|
Current
Signal Performance |
|
|
Turbo Signal
|
Trade Date
|
Turbo Model Returns (Long & Short Strategy)
|
|
|
|
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Classic Signal
|
Trade Date
|
Classic Model Returns (Long & Short Strategy)
|
|
|
|
World
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Stocks delivered another halting performance this week with uninspiring economic reports providing a slack backdrop to trading. U.S. investors awoke Monday to a flood of red tape crossing world markets. Fears that Italy and Spain were being sucked into the Eurodebt crisis coupled with yet another report of slowing economic activity in China to push stocks down. However, after the opening 1% gap down stocks traded flat through the day, showing some resolve among bulls to continue providing support. That resolve spilled over to oil, gold, and related stocks Tuesday. A Goldman Sachs report offering a bullish forecast for energy demand was the catalyst. The Nasdaq Composite's
0.46% drop on the day showed that non-energy sectors were still not finding many buyers. Wednesday extended Tuesday's pro-energy/resource sentiment. Stocks in those sectors lifted the market along with a positive analyst report on Apple. It should be noted that Apple has steadfastly maintained support at $330 all year, with the only two closes below that mark being strongly reversed the following day. This is a handy "line-in-the-sand" for tech stocks, the Nasdaq, and the broader market. Wednesday's positive mood propelled the small cap Russell 2000 index to a solid 1.45% gain while the broader indexes notched a 0.6% updraft. Small-caps carried their party into Thursday's trade despite a lackluster GDP report and continued high jobless claims. Somewhat optimistic consumer sentiment numbers kept trade positive Friday in a quiet pre-holiday session. Viewing the week overall, the U.S. dollar, after spiking higher to begin the week, gave up all those gains and then some as investors chose to return to beaten-up commodities and related stocks. In part, this appeared to be some end-of-month rotation among sectors with money shifting out of recent defensive winners: healthcare, staples, and utilities, and into other areas. Still, most large-cap indexes endured a fourth consecutive losing week, albeit barely, while U.S. Treasuries logged a seventh straight week upward. U.S. Markets are closed Monday in observance of Memorial Day.
For the week, the S&P 500 (SPY)
only slipped 0.07% while the Nasdaq 100 (QQQ) fell 0.59%. The small-cap Russell 2000 (IWM) beat back the bears to post a gain of 0.95%. All indexes with the exception of the Nasdaq 100 were able to reclaim their 50-day exponential moving averages (EMAs) by week's end after gapping below it to begin the week. All indexes remain well above their 200-day EMAs.
Our World portfolio picked up 0.37% for the week. This portfolio consists of the 5 top-ranked world ETFs as of our most recent 4-week rebalance on May 20th.
Our Classic Model remains on Buy signal while our Turbo Model is now on a Sell signal.
Building
an investment model
This week we pull the curtain back a bit on TimingCube's publisher,
Fraser Partners, LLC, to discuss some of their non-TimingCube activities.
Frank Minssieux and Thierry Fabre, two of the Fraser Partners, worked
to build the Models you see as TimingCube's Classic and Turbo. Lately,
they spend much of their time researching and building custom models
for investment advisors. We thought it might be interesting to dig
a little deeper into what makes a good trading system from their
model-building perspective. Herewith, Frank and Thierry paint a
picture of their world as investment strategy developers.
When you build a Model, where do you start? What are you trying
to achieve?
Define the Box ... in terms of risk
"Most advisors are looking for an answer to a given investment
question. We boil that question down to a "box" into which
the strategy's results must fit. We define the box by the typical
risk-return characteristics, first and foremost. People look at
risk from varying angles, of course. It can be simple volatility.
However, advisors focus that by usually responding to their client's
tolerance for drawdowns. The drawdown is the maximum loss from the
peak. Think of it as how far one falls from the top before stopping.
The sooner we stop that fall, the better! If we can keep that fall
under 10%, or even closer to 5%, we are pretty pleased with that
result. For comparison, the stock market gives up 25-50% during
a bear market phase. Advisors find that declines greater than 10%
really sap their client's confidence, even though a 10% decline
in the stock market is a fairly normal part of doing business. The
market delivers a 10% decline once a year, at least. We figure that
if we can prevent their clients from experiencing those 10% declines,
they will stick with the investment strategy and capture the resulting
long-term benefits. It's the drawdowns, the perceived losses, that
kick investors out of the market more than anything else. We want
to minimize the opportunity for that emotional reaction.
... in terms of return
The return objective is fairly straightforward. It's easy to say
that more return is better. But not all returns are created equal.
