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Turbo Model
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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
Markets kept their winning ways this week, pausing only briefly on Wednesday before resuming their March higher. The Nasdaq 100 has now risen in 10 of the past 11 trading days. This kind of strength marks a big change from the downward trading action we experienced the first four months of the year. Since the beginning of 2004, the Nasdaq 100 had taken backseat to the Russell 2000 and S&P 500, but it is now outperforming as investors appear to be rotating money back into tech stocks. On the economic front, oil prices moved higher but did not derail the market. On Thursday, stocks got a big boost when it was announced that GDP for the first quarter had been revised higher to 3.5% from the original 3.1% number.

For the week, the Nasdaq 100 and Russell 2000 respectively gained 1.42% and 1.23%. The S&P 500 finished 0.80% higher. All three indices remain above both their 50-day and 200-day exponential moving averages (EMAs). The continuation of the positive market action we have experienced since the beginning of May has reinforced our Buy signal, which therefore remains active.

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Trend Timing School
Fundamental confusion

We wrote about fundamental analysis in our October 10, 2003 article entitled "The difference between fundamental and technical analysis". We have even written about the relationship between the economic and market cycles in the August 13, 2004 Trend Timing School editorial, but we have not really looked at fundamental analysis as it applies to broad markets.

Fundamental analysts generally study countless details of a company's finances, management and operations in order to ultimately establish its intrinsic value. Cash flow, cost of goods, sales growth, and inventories are but a few of the variables that go into assessing whether a company is undervalued and by how much. While some fundamental analysts have a great track record of identifying good long-term value, they all suffer from two main issues: 1) there is no timing indicator and a stock can remain undervalued for a long time, and 2) during bear markets, 80% of stocks decline with the broad market, even undervalued ones. For this and a few other reasons Trend Timers focus on broad market indices instead of individual stocks.

Which brings us to another class of fundamental analysts, frequently economists, who look at endless economic indicators such as interest rates, employment, gross domestic product (GDP), the balance of trades, and the federal deficit to mention just a few, in order to establish the direction of the economy and of the stock market. We espouse the belief commonly held in financial circles that somehow the economy and stock markets are linked. Where we differ is that we do not believe that analysis of such economic fundamentals can reliably predict the market direction. Again, there is the total absence of timing cues, for example, the markets can be in a clearly excessive overvaluation situation for years. The second and most important argument against this type of fundamental analysis as a prediction tool is that everything is relative. The same exact fact or statistic can be a net positive for the stock market one day and a short-time later be clearly bearish. There are endless examples.

We know that higher interest rates are bad for stocks, we know that a declining stock market is ultimately followed by a slowing economy. Yet the public is constantly puzzled by the contradicting messages. Torn between higher oil prices and an inflation-generating economy one moment followed by a sense that the economy might not be so strong after all and may in fact be weakening.

On the other hand you have the "measured" rate hikes from the Fed which many say are doing the job, and the slowing money supply growth which has some economists worried about a coming recession. But it helps ease inflation, which others fear the most. At least partly attributed to increased demand from countries like China and India, commodity price inflation has been at work. Bad for the stock market. Did we mention the housing bubble?

So frequently are long-term trends and short-term reactions caught at cross-currents. Economic news are not only extremely depressing, more importantly, they are almost guaranteed to confuse you. Sometimes the evidence and urgency can seem overwhelming and doubts are hard to put to rest. As Trend Timers we always prefer to ignore much of the never-ending flow of economic information and most importantly squash any analytical temptation. Remember that the markets very seldom do what they are logically expected to do.

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FAQ of the Week
Question: The signal is fine for stock indices but what about currencies and commodities?

Our Model is strictly centered on the broad stock market and therefore is not at all correlated with other markets such as currencies or commodities (i.e. of no use). We currently have no plans to create such other models or services.

Warm wishes and until next week.

The TimingCube Staff

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