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Current Signal Performance
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Turbo Signal
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Russell 2000
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S&P 500
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Classic Signal
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
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Russell 2000
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S&P 500
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Markets became increasingly focused on the debt ceiling standoff as the week progressed. Fears of the debt ceiling debacle kicked off the week. After gapping down 1% to open Monday, optimistic investors quickly stepped in to buy the dip. Carrying forward last week's theme, investors favored energy and large-cap tech stocks, bringing the Nasdaq Composite to the breakeven line before dropping back 0.5% in afternoon trade. Tuesday brought a familiar pattern for stock investors: flat-to-down open, buyers showing up throughout the morning, sellers driving prices back down in the afternoon. Weak earnings from 3M cast a shadow on the Dow Industrials. Apple delivered its 8th straight day of gains, rising above $400/share while Microsoft also advanced, both helping the Nasdaq 100 to a slight day of green while other indexes gave up 0.5%+. Note that the falling U.S. dollar helped overseas indexes to modest gains Tuesday. Bears took control Wednesday driving indexes to heavy losses. The assumption of a second half improvement in the economy came under fire when a surprise drop in durable good orders appeared to be confirmed by cautious guidance from Emerson Electric as well as soft data in the afternoon release of the Fed's Beige Book. Stock indexes slid to 2%+ losses effectively ending any near-term hopes the bulls had for a broad-based breakout to new highs. Thursday investors sought to recover some of the lost ground. Tech stocks led the way higher with the Nasdaq 100 up
over 1% midday. A weak report from Exxon held the Dow in check; and optimism of debt ceiling progress fell apart during the afternoon as markets slid once again into the close leaving all but the Nasdaq in negative territory. By Friday, markets were worn out but thoroughly obsessed by the ongoing debt ceiling gymnastics. Stocks gapped down once more at the open, found buyers to drive to a brief taste of positive status, only to be sold off at day's end as investors showed little stomach for holding risk over the weekend. Second and first quarter GDP was revised downward adding to the day's pressure. Emerging market stocks outperformed with several countries posting gains on the day, while bonds soared higher on portfolio rebalancing and a safety bid.
The S&P 500 (SPY) closed the month of July with a 3.90% weekly drubbing. The Russell 2000 (IWM) lost 5.13%. Tech stocks continued to be relative favorites with the Nasdaq 100 (QQQ) the only index to hold on to a portion of the prior week's gains losing 2.68% this week after a 3%+ run-up the week before. As a result, the Nasdaq 100 is the only index to remain above both its 50-day and 200-day moving averages. The S&P 500 and Russell 2000 dropped back below their 50-day average to sit between that reference line and the 200-day moving average.
Our World portfolio suffered from its ties to domestic U.S. indexes with MDY and IWM driving a 3.03% weekly loss. The outperformance from Asian equities continues while the Euro had a relatively good week as well to support Germany's stock index.
Both our Classic and Turbo Models remain on Buy signals.
Who are these people and from where did they come?
So much for that daylight we spoke about last week. The Nasdaq 100
did push upward to its highest level in a decade and seemingly into
the light. Apple crossed $400 a share. Microsoft found someone
who loves it, though it's not clear it's a lasting relationship. Even
Cisco Systems may have gotten so cheap investors can't help but buy
a couple of shares just in case the company says something positive
in one of their quarterly earnings calls - it's only $15 after all.
Unfortunately, as has been the case all spring and summer, the storm
clouds come rolling in just as we lay out our towel to soak up a little
sunshine. (By contrast, those of us living in parched Texas would
actually welcome a storm cloud - it's rained once, maybe twice, all
summer here in Austin.) Those storm clouds come not from the economy,
however. They pour out of the blustery mouths of politicians, maybe
with a banker or two thrown in for a very slight change of tone. And
the politics has been mind-boggling and soul-numbing. First the odd
machinations of the European leaders trying to sort out how to fit
a rambunctious relative into their newly collective household. Push
comes to shove, the Europeans are able to figure out another patch
to put on the boat and row along a bit further. They are able to bring
multiple countries, cultures, and governments together to keep the
boat afloat. Viewed from beyond our shores, U.S. politics is an embarrassment,
letting a relatively small group of neophyte congressional folk rattle
global markets and imperil the country's prized AAA credit rating.
Markets are becoming increasingly nervous that these hard-line conservatives
would rather destroy the U.S. credit rating than allow the government
to continue operating at its projected spend rate for another few
months. It is a storm cloud that could bring heavy rains to global
stock markets.
Value investors should be salivating at the prospect. Regardless of
what happens in Congress over the coming week, the U.S. Treasury will
continue making required interest payments on its debts, payments
which are only a small portion of the bills due and owing in coming
weeks and months. There is zero chance of default on our interest
payments - zero. The Fed and Treasury will make sure of it.
