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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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Stocks once again posted solid gains this week, allowing the S&P 500 to close at its highest level since early November and to turn positive for the year. Most of the action occurred Monday, as market participants disregarded General Motors' bankruptcy filing to instead focus on positive economic news: consumer spending fell less than expected in April while construction spending actually improved during the same month. Also on the plus side, the ISM index of manufacturing activity for May turned out to be better than analysts anticipated. The main indexes rallied as a result, with the Nasdaq Composite finishing the day 3.1% higher. After digesting their gains over the next two sessions to remain almost unchanged, stocks returned to their winning ways Thursday. The S&P 500 tacked on another 1.2% despite mixed economic news: if productivity increased by a strong 1.6% during the first quarter, May retail sales were disappointing with a 4.4% drop vs a year earlier. The main averages gyrated during the week's last session to finish little changed following the release of the May employment report. The Labor Department announced that 345,000 jobs were lost last month, far less than the 520,000 that was expected. The positive news was toned down by a surge in the unemployment rate, which hit 9.4% last month vs an 8.9% reading in April.
The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively gained 2.18%, 3.96% and 6.04% on the week. All 3 ETFs are now located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio trailed its
U.S. counterparts this week with a 0.45%
loss. The portfolio consists of the 5 top-ranked world ETFs
as of May 22, which marked the beginning of the current 4-week
holding period.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Trend
Timing in 401k and 403b Plans
The Employee Retirement Income and Security Act of 1974 (ERISA)
paved the way for the introduction of 401k and 403b plans now
offered to millions of American employees. The purpose of the
Act was to give employees more direct access to and control
over their company-provided retirement plan. As with most Congressional
acts aimed at protecting investors, the ERISA resulted from
a series of abuses. ERISA set forth numerous guidelines for
plan administrators as they perform their fiduciary responsibilities,
a "fiduciary" being anyone who manages assets for
another person.
Plan administrators are often large investment institutions
such as Fidelity Investments, State Street, T.Rowe Price, et
al. The plan administrator typically determines which money
managers and investment choices are offered in the plan. The
vast majority of plans offer participants a variety of mutual
funds from which to build their portfolio. The mutual fund choices
almost always include a range of investments, from conservative
bond or balanced stock/bond funds to aggressive growth stock
funds.
For many Americans, their 401k or 403b represents the bulk of
their non-housing related investments. Most view their 401k
or 403b as a fairly static investment plan that changes very
rarely. As a result, many participants find their plan balance
following the gyrations of the stock market up and down with
little thought given to how they might do a better job interacting
with their plan's funds and improving their performance.
As observers of market trends, we understand that paying even
cursory attention to the ebb and flow of the broad markets can
make a huge difference in the growth of our wealth over time.
The following chart shows the percent gain we need to overcome
a given % loss. As an example from the chart, find the point
showing a 50% loss. Such a loss requires a 100% GAIN
in order to get back to even.
Chart 1: The impact of losses. - The First Rule Of Investing
Is Also The Second Rule... -
Copyright 2009. Crestmont Research (www.CrestmontResearch.com)
Given how difficult it is to recover from losses of any significant
magnitude, our approach is to focus on avoiding the losses in
the first place. Then, we can spend more energy growing our
wealth rather than always working just to get back to breakeven.
It is by absorbing these large losses that investors find themselves
running in place for years during dangerous secular bear periods
such as the current decade.
The first point here is to accept that we must avoid losses.
That is our first priority, always. The second point is that
we cannot ignore our 401k or 403b plan because of its long-term
horizon. The professional investment community will preach the
wonders of having a long-term view, as if the long term will
solve everything, as if it will undo the damage that a bear
market has wrought. Over decades that will likely happen. But
we argue that it's far easier and far more effective to acknowledge
upfront that the markets can inflict serious damage and to be
prepared to sidestep such hits to our wealth.
Given that 401k and 403b plans differ dramatically in their
investment choices, your first step in protecting your wealth
is to understand which choices in your 401k or 403b menu are
conservative and which are aggressive. Conservative choices
can be: money market funds, short-term bond funds, other fixed
income/bond funds, near-term "lifecycle" funds (Fidelity's
Freedom 2015 Fund would be an example), and even balanced funds.
Think of these conservative choices as our umbrella to bring
out during rainy days and seasons. The other choices in the
401k or 403b plan will vary in their level of aggressiveness.
You can sort these further if you wish, but it's a secondary
consideration. We primarily just want to know where to go when
the market is in a bad state, so we can move there quickly.
Knowing that we have our rainy day funds, how do we read the
weather? For trend-oriented investors like ourselves, we do
not predict the market weather. We use easily available tools
to tell us what the market is doing and react accordingly. We
can use the TimingCube
signal as our guide moving to our conservative funds during
Sell signals. But
these are long-term assets in our retirement plan and we may
not want to be that active. Or your friends and family may be
unfamiliar with investing and reluctant to follow such a seemingly
offbeat investment strategy as TimingCube
provides (some view TimingCube
as the investing equivalent of the too-good-to-be-true deal).
We can be substantially successful just by avoiding the major
market corrections and bear periods. With this perspective,
we do not have to make changes to our investment choices very
often at all.
Past Trend Timing School articles have outlined
various methods for identifying the market's trend. Using a
10-month moving average is a very easy and long-term reference
point. If the market closes below that average on a monthly
basis, you can move some or all of your 401k or 403b plan funds
to the conservative rainy day fund you have identified. This
protects your assets, helps you avoid damaging losses, and keeps
you from ever having to work hard just to get back to breakeven.
Chart 2: 10-month Moving Average on S&P 500
This 15-year chart of the S&P 500 ETF (SPY)
shows that following this simple 10-month rule would have protected
you from almost all of the damage the stock market has thrown
our way. There is an occasional false signal as with all such
systems. You can certainly use the TimingCube
signal as a cross-check or confirming signal of this simple
system. However, over a long investment period, these basic
trend timing methods will keep your portfolio's rainy seasons
to a minimum and provide for a very sunny retirement.
(Note: our friends at MARKETTREND
Advisors are always available to help you sort out
your 401k or 403b choices. Feel free to contact them for a no
obligation portfolio or plan review at info@markettrendadvisors.com).
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FAQ of the Week |
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Question:
What is "window dressing"?
On
Friday, May 29th, the stock and bond markets saw
a surging rally in the last hour of trading. Professional investors
recognized this dramatic behavior as a typical end-of-month
window dressing move. With a stock market still holding on to
a three-month long rally, brokers and advisors want their client's
monthly statements to show a fully invested account with minimal
cash. They want to "window dress" or "pretty-up"
(for you technical folks  )
the statement to meet their client's expectations. Pay attention
to the market the last day of any month or quarter and you will
often see buys of the strongest sectors and sales of the weakest.
Seeing a statement that reflects the winners of the period while
not showing the losers looks a whole lot better, makes for a
more palatable month-end statement, and happier clients. Just
recognize it for what it is - a possibly very short-term trade
made for superficial reasons that may reverse completely in
the days that follow.
Warm wishes and until next week.
The TimingCube
Staff
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