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What's new this week?

First of all we would like to thank the subscribers who have volunteered their help in last week's "quest for testimonials FAQ". Journalists are always appreciative, as we are, of hearing personal experiences and opinions about TimingCube and Trend Timing. If you have any to share, send us a note at: support@timingcube.com.

Three recent articles have been added to the In the News page listing (for two of them we are still in the process of securing the rights from the publishers).


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
This week again, markets showed their resilience in the face of bad news, therefore illustrating their technical strength. Despite new bombings in London and disappointing earnings results from Intel, Google and Microsoft, all major indices finished the week higher. On Wednesday, the Nasdaq Composite and S&P 500 closed at new 4-year highs. Both indices finished the week only slightly off from these levels, while the Russell 2000 closed at a new all-time high on Friday. Fed Chairman Alan Greenspan gave an upbeat testimony to Congress, saying that the economy is showing solid growth while inflation is contained.

For the week, the Russell 2000 and Nasdaq 100 respectively gained 2.12% and 1.45%. As for the S&P 500, it finished 0.47% higher. All three indices still rest well above both their 50-day and 200-day exponential moving averages (EMAs). There is no change for us this week and our Buy signal remains active.

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Trend Timing School
Taking profits versus upping the ante

When establishing a new position everything is simple. Because the risk increases with time elapsed since the last signal, the best strategy is to invest all the money you have earmarked for Trend Timing right away, on the trade date. The only exception to that rule would be for investors with funds to invest between signals who might consider a dollar cost averaging method. Disposing of the position should be just as simple since we recommend holding it until the next signal comes. Ironically, because of the same exact fact that "risk increases with time elapsed since the last signal", as profits appear, investors are temped to put some away.

Whenever a signal is starting to deliver some gains as is the case right now, the general topic of profit taking comes up. Our normal guideline is to simply let it ride and keep the position for the signal duration, but it seems that certain investors just can't leave well enough alone. Some feel the urge to take some of the profits off the table along the way and, surprisingly, another group wants to do the exact opposite and ratchet up margin. How do you decide which is best for you?

The principle of taking some profits is well known to conservatives who favor preservation of capital, but it is important to have a method and understand the pros and cons. One approach is to start with the average gain per trade as a target. Our average gain per trade has been 10.49% for the Nasdaq 100 since our first signal on June 18, 2001, using no margin. Let's call it ten for this example. A common profit taking model could be to cut back on the position by 25% after it has increased by 5% (half the average gain), by another 25% when it has gained 10%, and so on until you hold on to last 25% position as long as the signal lasts.

Such profit taking methods will of course benefit if the market soon turns against the signal, but suffer during long prolonged trades - which have been known to produce gains as high as 50% on the Russell 2000. The clear drawback of profit taking is that by doing so you reduce your exposure to the market, and therefore, reduce your chances of future gains. One way around this shortcoming is to use options which truly let you take profits and roll forward by taking new options further out to keep the same market exposure (for more on options see the January 21, January 28, February 4, and February 11, 2005 Trend Timing School articles).

On the other side of the investor spectrum, the more aggressive side, there are those that want to fully benefit from prolonged market runs. Some might take the initial position with no margin and, as gains are achieved, increasingly leveraged positions are taken. Another version of this is to maintain the initial amount of leverage as gains accumulate. Let's say you invest $10,000 of your money on full margin, for a $20,000 position. The trend is strong and your position doubles in value to $40,000. Instead of being margined at 100% of your assets you are now only at 33%. This is why an aggressive investor would borrow another $20,000 to restore the ratio. From that perspective, the terms ratcheting up margin or upping the ante are misnomers because they only bring a declining margin ratio back to where it was in the beginning.

The ultimate decision is of course yours to make, but from our purist perspective we have to remember and side with one of the primary tenets of Trend Timing, which is "to fully participate in all significant market moves, up or down." Again, with the exception of options which nicely accommodate this, profit taking with other investment vehicles reduces our exposure to the market and therefore conflicts with our intent to "fully participate", and therefore we opt to stick with the signal. As far as ratcheting up margin, we feel it is fine to maintain the level of leverage you have selected and feel comfortable with. Remember that for most investors we recommend a ratio of no more than 20% leveraged, 80% non-leveraged.

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FAQ of the Week
Question: Will I be able to sell my options when the time comes?

Since we published a guide on following the signal with options (see the January 21, January 28, February 4, and February 11, 2005 Trend Timing School articles) a number of you, having noticed the low liquidity of some of the options, have become worried about finding a buyer when the time comes to dispose of them.

It is true that with the relatively long horizon of our options (around 6 months out when we buy them), the daily volume and the open interest can be very low, or non-existent on some contracts. One of the attractions of options though, is that the Options Clearing Corporation (OCC) through which all options must trade, is obligated to buy them whenever you decide to sell. The spread may not be very good for some very illiquid contracts, but that is a small price to pay.

Warm wishes and until next week.

The TimingCube Staff

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