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)
|
|
After a one-month drop, stocks were able to post a solid rebound this
week. With concerns over the banking sector still lingering, the main
indexes moved lower Monday. They continued to drop Tuesday morning,
undercutting their recent lows, before a sharp drop in oil prices helped
stocks move back up. By mid-afternoon, the Nasdaq Composite was sporting
a 1.7% gain, but a late-day pullback caused the index to close flat.
Wednesday's session saw the major averages score big gains, with the S&P
500 closing 2.5% higher. The rally was triggered by a sharp rebound in
financial stocks and lower oil prices, as crude dropped to under $135 a
barrel, losing $10 in just two sessions. On the economic front, consumer
prices jumped 1.1% in June but the core CPI, which excludes food and
energy costs, only rose 0.3%. With oil prices shedding another $5 a
barrel Thursday, stocks were able to continue their ascent, also helped
by better-than-expected earnings reports from financial bellwethers
JPMorgan Chase and Bank of America. with Microsoft and Google both
missing their earnings targets after the close, tech stocks were set for
a rough session Friday. Indeed, the Nasdaq 100 lost 1.63% on the day,
but the S&P 500 was able to fare much better, closing with a slight gain
instead.
For the week, the Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000
(IWM)
respectively gained 0.07%, 1.73% and 2.39%. All 3 ETFs are still
located below both their 50-day and 200-day exponential moving
averages (EMAs).
For its part, our World portfolio posted a
0.34% 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. The World portfolio is being rebalanced today, as the
current 4-week holding period is now over. 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.
Our current Cash
signal remains in effect.
On
the margin
You do not have the time to grow your nest egg, or the required
starting capital? Not to worry. Leverage will supercharge your
investments and let you leapfrog ahead. If we were guaranteed
to get the perfect Buy/Sell
signals (all timely and profitable), and that the investment
vehicles we use to generate the desired leverage delivered perfectly
on their promise, we could get very rich very fast. Don't believe
it. That's a lot of ifs. The more likely scenario is that the
market does not oblige, and instead of strong and well defined
up and down trends, it delivers unpredictable stops and starts.
As always at the worst market junctures, leverage has become
all the rage. The financial industry has built a whole new sector
for derivative investment products, a new economy they say.
Institutional investors, hedge funds and their wealthy sponsors
have been reaping the benefits of highly leveraged strategies
(unless the underlying happened to be real estate loans or interest
rates, of course!). Investing on margin and leveraged derivatives
have always been around for sophisticated investors. The trouble is that the new leveraged ETF products are so simple to use that innocent investors could be tempted to buy them, unsuspecting of possible consequences.
To be upfront about it, we have an axe to grind. We are not
big fans of leverage and margin in general, and for the coming
economic phase we believe that those with the least debt and
leverage will do best. The odds are highly stacked against the
big risk takers. Yes, when the next signal comes, be it a Buy
or a Sell, we will
jump in with both feet, but we will not invest more than we
have, because we will never risk more than we have. There are
numerous analogies in popular folklore to the leverage dilemma,
such as "The Hare and the Tortoise". Very few paint the greedy
and impatient as the winner.
To understand how margin investing works, let's briefly look
at a specific example: if you have a margin account (retirement
accounts do not apply) with $10,000, you could borrow up to
the same amount from your broker to invest for a total portfolio
of $20,000. That's what's called being on full margin because
from your perspective you have borrowed a full 100% of your
own capital. From your broker's point of view you meet the maximum
50% initial margin rule because you are on margin for 50% of
your overall account value. If the investments you purchased
increased by 30% in value by the time you sell, your portfolio
is now worth $26,000 and $16,000 of that is yours ($26,000 minus
the $10,000 you borrowed from your broker). This represents
a net gain of $6,000, or a 60% return on your $10,000 investment.
Without the margin trade you would only have gained $3,000.
BUT, if instead of increasing by 30% the investments
you purchased lose 25%, the equity in your account would be
$5,000 ($20,000 minus 25% = $15,000, minus the $10,000 you borrowed
= $5,000). This $5,000 is about 33% of your $15,000 portfolio
value, which would satisfy a maintenance margin requirement
of 30%. Hopefully, we would have issued a new signal long before
that happened, but the example illustrates how leverage so easily
gets you to the brink of being wiped-out!
Some say that one way to simplify all of this and side-step
many of these issues and risks, and circumvent the no margin
trading in retirement accounts rule, is to instead use one of
the numerous leveraged mutual funds and ETFs. Here are the various
ways to apply leverage:
- Margin,
2x maximum
- Leveraged
mutual funds, 2.5x maximum
- Leveraged
ETFs, 2x maximum
- Options,
10x+
As you
would expect the leveraged ETFs have the edge in simplicity,
low cost and IRA compatibility. Great! What could be wrong
with them? Just a few things:
- Leveraged
ETFs available only for selected markets, few international
ones
- You
lose your money twice as fast when the market goes against
you
- Negative
compounding could cost you dearly in trendless markets
- Compounded
leveraged losses can wipe you out fast
Yes,
we used to show results for "with Margin" strategies and,
for the longest backtested periods, they tended to deliver
the best results. This was misleading in many respects, and
because we did not feel this served the best interests of
the vast majority of our subscribers, we eliminated margin
strategies altogether on the updated version of the web site.
So, what is our specific recommendation? Most of us get enough
volatility investing in the main U.S. markets and strongest
world markets, without leverage. Should one be tempted to
increase the risk/reward scales, we do not recommend exceeding
an 80/20 ratio, or an 80% margin (which means 80% your capital,
20% borrowed capital).
If you are really intent on applying leverage to your investments,
and fully understand the risks and liabilities, we provide
much information on the subject in our Weekly Update library.
By searching the Weekly Updates index page
for "margin" and "leverage", you will find many relevant articles
on the ins and outs of leveraged investing. Information on
the techniques and pitfalls, the leveraged funds, mutual and
ETF, and much more.
Question:
What do negative strength numbers mean?
Observant subscribers have noticed that recently, markets with
negative strength readings have appeared in the World
ETF Ranking Top 5. The "Strength"
column represents TimingCube's
proprietary momentum indicator which determines each ETF's relative
strength and rank. It is an unbounded indicator which can swing
between positive readings as well as negative ones. Last Friday
July 11, 2008, Strength scores ranged from over 18 for #1 EWZ
(Brazil), to a low of -29 for EWK (Belgium). Only 3 of the Top
5 funds had positive readings.
During times like these we primarily want to be in Cash,
as signaled by our trend timing Model which has us on the sidelines.
For anyone following our Buy and Rebalance
strategy, which ignores the timing signals altogether and always
stays fully invested, buying the Top 5 can mean holding the
best of the worst, the ETFs that are dropping the least.
The Strength indicator is meant as a relative momentum measure
which lets us rank all broad world markets, from strongest to
weakest. Absolute Strength readings are meaningless, but generally
speaking, markets with 20, 30 or 50 as their strength have been
providing very nice returns over the past many months. Conversely,
funds with -20, -30 or -50 on the strength scale have been big
losers.
Warm wishes and until next week.
The TimingCube
Staff
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