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Turbo Model
Classic Model




Signal Update
Current Signal Performance as of
Signal Type
Trade Date
Index
Return since issued
Nasdaq 100
Russell 2000
S&P 500
QQQQ

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
QQQQ

Note: QQQQ returns are included for continuity sake.

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Market Update
After three quiet days, markets moved markedly lower on Thursday and Friday. Rising oil prices and renewed concerns of slower economic growth were given as explanations for the sell-off, as investors booked profits following the big run-up from the April lows. Trading volume ran higher as the markets fell on Thursday. Volume increased again Friday, but a close look shows that it was artificially inflated by the yearly reshuffling of the Russell 2000 index that took place at market close, as fund managers readjusted their portfolios accordingly. Without this reshuffling, Friday's volume would have been significantly lower than Thursday's.

For the week, the Nasdaq 100 lost 2.47%. It now sits in between its 50-day and 200-day exponential moving averages (EMAs). As for the Russell 2000 and S&P 500, they respectively lost 2.14% and 2.09%. Both indices remain above their 50-day and 200-day EMAs. Despite this week's negative action, our current Buy signal remains in effect.

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Trend Timing School
Stock splits

In the last FAQ of the Week entitled "Why did IWM lose 50% of its value overnight?" we introduced the notion of stock splits but did not really elaborate on what they are or on their purpose. So why do stock splits occur and should we care?

Stock splits are a way for corporations and fund managers to control the share price and the total number of outstanding shares without affecting market capitalization. The market cap of a company or fund, which is calculated by multiplying the total number of shares by the share price, does not change as a result of a split.

There are various flavors of stock splits, with the most common ones being so-called forward splits of 2-for-1, 3-for-2, and 3-for-1. There are also reverse splits, such as a 1-for-10, but these are far less frequent and the motivation for them is very different than for the forward kind. A reverse split is generally done by a company in deep trouble as an attempt to prevent being de-listed by a major stock exchange. Stock exchanges have many rules including a minimum price for a share of stock. When a company's stock loses significant value and falls below that limit, generally set at $1 on major exchanges, the share price can be artificially boosted, at least temporarily, by a reverse stock split.

Back to the more conventional forward stock splits. They have become part of corporate and institutional culture because of the widespread belief that they present certain psychological advantages. Management fears that if the price of their company's stock or fund shares grows too high, say above $100, it becomes so expensive that small investors will not buy it anymore, and that this will in-turn put a lid on its price and growth. Conversely, by lowering the share price a stock split is thought to make the stock more attractive to investors. Many in the industry have come to believe that a split is a positive indication of a stock that is "on the move" and doing well, and there are even investment newsletters that focus almost exclusively on that theory by recommending primarily stocks that announce splits. There is of course no conclusive proof that a stock that splits will perform better than others in the future.

Not everyone in the industry endorses the stock split psychological advantage theory. One of the most notable opponents is none other than Warren Buffett, one of the most successful investors of all times, the Chairman and Chief Executive Officer of Berkshire Hathaway. The Oracle of Omaha believes that stock splits are for the birds and wants no part of them. In fact, Class A shares of Berkshire Hathaway (BRK-A), after appreciating at an average annual rate of about 22% since 1965, now stand right at $83,000. Yes, that's $83,000 for one share! So much for the theory that a high price will limit the growth of a stock, but for those of us of somewhat lower means, Mr. Buffett has kindly issued 'B' shares (BRK-B) which are "only" priced at about $2,780 each!

So, whether you are for or against them, since the value of your investment is really unaffected by a stock split, is there any downside for the individual investor? The only possible drawback we could come up with is the potential for higher broker fees. While most brokers have moved to flat commissions, the same fee regardless of how many shares you buy/sell, some have not. If your account is with such a brokerage house, a stock split, by increasing the number of shares you own, could increase the fees you will have to pay when you ultimately sell the stock.

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FAQ of the Week
Question: Do the 9% and 15% rules apply to options?

As described on the Model page, both the 9% and 15% varieties of our Cash signal are measured on the Nasdaq Composite Index, not any particular investment. If and when such a signal is issued (note that the Model has never triggered a Cash signal, yet) it will apply to all investment vehicles used to implement the strategies, including options. Specific investments might move more or less than the Nasdaq Composite Index, especially leveraged ones such as options.

Warm wishes and until next week.

The TimingCube Staff

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