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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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After a
poor start to the week, stocks recovered partially but nevertheless
finished with losses over the 5-day span. The main averages
took it on the chin Monday as overnight weakness in foreign
bourses spilled over to the U.S. markets. After the recent run-up
by equities, it appears that profit taking was in order, causing
the S&P 500
to shed 2.4% by day's end. Stocks continued their retreat Tuesday,
amid conflicting economic reports: while new home construction
increased by 17%, industrial production and capacity utilization
fell more than expected. The S&P 500 dropped another 1.3% as
a result. Stocks managed to stabilize over the next two sessions
following the release of positive economic news. First, the
Labor Department reported that the number of people filing for
unemployment claims is abating. Second, the Conference Board's
index of leading indicators jumped 1.2% in May, indicating that
economic conditions are gradually improving. Stocks finished
the week on a positive note, as leadership among technology
and financial issues helped push the markets higher Friday,
the Nasdaq Composite
finishing with a 1.1% gain during the session. Trading volume
was particularly heavy as Friday was a so-called "quadruple
witching" day, which marks the simultaneous expiration of four
different kinds of options and futures contracts.
The Nasdaq 100 (QQQQ)
and Russell 2000 (IWM)
respectively lost 1.34% and 2.79% on the week. They remain located
above both their 50-day and 200-day exponential moving averages
(EMAs). The S&P 500 (SPY)
did slightly worse with a 3.20% loss and is now located in-between
its two EMAs.
For its part, our World portfolio trailed its
U.S. counterparts this week with a 5.34%
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. Please note that the World portfolio is being
rebalanced today, as the current 4-week holding period is now
over.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Context
is everything
Treasury Yields SOARING!! U.S. Dollar CRASHING!!
These headlines scream from recent publications of popular investment
newsletter writer Martin Weiss. Mr.Weiss is not alone in serving
as the town crier for investors. Many other commentators identify
seemingly alarming trends and put them in caps so we do not
miss the critical and historic nature of what we are witnessing.
The question is whether such alarm is warranted, accurate, and
a true investible trend.
Indeed, yields on the U.S. Treasury bond are moving higher as
depicted in our Chart 1.
Chart 1: 10 years U.S. Treasury bond yields
But is this really such a dramatic event? Are Treasury yields
really "soaring" to unprecedented heights? Our Chart
1 above certainly suggests they are. However, if we
broaden our view to the past nine months, a period that was
truly historic in its financial market dislocations, we observe
that the trend in the 10-year U.S. Treasury Bond yield is actually
flat.
Chart 2: ^TNX before and after the crisis
The Chart 2 above shows that yields are just
returning to where they were before the crisis. This movement
in yield is nothing more than a simple return to normalcy; the
result of money flowing to safety during the crisis last fall
and back to riskier assets now that calmer markets have returned.
Fine, you say, but the federal budget deficit and record Fed
printing of money will surely push yields to record heights.
Maybe so. However, if we step back even further to look at ten
years worth of the U.S. Treasury yield we observe a pretty typical
pattern. Treasury yields fell during the 2000-2002 recession/bear
market and again during the current recession. They moved modestly
but steadily higher as the economy recovered from 2003-2007.
Thus, the link between Treasury rates and the economy appear
to be relatively intact.
Chart 3: Medium term ^TNX Trends - 2000 until now
One step further back shows us that the 10-year U.S. Treasury
Bond yield has been in a downtrend for almost twenty years!
It would take a 10-year Treasury yield above 4.5% before we
would consider the downtrend possibly broken. That certainly
seems likely in the next economic upturn given that yields are
already approaching 4.0%..
Chart 4: Long term ^TNX Trends - 1991 until now
The point of this series of ever-widening views is not to comment
on the future of Treasury rates nor is it to cast dispersions
on Mr.Weiss' comments. Indeed, he has been right in his calls
throughout much of this crisis and we applaud him for protecting
his subscribers. The point is to recognize that there are short-term
trends, intermediate term trends, and longer term trends. The
financial press and media will often make no distinction between
them. In fact, in this 24/7 news cycle, they will typically
treat a short-term event as far more important than the bigger
picture as they must keep their viewers riveted to their channel
- e.g. ALL news, no matter how mundane, is now "Breaking
News!!!". As trend following investors, we must understand
the context of the trend and ignore the "noise" created
by the media and many other noise creators. Otherwise, they
throw us off our game and introduce emotion (our biggest enemy)
into our investing.
Investing your hard-earned funds according to emotion and hyperbolic
newsletter language is not usually the best way to go. At TimingCube,
we have found that following the intermediate term trend provides
the best risk-return for our money. Other traders might be quite
successful following shorter trends. We wish all investors success,
of course. But beware next time the media tells you that: Bank
stocks are SOARING!! That may just be the story of the day,
the hour, or the past minute. It may not be an investible trend.
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FAQ of the Week |
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Question:
Can you apply trend timing to the bond markets?
The short answer is "yes, of course"! However, bonds,
like stocks, come in a wide variety of flavors, making some
credit markets better prospects for trend timing than others.
Or perhaps another way to look at it is that some markets are
better for long-term timing while others lend themselves to
shorter-term efforts. For example, government agency and mortgage-backed
bonds tend to be relatively less volatile than most bonds. High
yield bonds, by comparison, behave more like stocks with a fairly
high level of volatility. Trends in high yield and emerging
market bonds lend themselves fairly well to intermediate trend
timers while other segments of the bond market are better suited
for longer-term trend watchers. At this point, most of your
bond timing is likely to be long-only as few alternatives exist
for shorting bonds - the inverse Treasury ETFs (symbols: PST
and TBT) being the exception. Though bonds are considered conservative
investments in a broad sense, there is actually quite a bit
of volatility as evidenced by our discussion above on U.S. Treasury
rates. Trend timers can take advantage of this volatility. However,
given that stocks and bonds are often not well correlated, our
TimingCube
signal is not very applicable to bond markets. But simple trend
timing approaches do work and can generate handsome profits.
Warm wishes and until next week.
The TimingCube
Staff
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