Current
Signal Performance as of
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 |
|
|
|
|
|
After a relatively uneventful start to the week, markets rallied
sharply Wednesday after Fed Chairman Ben Bernanke gave testimony that hinted at a possible halt to interest rate increases.
The jump was questionable as it could largely be attributed to short-covering by institutional investors, following the
previous week's big decline. Sure enough, the gains did not last. First, Intel released a weak earnings report after the
close. Then, the release of the Fed's June meeting minutes the next morning renewed interest rate worries. The major averages
moved lower Thursday as a result, with the Nasdaq Composite giving back all of Wednesday's gains.
Finally, Dell warned of
disappointing results Friday morning, causing the markets to drop some more, despite positive reports from the likes of
Microsoft and Google. Investors are obviously concerned that we may be facing an economic slowdown and that the Fed may
have already gone too far with its tightening campaign.
For the week, the Nasdaq 100 and Russell 2000 respectively lost 0.70% and 1.37%.
The S&P 500 did better, as it posted
a 0.33% gain. All three indices still rest below both their 50-day and 200-day exponential moving averages (EMAs).
It should be noted that the Nasdaq Composite closed the week below its October low
and that the Russell 2000 is now at its lowest level of the year. Our Cash signal remains in effect.
Cross currents
The Trend Timing School section of the Weekly Update is most
commonly dedicated to exploring a specific aspect of investing
to broaden our understanding of how markets and trend following
work. Lately the articles have instead dealt with the recent
market action and the less than optimal signals our Model generated.
Now that we are in a new type of Cash
signal, many would like to hear more about it, such as how and
when the next signal gets generated, be it Buy
or Sell. While we
rest in cash there are a number of "behavioral" tips we would
like to share in order to help reduce certain self inflicted
pain by some subscribers. You will recognize yourself if you
are one of them.
As outlined in the Market Update above, the markets are really
undecided and on edge, with daily movements mostly driven by
the predominant news story. The key elements which take turns
moving the markets one way or the other are high energy and
materials prices, inflation measures, the future of interest
rates (as repeatedly hinted at by Fed officials), the prospects
of a slowing economy, a mixed earnings season, and the wars
in the middle-east. Developments in these areas have the potential
to move the markets up or down by 2% on any given day, on above
average volume. The cross currents created by these opposing
forces have created an environment in which our Model detects
the signs of both up and down trends in the making. Remember
that a trend, or a signal does not come on one day out of nowhere,
they can take a few weeks to develop. In times like these the
best place to be is in cash.
As we indicated last week, this new version of the Cash
signal, which complements the existing 9% and 15% versions,
is issued and maintained when our Model detects concurrent conflicting
trends. Don't think for a minute that just because we are in
a new type of Cash
signal that we have abandoned our purely mechanical ways of
following the Model. Quite the contrary. The Cash
signal was triggered by conditions in our Model, and the next
Buy or Sell
signal will be wholly Model-generated like all of our signals
have been. To resume with a Buy
or Sell signal and
get back in the markets we wait until one of the sides begins
to dominate and when that happens its advance will cause our
Model to trigger the new signal. We cannot predict how long
we will stay in cash but we do not anticipate a new signal within
days. We would think, at least one week and maybe several, depending
entirely on when the market makes up its mind. The trend must
first prove itself.
The other enhancement which has successfully been passed all
our acceptance criteria and is now implemented is the adjustment
of input data for anomalies such as option expiration days,
pre-holidays, end of month/quarter, etc.
Now let us switch to the topic of negative behaviors which are
wide spread with investors, and can be corrected fairly easily
for a much more enjoyable investing experience.
Judging the market and signal daily. Because of the availability
of so much real-time information about the markets and the world
we live in, many of us get hooked and watch on a daily basis.
When your own money is committed one way or the other, it can
be tempting to start taking the daily gain or loss to heart
and view today as a personal win or loss. Even if you think
in terms of "today, the signal is right or wrong", you are really
critical of yourself for following the signal. The problem with
this pattern is that you start identifying yourself with the
trade and you end up feeling like a loser about half the time.
Actually, when in cash, you get to feel bad about yourself just
about every day. The remedy is simply to lighten up on daily
financial news, but mostly in remembering that investing is
a long term activity, and that daily gyrations are immaterial.
Try it, you'll be amazed how fast you start feeling better.
The second behavior we need to discuss is a tough one: having
an opinion about the future market direction. Almost every investor,
to some degree, wants to know where the market is headed. More
dangerous is the fact that most of us believe we know, even
if it is just a gut feeling. And experienced, long time investors
are the worst because they have more practice in predicting
markets. Not that they are any better at it.
Today, we have the two camps. The ones who are convinced that
the market is headed for a sharp drop for various reasons are
chomping at the bit, wishing we had issued a Sell
instead of a Cash
signal. From a technical point of view, the Nasdaq charts stink.
Indeed this could be the beginning of a cyclical bear market
within a longer term secular bear market which started at the
2000 peak. On the other side of the isle we have the bullish
crowd, pointing out that the S&P 500 is
at its lowest P/E (price/earning)
ratio in years and that as soon as the Fed stops the rate hikes,
the market is due for a major rally. The recent down trend is
nothing more than a simple correction within the cyclical bull
market that started at the October 2002 lows. Many hope this
is the move we have been waiting for a long time, and they do
not want to miss it.
We have our own opinions, but we don't know which side is right.
But the point is that it does not matter because wanting to
guess the future of the market is fundamentally in contradiction
with trend following. The only practical outcome of taking one's
opinion too seriously is frustration, doubt, and emotionally
driven actions, which is equivalent to throwing in the towel.
It is surprisingly easy, with a little effort and perseverance,
to set our opinions aside, and let the mechanical system follow
the trend.
Question:
Can I invest in the leveraged ProShares ETFs on margin?
Yes, technically you could, but you would have to be out of
your mind to do it. In fact, even investing in the leveraged
funds, without additional margin, requires some serious restraint.
Just because we have written about many new leveraged ETFs being
announced over the last few months does not mean that we suddenly
recommend investing on full margin. We have heard many cries
recently from subscribers who invested on full margin all the
money earmarked for the TimingCube
strategy, often using the bull/bear leveraged mutual funds and
their lag. If you do not have the stomach for the wild ride
and substantial losses from time to time, do not use margin.
Think in terms of worst case. The single digit losses experienced
with recent signals are small compared to the biggest absolute
drawdown we have measured in our backtesting (15% for
Buy signals
and 19% for Sell signals
on the Nasdaq Composite index). With
full margin this could be in the 30%-40% range (and with the
insane double leveraging suggested by the question above, a
cool 60% to 80%.)
This is why we have always recommended a maximum of 20% margin
for the typical investor. Many should refrain all together.
Warm
wishes and until next week.
The TimingCube
Staff
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