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Signal Update |
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Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
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World |
U.S. |
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Nasdaq
100
(QQQQ)
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Russell
2000
(IWM)
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S&P
500
(SPY)
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Market Update |
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Despite seesaw action this week, all major indexes managed to finish the 5-day period with modest gains. Stocks climbed sharply Monday, yielding the Nasdaq Composite a 3.1% daily gain. The market was lifted by a strong performance from financials after Bank of America was upgraded by Goldman Sachs. Investors were also pleased to learn that the National Association of Home Builders Housing Market Index reached its highest level in 8 months, suggesting that the worst of the housing slump might be behind us. After a quiet session Tuesday that saw the major averages little changed, stocks rallied at the open the next day, but the gains could not be sustained as stocks reversed course to close with modest losses. The reversal was in part due to news that the Federal Reserve cut its GDP forecast for the year while raising its unemployment target. With world markets selling off Thursday on news that Standard and Poor's was threatening to downgrade the U.K.'s credit rating, U.S. stocks opened lower but were able to recoup part of their losses by day's end. The main indexes still finished in the red, but trading volume remained low, suggesting that large institutional investors were not dumping their shares. Stocks finished the week Friday with another quiet, low volume session that left the main indexes almost unchanged ahead of the Memorial Day week-end.
The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively gained 0.51%, 0.35% and 0.06% on the week. All 3 ETFs are still located in-between their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio vastly outperformed
its U.S. counterparts this week with a 3.93%
gain. The portfolio consists of the 5 top-ranked world ETFs
as of April 24, which marked the beginning of the current 4-week
holding period. Please note that the World
portfolio is being rebalanced today, as the current 4-week holding
period is now over.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Recent
Rally Bears the Imprint of Well-known Investor Playbook
Over the past few years, the emergence of the internet and the
increase in computing power available to all of us has seemingly
changed the investment landscape. We have enormous volumes of
stock market data at our disposal; data that heretofore was
only offered at a steep price to large investment institutions.
Depending on your investing confidence, this mountain of data,
now at your fingertips, is either overwhelming, confusing, or
a phenomenal leveling of the investment playing field. The answer
is probably some combination of all three of those emotions
for most investors.
In the wake of this data flood has emerged a wide offering of
software programs and internet sites promising easy "systems"
for individual investors. The systems offer simple color-coded
investment "guidance" that is seemingly simple to follow and
apparently infallible. Sites such as WizeTrade, VectorVest,
and many others have leveraged their color-coded boxes and basic
red/green arrow indicators to tremendous sales and phenomenal
growth. Individual investors flock to such programs as they
appear to demystify the presumably complex world of investing,
offering even the unschooled investor a chance at riches.
Of course, these sites and software programs are never as simple
as they first appear. The companies follow up the initial enthusiasm
with plenty of training courses and handholding -- many now
even offering daily web television guidance and recommendations
on the markets. The intent being to serve their customers and
improve their chances of success, of course, but also to become
an indispensable one-stop shop for all their investing advice.
A sort of investing "cult" is created by each of these systems,
for better or worse (we acknowledge that Trend Timers, in their
own quiet way, might exhibit some of these same attributes 
).
This desire to make investing a simple, easy path to riches
speaks to our basic emotions. Some may find it surprising that
professional investors have their own versions of these red/green
arrows, their own basic playbooks to narrow down their investing
choices. One of these playbooks has been clearly on display
thus far in 2009 and especially as the market shot up from the
March 9th low.
The Sector Rotation Playbook is widely followed amongst investment
professionals. The basic version is simple enough. Divide the
major market sectors into those that benefit directly from the
economy's growth (known as "cyclicals") from those that are
somewhat agnostic to the economy's motions (the "defensive"
sectors). Primary cyclical sectors are things like basic materials
(e.g. steel, chemical companies, etc.), industrials (GE, UPS,
3M, et al.). Defensive sectors are healthcare, utilities, and
consumer staples (companies like Proctor & Gamble which
sell things that people presumably buy regardless of economic
conditions). Rounding out the major sectors are technology,
finance, and consumer discretionary (primarily retailers).
The Sector Rotation Playbook holds that finance, consumer discretionary,
and technology stocks are the biggest movers after a recession.
The reasons for each of these sectors being the beneficiaries
of a bottoming economy vary. But the playbook is clear -- these
are the places to invest at the bottom of the economic cycle.
And almost every investment professional knows it. Looking first
at the sector returns from past market bottoms sets the action
plan for the Sector Rotation playbook during the latter stages
of a bear market.
Table 1: Sector performances during the first year of
Bull Markets 1970 - 2003
Source: Standard & Poor's Equity Research, Nasdaq, Russell.
Past performance is no guarantee of future results.
Note: Since 10/90, GICS Sector Index performances were used
in place of a simple average of sub-industry indexes.
Also, the S&P Small Cap 600 replaced the Russell 2000 in
the 2002-03 observation.
Sector performance since the beginning of the year (Chart
1) and from the most recent market bottom (Chart
2) confirms the influence of the Sector Rotation Playbook
in the market's recent leap. Clearly, money has been moving
OUT of the defensive, non-cyclical sectors and INTO the sectors
that benefit from an economic and market recovery.
Chart 1: Sector performance since the beginning of the
year
Chart 2: Sector performance since the the most recent market
bottom
Whether the economy confirms the market's recent suggestion
of an economic bottom remains to be seen.
In so many areas of investing, it is not the fundamentals of
the economy that necessarily lend the dominant voice. Well-known
shortcuts and investor emotion supply the forces that drive
the money into one sector or another. Professional investors
are not immune to these forces and, in some ways, act with even
more of a herd mentality than individual investors. Understanding
these playbooks of the pros and recognizing their imprints on
the market helps us determine what is behind some of the trends
we observe. For trend followers, we have the luxury of remaining
agnostic regarding economic projections and guesses on sector
recoveries. We benefit from the herd mentality and will continue
to do so, regardless of which playbook provides the backdrop.
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FAQ of the Week |
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Question:
What does it mean that the market is "consolidating"?
As we have observed many times, markets move in a never-ending
series of waves -- up and down. Sometimes these moves higher
or lower are sharp, occurring in a sudden burst of buying or
selling activity. This buying or selling moves the market to
a new price level. As these bursts of activity subside, the
market typically enters a period of rest where it digests the
recent flurry of buying or selling. A part of this rest phase
is the bulls and bears considering what this new price level
means for their market view. For example, the recent rally took
the S&P 500
January and February. It's only natural that the frenzy of activity
would eventually slow down and investors to stand back and look
at the results of their burst of activity. For some, this rest
is an opportunity to bank gains from the move up or down. For
others, it's a chance to reevaluate their assumptions on where
they believe the market is headed. This period of relative quiet
and flattish market movement is called "consolidation" and inevitably
leads to another move as new information affects investor's
psyches and outlooks.
Warm wishes and until next week.
The TimingCube
Staff
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