Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

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

Market Update

Markets started the week where they left off, that is by moving lower on heavy volume as continuous talks of rising inflation in a slowing economy took their toll. The negative action caused our Model to issue a new Sell signal after the close on Tuesday. Stocks found some stability Wednesday and posted big gains the next day. Given the scope of the previous decline, the bounce did not come as a surprise. It occurred on relatively low volume and was certainly in large part due to short-covering, a phenomenon often seen during market downtrends.

Overall, the major averages did not move much this week. The Nasdaq 100 gained 0.77% while the Russell 2000 lost 1.19%. As for the S&P 500, it was almost unchanged over the 5-day span. All three indices remain under both their mid-term 50-day and long-term 200-day exponential moving averages (EMAs). It should be noted that the Nasdaq 100's 50-day EMA has now crossed below the 200-day EMA, clearly indicating that the index is in a confirmed downtrend. We now have a Sell signal in effect.

Trend Timing School

Seeing red

We share your pain and concern about the recent signals, and the resulting losses. We know first hand the gamut of emotions you are going through from anger to disbelief, and maybe more importantly, a sense of loss of confidence in the Model we so much depend on for our wealth building program. How could it be so wrong and at odds with every recent short term trend?

Our Model does not seek to identify short term trends, but sometimes, like for this most recent Buy, finds them by mistake. We say mistake but it is more the market acting at odds with its historical behavior, and what the Model detected as the start of a solid uptrend turned out to be nothing more than a bull trap.

In retrospect, here is how we see the last few weeks. The uptrend which started in October 2005 petered out in early May this year rewarding our Buy signal with decent gains, especially for those invested in the Russell 2000 (+18.67%) and even more on most international indices. The May 11, 2006 Sell signal was as close to perfect as any trend follower can wish for. Remember that trend following does not attempt to spot tops but rather identify a new trend as it forms. Our Model then got tricked into detecting a trend reversal and the resulting Buy signal issued on May 31 turned out to be a dud. The unfortunately shortened Sell signal gained us between 2% and 5% on most indices, not quite enough to pay for the losses of the ill fated Buy which ranged from 3.61% for the S&P 500 to 6.71% for the Russell 2000. These two figures established new worst trade records since we are live, but the Nasdaq 100 had a higher loss (4.09%) in 2003.

To compound our emotional distress, the most recent Sell signal hit perfectly on cue for a rebound, for once benefiting the mutual fund investors who incur the one day lag. There is little point discussing the performance of this last signal because it is so young, except to say that right now it looks like a strong confirmation of the previous down trend and should be viewed as a continuation of the Sell signal issued early May 11th. It is important to point out that we would have had this most recent Sell signal with or without the prior Buy. The fact that the market gained during the first two days of the signal is an expected technical bounce, very likely a short covering rally. Our judgment or the fact that most observers have declared the market oversold plays no role in our Model.

We know many subscribers are upset at losing 3 to 7% on the last Buy, more with the meltdown seen in foreign stocks (and even more depending on the level of leverage), and most of us are dejected because this latest Sell signal is in the red already. Whenever this feeling hits, there is nothing like a tour down memory lane to regain some perspective. Looking at our historical data, live since June 2001 and backtested before that to 1989, we find some interesting facts. Looking at the Nasdaq 100 for example, 71% of all signals go negative at some point, and over 71% of those go on to be winners. So having a signal dip in negative territory is not all that unusual or necessarily bad.
Another statistic for those who feel that the recent losses are monumental is that the maximum mid-signal loss was -11.05% (that April 16, 1992 Buy actually went on to be a winner), and even more impressively, the largest drawdown was -17.10% (that April 11, 2001 Buy which still went on to be a slight winner). And for anyone tempted to defect Trend Timing for the ranks of buy and holders, during the same period the Nasdaq buy and hold had a maximum drawdown of -82.90% (from the March 27, 2000 high to the October 7, 2002 low).
Regarding our Cash signal, which is discussed in the FAQ of the Week below, the maximum Nasdaq 100 mid-signal loss -11.05% was possible because the Nasdaq Composite never declined 9% and no Cash signal was triggered.

Many subscribers use our signal in conjunction with their own favorite technical analysis tools such as moving averages, trend lines, or the well known gut feeling, and tell us they were able to side-step some of the losses. Such techniques can indeed work at times but they have also cut many of the largest winners in our backtesting. As for using such techniques or our judgment to confirm or invalidate a new signal, it is something we do not do as you can very easily get it wrong. There have been several cases since we have been live where a new signal seemed to fly in the face of our personal or consensus opinion, and yet the signal turned out to be a winner. Therefore, we leave what we think aside and let our Model do its work alone.

We are firm believers in continuous improvement and we will carefully study what happened with this false Buy signal and seek to learn some lessons to possibly improve the model. Any enhancement must meet our stringent tests including improving the stats over our entire live and backtest period to 1989.

Part of the secret to successful investing is to know how to lose gracefully in order to fight another day. Throwing in the towel every time you lose a battle surely leads to giving up. As we frequently say (probably too often) our system is not perfect and no investment system can be right 100% of the time. We believe in our model's long term winning trades ratio (66 %+) and we look forward to a return to our historical averages.

FAQ of the Week

Question: How does the Cash signal work?

As we have seen lately, the early phase of a new signal is the touchiest, because the trend is not yet well established there is a higher risk of reversal against which our Model uses the Cash signal for protection. The 9% Cash signal is automatically issued by our Model if the Nasdaq Composite index moves against our current position by more than 9%, on a close, from our Buy or Sell entry point. There is also a 15% variety of Cash signal which comes into play once the Nasdaq Composite index has advanced 7% or more from our entry point, the maximum drawdown limit is ratcheted-up to 15% and the Cash signal becomes a trailing stop to protect our gains. This means that from then on, if the Composite declines 15% from its most recent closing high on an active Buy signal, or moves up 15% or more from its recent closing low on an active Sell signal, a Cash signal will be issued. It goes without saying that these percentages are un-leveraged and do not represent worst case number (since the market could blow by the Cash level in session before we even issue the signal). A Cash signal simply invalidates the previous trend and signal, and positions us in cash until the market establishes a new trend and our Model issues the corresponding signal. No Cash signal has ever been triggered since we are live.

Like all of our signals, the Cash signal derives from the Nasdaq Composite index but is applied to other broad market indices, domestic and international. Different markets have varying relative strength and some may be down more or less than the Nasdaq when the Cash signal is issued. If you are not prepared to accept a larger loss than the 9%, you can create your own Cash signal at 9% (or whatever level you prefer) based on your specific investment vehicle. The risk with this approach is that you get cashed out and our signal is not, causing you to miss out on a potentially good move.

We do not use stop loss orders for our own investments, but you can certainly do it for yours if it makes you feel safer. Just make sure that the stops are not too tight to avoid getting whipsawed on minor intra-day moves.

Warm wishes and until next week.

The TimingCube Staff