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Turbo Signal
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Classic Signal
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Classic Model Returns (Long & Short Strategy)
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World
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Russell 2000
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Coming back from a long weekend and a Monday holiday, investors chose to finish the losing month of May with strength, pushing stocks higher seemingly on the back of Germany's agreement to a Greece debt restructuring package. The enthusiasm was short-lived, however. Wednesday brought a continuation of recent poor economic statistics. Investors quickly forgot their Tuesday bluster to inaugurate June with a vicious stock market beating, pushing the Russell 2000 small-cap index
down more than 3% and unloading all of the prior week's gains. Thursday offered a tepid rebound to some market sectors from Wednesday's drubbing, though markets finished mixed and little changed on the day. Stocks keyed off a depressed weekly jobs number Friday morning as an excuse to continue the selling and deliver another 1% drop to the higher-beta Russell 2000 and Nasdaq 100
indexes. The week's pounding handed most domestic indexes their 5th straight weekly loss and sent them back to early January levels; thus, stocks have given up just about all their year-to-date gains now. Consistent with this weakness, our Classic Model issued a Cash signal this evening.
For the week, all domestic indexes suffered, with the Russell 2000 (IWM) dropping the most at a 3.31% decline. The S&P 500 (SPY) and Nasdaq 100 (QQQ) gave up 2.31% and 1.88%, respectively. Those losses pushed all three indexes back below their 50-day EMAs, though they remain above their 200-day EMAs.
Our World portfolio actually bucked the trend with a gain for the week of 0.17%. The portfolio consists of the 5 top-ranked world ETFs as of May 20, which marked the beginning of the current 4-week holding period. Please note that since we have an active Classic Model Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the Classic Model "Description" page for all the details.
Our newly issued Classic Model Cash signal and Turbo Model Buy signal remain in effect.
Trend
followers still looking for something to hold on to
Most short and intermediate-term trend followers are likely to be
nervous wrecks after the past three months. The markets have been
operating on a "buy the dips" mentality. Those dips have
been just sharp enough to kick many trend following adherants out
of the market; only to see stocks subsequently rally back to the
starting line, stop, and reverse course yet again. The chart below
provides the ups and downs that come together to form the picture
of pain for these folks.
Chart 1: Stock churn burns those looking for a short-term
trend
A technical walk-through of the chart from left to right:
- After an almost non-stop rally from September, stocks settled
into a consolidation in mid-February marked by a series of churning
days as the month came to an end.
- Stocks then proceeded to enter full-blown correction mode (or
so it seemed) climaxed by the earthquake in Japan in mid-March (presumably
bearish news).
- But wait! Stocks quickly shrugged off the earthquake damage implications
to drive stocks all the way back to positive for the month (a bullish
reaction).
- Stocks stall out at the prior highs to consider whether there
is any new information that warrants paying a richer price.
- Stocks begin April with another drop downward, leading some to
believe a technical "double-top" (bearish) has been put
in place.
- April 18th sees a sharp intraday recovery in stocks which looks
like it could be the bottom for the consolidation as stocks typically
exhibit such behavior as buyers rush in to stop the decline (bullish).
- Two days later, stocks gap up to seemingly initiate another leg
higher (bullish).
- Three days after that, stocks break through the prior highs putting
in place what technical analysts would consider a classic head-and-shoulders
pattern breakout (more bullish).
- All that technical goodness and investor enthusiasm only lasts
until the end of the month, sadly.
- May begins with four consecutive down days as the "sell
in May" crowd crows. However, the selling appears to largely
stop at the point of the head-and-shoulders breakout - viewed as
a positive by technical folk.
- It's not meant to be, though, as stocks begin winding their
way downward step by step.
- An end-of-month surge higher climaxes with huge May 31st volume
and another apparent break higher - this time up and out of the
downward stepping channel (bullish).
