowing institutions such as pension funds and accredited investors to buy into them, the SEC has freed hedge funds of registration and regulations. The SEC defines accredited investors as having an annual income of at least $200,000, or a net worth exceeding $1 million. Such accredited investors are described in Regulation D as investors that are financially sophisticated and have no need for the government's protection. For the protection of everyone else, hedge funds may not solicit an investment in the fund by any form of "general solicitation" or "general advertising", which also explains the broad absence of information about them.

So, what is a hedge fund? In contrast with mutual funds which for the most part attempt to perform well relative to the market, and go down when markets drop, hedge funds seek positive absolute returns regardless of what the market or a particular index does. Not having the many constraints and restrictions placed upon mutual funds, the hedge fund manager can be more aggressive and have a full range of strategies such as short selling and using leverage, but also have the flexibility to trade in derivatives. A derivative instrument, such as an option or a futures contract, is an investment vehicle whose value depends on the performance of an underlying security or asset. Derivatives allow the hedge fund manager to make broad bets on the direction of interest rates, currencies, commodities, or the stock market. They have traditionally been used by institutional investors to increase overall portfolio return or to hedge portfolio risk. This is exactly what hedge funds do.

Except for a few well publicized and reported failures, the best known example of a hedge fund has to be George Soros' Quantum Fund which in many ways helped define the space for decades. The fund also averaged an annual return of over 30% for its 35 year history. Of course, returns are never guaranteed, and few managers will consistently deliver timing decisions as profitable as George's. We are certainly not providing hedge funds a blind endorsement. There are bad ones. Some take too much risk or have bad management. Still, if you number amongst the wealthy, the reasons to invest in a hedge fund are to seek higher returns and diversification.

If not, you simply implement your favorite Trend Timing strategies. In a very real sense our investment system is much like a macro directional hedge fund. Using our trend following Model as a guide we place bets on the direction of the broad stock market. By using a little elbow grease, the Long and Short trading strategies, leverage with discretion, or even options as described in the four weeklies starting January 21, 2005, each of us can achieve the positive absolute returns delivered by hedge funds. And with "Managed Accounts" you can even drop the DIY moniker!

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FAQ of the Week
Question: What data do you use to generate the signal?

Our Model consists of several proprietary components and indicators, but it is primarily driven by price and volume action of the Nasdaq Composite Index. Surprisingly to some, it generates one single signal which applies not only to Nasdaq Composite or Nasdaq 100 related investment instruments, but to most of those tracking broad market indices.

Disconnects between indices do not last long. Just have a look at the returns on our "Results" page. It will clearly show you that our signal works very well across many indices, including international ones. This is due to the correlation of the markets; you can review the Trend Timing School of the June 11, 2004 issue of the Weekly Updates "The Trend is contagious", for more information about correlation of markets.

Since we cannot predict which of the indices will be outperforming in the future, we generally recommend diversifying into a blend of the three main indices (Nasdaq 100, Russell 2000, S&P 500), and possibly some international ones as well.

Warm wishes and until next week.

The TimingCube Staff

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