A lower U.S. credit rating is a more likely outcome caused by our
inability to pay other bills. However, it would likely have little
effect on the near-term economy and probably little real impact on
interest rates. U.S. Treasury bonds set the "risk-free"
interest rate, a key reference point for many other rates, including
those faced by consumers for home loans. Some are concerned that a
credit downgrade might cause buyers to avoid U.S. Treasuries as a
result of the instable congressional situation.
We think those fears would not be realized. U.S. Treasury bonds offer
the only market of enough size and liquidity for investment by institutions
looking to place multi-billions of dollars. No other market is close.
The impact on U.S. Treasury bonds would be brief, if history repeats.
The Chart 1 below shows that rates tend to rise beginning a couple of
weeks in advance of the rating downgrade as investors anticipate the
change. But they come right back down to their prior levels two weeks
afterward. This drop in rates has occurred EVERY time a country's
credit rating has been reduced.
Chart 1: Sovereign debt downgrades have no net impact on rates
in the near-term
Instead, failure to raise the debt ceiling will force deferral of
payments to our citizens, veterans, doctors, and others who are due
payments for Medicare, Medicaid, Veterans benefits, Social Security,
et al. While that deferral would have some economic consequence, it
would likely be temporary and small in the scope of overall economic
activity. Do you think those deferrals would noticeably impact the
surging global fortunes of Apple, Microsoft, Starbucks? Markets may
think so for a few days as investors let their emotions take charge.
But they'd be wrong and the buying opportunity for those seeking a
good entry into these stocks would be juicy.
Thus, we take a somewhat contrarian view of this debt ceiling debacle,
viewing it more akin to Y2K hype than reality. After all, the economy
is growing, albeit quite sluggishly and should continue to do so.
Where we could certainly be wrong is if the debates lead to a more
dramatic and swift change in government spending plans. You think
unemployment is high now? Slashing government spending won't bring
that down and could only serve to further the demand slack that plagues
many of our non-global companies. Weaning the nation's citizens off
the governmental teat and fixing the country's finances can't and
shouldn't be done by shock therapy. Good decisions are rarely made
with gun to head. Yet, that is what our current set of representatives
seems bent on doing. One thought: instead of holding our creditors
hostage and threatening markets with nonsensical political powerplays,
how about getting back to a normal Congressional debate over priorities
and how they are funded as part of the ongoing budget and appropriations
process. Doing so will restore a little faith in the U.S.'s ability
to fiscally function, which will heighten confidence at home and abroad.
That will send this stock market into daylight, which puts more money
in all our pockets, thus improving demand for goods and services.
Imagine that, rational, common sense governing as the key to an improving
economy - stop yelling, posturing, and being ridiculous, and start
working to make our situation better, not worse. Let the sun shine!
Question: Should I average into the Turbo signal?
Dollar-cost averaging or scaling your investment into anything is
generally a reasonable approach. It may limit your gains if the signal
accurately calls the market direction from the onset of the signal.
But it may also limit your downside on a signal that becomes a loser,
or takes awhile to turn profitable. We recently wrote about buying
more of equities at support as some our signals were still on Buy
signals. Thus, we were advocating averaging down in that case.
The stock market over the past few months has been range-bound and
attractive for trading that range. It has not been a trend-following
market. There has been no consistent trend after the steady move higher
from last September to February. The Nasdaq Composite has put together a small
string of maybe three consecutive weeks all year. In an uncertain
market, technical analysis tends to work well as investors can't really
count on or understand the various crosscurrents causing the uncertainty.
The charts offer that illusion of certainty and become even more of
a self-reinforcing system. Such has been the case this year with the
storm clouds outlined above keeping investors from knowing the true
fundamental outlook. In these environments, buying on support and
selling at resistance works very well. Our signals are built to primarily
follow the market's trend. In the absence of that trend, averaging
in based on technical levels becomes a good way to minimize downside
risk - e.g. risk of a losing signal - while offering a better shot
at generating gains on a signal.
The challenge in applying that approach with Turbo is that the signals
can come fast and heavy during volatile market periods. Many of our
subscribers are not interested in frequent trading. And it's not something
one needs to do to realize good results from our system. The signals
should follow their history over time and generate returns consistent
with that history. Averaging into your position can offer a way to
lessen risk in periods where no trend is apparent. We are happy to
help with those interim calls if you are interested. Before long,
we will have a twitter feed option that will provide interim instruction
for those who are interested in fine tuning their trading of the signals.
Additionally, we are working to make these Weekly Updates more helpful
in offering our mid-signal views.
What do we think right now? We see a market having dropped back to
support that has held all year. We would expect buyers to continue
offering that support and view the downside risk from here as limited
on this current Buy signal. This is a good place to add to your position.
If the market weakens much more, our models will be shifting their
stance. But your losses from here will be relatively modest. If recent
history repeats, we are likely to get another run to the top of the
trading range, which would deliver some gains. We'd also note that,
at least for now, the Nasdaq 100, emerging markets, and high yield
bonds are all noticeably above their June lows - a sign that investors
are not throwing in the towel on risk just yet.
Warm wishes and until next week.
The TimingCube Staff
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