- Alas, once again, stock investors are taken to the woodshed
for believing in a new uptrend. June 1st brings the worst down day
yet. The abrupt shift in sentiment from one day to the next leads
Investors Business Daily to call the move perhaps the quickest change
in market sentiment in history as investors careen from euphoria
over a presumed pushout of Greek debt obligations to despair over
another round of weak domestic economic data.
The beauty of technical analysis is that it keeps us from making
emotional decisions - the charts tell us what to do, and we follow
the charts regardless of our preconceived notions of the economy,
market, et al. Yet, technical analysis doesn't prevent us from being
thoroughly disgusted and emotionally whipped by an indecisive market
that throws out false signals like beads at a Mardi Gras Carnival
parade.
While there is nothing much we can do to minimize these false signals
(they are part of the landscape for short and intermediate-term
traders), there is something we can do to improve our investment
account health throughout the process: vary our allocation amount
based on a broader set of factors.
There are times when a signal feels wrong but is oh so right. There
are times when a signal has maybe a more mediocre chance of delivering
heavy gains; it might give us a home run, but the likelihood seems
low. Wouldn't it be great to know such a shading in advance? While
we have no quantitative way to determine how "strong"
a signal is just from our in-house model inputs, there are external
factors that we can consider to decide whether to go after the signal
with all our muscle, or just a touch of our money.
This recent market churning coupled with some of the items we have
talked about in prior weekly updates have given careful readers
reason to proceed with more caution on any Buy signals - for example,
the shift away from cyclical stocks toward defensive sectors. Along
those lines, strength in U.S. Treasury bonds over the past two months
has been further cause for caution about stocks. Being cautious
does not mean that a Buy signal won't be profitable, nor that a
Sell signal will be a big winner. It just means that the odds for
a home run on a Buy are perhaps somewhat less than at other times.
While no one has any hard and fast rules for what makes a given
signal better or worse, stronger or weaker, we do recognize that
many of our subscribers would enjoy more information to help them
make better allocation decisions regarding the signal. Our intent
going forward is to use our Weekly Updates to offer a little more
"color" around the base Classic and Turbo Model signals.
In doing so, we hope that we can further increase your success using
our investment system, and move your perspective to a more holistic
view of the system and beyond just whether the signal provides a
profit or not. After all, a buy-and-hold system will ultimately
provide a profit if you have the time - decades? - to let markets
work their way higher. When it comes to trading, it's helpful to
discern whether what's coming your way is the "fat" pitch,
or whether we're just looking to hit singles.
To that end, we would view the market with caution right now. Bulls
are having trouble sustaining and adding muster to any and all rally
attempts. Stocks will break, up or down, out of this trading channel.
Until they do, any profit opportunities will likely be modest.
Question:
Why is the Turbo Model struggling to deliver winners?
While we all wish that every signal delivered a profit to our accounts,
we must recognize that trading systems are a game of averages. Just
as the greatest baseball player only gets a hit one-third of the
time, a trading system like Turbo does well if it provides more
and bigger winners than losers. Our history shows that the Turbo
Model delivers a winning signal about 70% of the time. That's a
good track record. But the other key to success with a trading system
is limiting losses so that we have alot of powder left to profit
from the winners. On that front, Turbo does an excellent job, with
an average loss of 2.27%. To be sure, there have been a few times
when Turbo has strung together 3 or 4 losing signals. This typically
happens once each year. So, this latest string of losses is not
unheard of. Also occurring once per year, in almost all years of
our testing, is a >10% profit on a signal, with a >20% profit
fairly typical.
The bottom line being that trading systems have their good times
and their rough patches. Our Turbo Model has rough patches like
all trading systems. But they rarely inflict more damage than any
garden variety market pullback while overcoming those "pullbacks"
with some stellar results for just a little bit of patience. Having
come off a fairly recent 20%+ result from September 2010 to March
2011, we think it's not unusual for the market, and our Turbo Model,
to be encountering some choppy waters. Consistent with our message
above, dip your toe into the signals for awhile, and align your
expectations with the model's history - which is good, but not perfect.
Warm wishes and until next week.
The TimingCube
Staff
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