A
Cash signal was issued this week!
The Cash
signal was issued Thursday June 26, 2008 after the close of the
market. Read more about it in the "Market Update"
below.
Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
It has been a terrible week for stocks, that saw the Dow Jones
Industrial Average close at levels not seen since August 2006. Whereas
large-cap indexes were almost flat the first 2 days of the week in
anticipation of Wednesday's Fed meeting, small caps and tech stocks lost
ground, causing both the Nasdaq Composite and the Russell 2000
to undercut their mid-June lows. Driven by lower oil prices,
stocks moved higher Wednesday, but gave back some of their gains
after the Federal Reserved announced that it was leaving the
funds rate unchanged at 2% and stated that inflation risks have
increased. The market was then hit by a perfect storm the next
day: a $5 jump in oil prices and disappointing earnings report
from Research in Motion and Oracle combined with downgrades
of General Motors and Citigroup to trigger widespread selling
on higher volume. The Nasdaq Composite lost 3.3% on the day
and the rapid degradation of market action for the index over
the past week caused our Model to issue a Cash
signal after the close Thursday. Please note that a Cash
signal was issued instead of a Sell
because oversold readings within the Model indicate that a solid
rebound is as likely as further deterioration at this point.
Stocks tried to regain their footing Friday with mixed results:
If the Nasdaq Composite managed to close with only a modest
loss, the Dow Jones Industrial Average suffered a drop of almost
1% as the market watched oil prices hit yet another record high
at almost $143 a barrel.
For the week, the Nasdaq 100 (QQQQ), Russell 2000 (IWM) and S&P 500
(SPY) respectively lost 3.73%, 3.96% and 3.08%. All 3 ETFs are now
located below both their 50-day and 200-day exponential moving averages
(EMAs).
For its part, our World portfolio posted a
2.62% loss this week.
The portfolio consists of the 5 top-ranked world ETFs as of
June 20, which marked the beginning of the current 4-week holding
period. Please note that since we now have an active 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 "Our
Service" page for all the details.
We now have a Cash
signal in effect.
Trading
options
The investment
vehicles of choice to implement the TimingCube
strategies have always been index ETFs, with bull/bear mutual
funds as an alternative for retirement accounts where shorting
and margin trading was not permitted. Since inverse and leveraged ETFs have become available over the last two years, the mutual funds have now become much less attractive. While they are easiest to use, ETFs and mutual funds are not the only investment choices, and we routinely receive questions from our
subscribers who are wondering if it is possible to implement
the TimingCube
strategies with options. The answer is yes, options can be
an alternative investment tool for some subscribers to consider.
We say "some subscribers" because options are complex securities,
can be very risky and should only be used by fully knowledgeable
and sophisticated investors or professionals.
Options trading is an entirely different world complete with
its markets, players, rules, strategies, and even its own
jargon. With a topic this broad you might well imagine that
one single article will barely begin to address the subject
matter. We apologize in advance to experienced option traders
and, to a lesser degree, to impatient readers who will just
have to wait through a number of episodes for the plot to
develop fully. Here is how we envision the upcoming "options
curriculum":
- Options
basics and terminology (this article)
- Simple
option transactions and strategies
- How
to simulate short selling with options
- How
to simulate margin trading with options
- Using
options to generate cash
- Using
options to reduce risk
- A
blend of strategies for Trend Timers
Let's
begin with options basics and terminology.
What are options? Unlike stock securities
which convey ownership or "equity" participation in a company,
an option security is a contract that conveys a right to either
buy or sell the financial instrument on which it is based
at a fixed exercise price, before the expiration date. There
are regular options that have expiration dates of up to 9
months after they are issued and there are long-term options
called LEAPS with expiration dates of up to three years. Options
are also frequently described as derivative securities because
their value is at least in part derived from the value of
the underlying security. In the U.S., options are regulated
by the Securities and Exchange Commission (SEC) and all options
and all exchanges work though the Options Clearing Corporation
(OCC). There are many different styles of exchange-listed
options around the world but the only ones we will concern
ourselves with are the so-called standardized "American-style"
traded on U.S. exchanges.