If you get a 40% return one year, for example, that does buy you
some time in the strategy typically. But investors that are excited
by the big outperformance are likely going to be the same investors
that will immediately bail out of a strategy if it underperforms
the market the following year. They are looking for the hottest,
fastest stuff, and often don't have the patience to hang around
for anything they perceive as mediocre - even though it may be a
winner when considering risk. We think this emotional reaction to
high returns is one reason options and currency trading have become
more popular - this eternal pursuit for outsized performance. Now,
we obviously love to deliver that performance! After all, our new
Turbo Model is built for that type of action. But you will note
that Turbo's results are also pretty "lumpy" with spectacular
performance some periods while only solid performance other times.
When building a strategy for an advisor to attract clients, however,
it's better to have steady returns than to have returns that spike.
Those steady returns allow clients to build up confidence in the
strategy, which, in turn, allows them to weather a bad month here
or there.
... in terms of diversification
The 3rd side of the box is diversification. Investors have a belief
that diversification is a positive attribute. However, many don't
really know how to define diversification much of the time. They
see it only as a collection of assets. It's intuitive that the internet
ETF is more diversified than any single company within the ETF.
But it's not so intuitive for most people that investing ONLY in
the S&P 500 as a single position in the SPY
, for example, is
being diversified. It certainly doesn't FEEL diversified, even though
that one investment is representing 500 companies. Thus, we want
to build strategies for advisors that not only are diversified,
but that they can easily sell and explain as diversified. That means
holding a collection of assets rather than the singular "concentration
of force" concept that drives the published TimingCube strategies,
whereby we might place all our money into the Nasdaq 100 (QQQ)
. This part
of the puzzle is a big difference between building a portfolio strategy
compared to building a single Model, as we present on our Web sites.
... in terms of trading
The last side of the box is trade frequency. This preference really
depends on the person. Most brokers and advisors prefer to spend
the majority of their time interacting with clients, both existing
and prospective. Thus, they would rather have a strategy that does
not trade all that often - some want only one trade every two weeks,
or even once per month. The tradeoffs typically become managing
drawdowns without having a lot of trades. You can build a reasonably
effective market timing Model that avoids a good chunk of a bear
market. But that system will typically exhibit some heavy drops
before it exits, and will similarly lag upon its reentry. Conversely,
you can keep drawdowns very low by selling positions very quickly
on the slightest hint of a change in trend to the downside. But
you will be trading all the time, and will be frustrated when the
market shifts gears and leaves you behind - you could be spinning
your wheels an awful lot. In the end, building a system that trades
with just enough regularity to keep the portfolio out of danger
and responsive to major trend moves is the balance we are looking
for.
In the end, building a good investment system is some parts art,
some parts science. You are trying to put together a system that
won't get derailed by investor or advisor emotions, but still achieves
their objectives. As we all know, the stock market is an inherently
volatile world. Taming that volatility while still capturing the
bulk of the returns offered is what we are all trying to achieve.
The two TimingCube Models, Classic and Turbo, come at that resolution
from different angles. They each do a reasonable job getting to
the goal line objective of good risk-adjusted returns. Combining
those methods in a broader ETF portfolio can enhance one or more
sides of that box we outline above. It's like a never-ending puzzle,
in part because the market is always shifting, investor moods are
always a-changing, and the foundation we are working from is dynamic.
When the markets are doing well, people want more return and tend
to think less about risk. When the market crashes, they want less
risk in exchange for even a small token return. Building a system
that meets both of those mindsets is what we are working all the
time to deliver.
Question:
Does your system work only with major indexes?
Though our Web site reports daily on the results of our signals when
applied to the major U.S. indexes, the signals can be very effective
when used with many other securities. For example, Apple (AAPL)
has been hard to beat as a buy-and-hold stock since the market recovery
began in March 2009. Yet, applying our Turbo Model to the AAPL stock
would have performed noticeably better. The picture below comes
from our "Results" page where you can try out your own preferred stocks
and ETFs to see how well our signals would guide them. In this case,
we're showing the results of applying the Turbo Model to AAPL while
using the leveraged short Nasdaq ETF (QID)
for the Sell signals.
Using the Turbo Model would add just shy of 20% more to your annual
returns since January 2009. Even going to cash during Sell signals,
instead of buying a short ETF, would have resulted in a materially
better performance. We think this feature, available at the bottom
of the "Results" page for either Classic or Turbo is a fun and handy
tool to maximize your benefit from our signals.
Chart 1: Applying the Turbo Model to AAPL stock
Warm wishes and until next week.
The TimingCube
Staff
|