Underlying security. For our purposes the
security on which an equity option is based can be an individual
stock, ETF, or even a market index. There are option-type
contracts for just about anything under the sun, such as commodities,
but these are generally based on futures and are not pertinent
to our option investment activities.
Two option types. The two standard equity
option types are calls and puts. A call option contract conveys
to its owner the right (not the obligation) to buy 100 shares
of the underlying equity, at a set price per share (the "exercise
price" or "strike price"), for a predetermined amount of time,
no later than the expiration date. The buyer, or holder, of
the call could be betting that before time expires, the shares
of the underlying will be worth more than the strike price
of the call option, but as you will discover, the motivations
for an investor to either purchase or write an option can
be many. Conversely a put conveys the right to sell 100 shares
of the underlying, at a set price per share, for a predetermined
amount of time. You buy an option contract from two types
of sellers: either a person that bought an option in the past
and now wants to close out that position, or a person who
chooses to create, or write it. Where the buyer of the option
has a right to exercise, the writer of the option has the
obligation to fulfill its terms if called upon to do so.
Long and short positions. In options terminology
the words long and short have a very different meaning than
with equities. If you buy and own an option, call or put,
you are said to be long the contract. It does not mean you
have a bullish market position. With options, the word short
means that you have written a call or put option, that you
are short that contract and have the obligation to fulfill
its terms if you are assigned an exercise notice.
Sell, exercise, or expire. When you are long
an option contract (you bought it and you own it), you have
the right to either exercise the option (by buying the underlying
shares if a call, or selling the underlying shares if a put),
sell the option in the open marketplace (if it has value and
there is a bid price to buy the option), or to let it expire
unexercised.
Why use options? There are generally three
objectives for contemplating the use of options investment
strategies: portfolio protection, income generation, and speculation/leverage.
The driving force for Trend Timers is primarily as an alternative
to bull/bear mutual funds in retirement accounts. As it turns
out, the strategies we developed specifically to work with
the TimingCube
strategies can combine all three objectives of options.
Requirements:
- Know
exactly what you are doing and getting into or do not touch
options with a ten foot pole. We think very highly of our
Trend Timing School articles but they by themselves do not
constitute complete or sufficient education. See the Additional
Resources section below for good educational sources
- Options
account. You generally need to get your broker to approve
options trading in your account(s) by submitting an Options
Request Form, or one by a similar name. The good news is
that this can be done in just about any regular or qualified
retirement account
- Keeping
your head on your shoulders and your feet on the ground.
Options are very versatile and sophisticated securities
which could be used to create extreme risk where one not
only stands to lose the entire invested capital but more
- Stay
on top of your options. Unlike the "buy and forget" (until
the next signal) ETF or mutual fund investing we normally
do, options require attention and management. For example,
if you let the expiration date sneak up on you, the contract
can expire unexercised and worthless.
Additional
resources: As we said at the beginning, the best
course of action is education. If you are not able or willing
to invest sufficient time and effort on education we respectfully
suggest that you stay away from options altogether, or use
a professional. As registered investment advisors our colleagues
at MARKETTREND Advisors can implement
options strategies in managed accounts for you. If you prefer
the self-education route, here are good places to start.
Question:
How can I find trade prices?
Subscribers and casual visitors to our site frequently want
to double-check some of our published results or investigate
"what-if" scenarios with other securities for which they need
various trade prices. Of course there are numerous sites which
provide historical quotes, such as Yahoo!
Finance. If you use such sources you need to make sure to
use the open price on the trade date and, if necessary, adjust
that price for any distributions and splits.
For your convenience we provide the actual trading prices in
the TimingCube
Charts that can be found from the "Results"
page. To chart your favorite ETF or index, simply enter a ticker
symbol in the "Performance
with individual security" feature at the bottom of our Results
page and select "TimingCube
Chart" on the new window.
As
illustrated in the example above, when you place your mouse's
pointer on any trade symbol (the green and red squares along
the yellow line), the actual trade date and trading price will
be displayed. The displayed prices are the adjusted open prices
on the trade date, unless you charted a mutual fund, in which
case you obtain the closing price on the trade date (since you
cannot trade a mutual fund at the open).
Warm wishes and until next week.
The TimingCube
Staff
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