TimingCube - Long and short risks - short the market,long the market,sell short,go long,risk of going long,risk of going short

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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.

Market Update

Markets consolidated again this week as record oil prices keep putting pressure on stocks. With the earnings season now over, investors are focusing on economic news, which was mixed this week. On the positive side, new home sales jumped 6.5% in July, alleviating fears that the housing market may be cooling. However, consumer confidence as measured by the University of Michigan came in lower-than-expected on Friday, dropping for the first time in 3 months as higher energy prices are obviously taking their toll. So far, the decline off the early August highs by the major indices is well within the range of a normal pullback, defined as a loss of less than 10%. Of the main indices we follow, the one that has suffered the most is the Russell 2000: it has lost 5.00% since its August 2 closing high.

For the week, the S&P 500 moved 1.2% lower. As for the Nasdaq 100 and Russell 2000, they posted milder losses of 0.95% and 0.59%, respectively. All three indices have now moved below their 50-day exponential moving average (EMA), reflecting the recent weakness. However, they all remain above their long-term 200-day EMA. There is no change for us and our Buy signal remains in effect.

Trend Timing School

Long and short risks

Left to their own instincts most investors feel that being short the market is more risky than being long the market. This leads to strategies which we hear are used fairly frequently, such as "I use full leverage when going long, but none when going short". Maybe this widely held belief stems from the fact that markets have a general upward bias and spend slightly more time going up than going down. Or maybe the shorting process of selling shares which you borrow from someone in the hope the price goes down is not nearly as natural as buying shares outright waging that they appreciate in value. Regardless, when looking at historical market facts and figures to assess the relative risk of being long and short the stock market, it turns out that once again, popular wisdom may have it backwards.

We frequently mention that the prime objective of Trend Timing is to avoid any substantial losses by stepping aside, or going short the market, during downtrends. This not only lowers our risk, but keeps our powder dry to boost our returns during the following rise. Never ever forget that it can take double the work to recoup losses (a 100% gain is needed to recapture a 50% loss), and instead of wasting time just getting back to the starting point, the 100% gain should have doubled your money.

Observation of historical market behavior clearly shows that downward action tends to be much more swift and explosive than upward movements. Markets drop further and faster than they rise. It is as if the laws of gravity worked to accelerate and amplify downward spurts. Maybe this is why there is no bullish equivalent to the word "crash". The list of biggest daily percentage drops shown in Table 1 below is still headed by the 22.61% percent decline when the stock market crashed on October 19, 1987, Black Monday (one of them anyways), followed by a series of 1929 crashes that preceded and precipitated the Great Depression.

Table 1: Worst single-day losses on the Dow Jones since 1928

Date	1-day Loss
10/19/1987	-22.61%
10/28/1929	-13.47%
10/29/1929	-11.73%
10/05/1931	-10.73%
11/06/1929	-9.92%

The point is that bear markets always begin, and major crashes most often occur, during a bull market when we are fully invested and long the market. When short, during severe corrections and bear markets, or false alarms, the worst risk is that a new rise begins. Since such rises usually begin softly, when no one expects it, our exposure when short is more limited. Logic would therefore dictate that the highest risk exists when long, not when short. The trick, of course, is to be short when the big one hits (crash).

We have gone back to check historical data and the vast majority of large single day crashes come some time after a market top has been achieved, and markets have already started their declines. Looking at Table 2 below, we can see that during the 10 worst single days on the Nasdaq Composite Index since 1989 (when we had all the data needed to backtest our Model), the TimingCube signal was already in a Sell mode. So it turns out that TimingCube subscribers have another huge ace up their sleeves, they are on the right side of the market more often than not.

Table 2: Worst single-day losses on the Nasdaq Composite Index since 1989

Date	1-day Loss	TimingCube Signal
04/14/2000	-9.67%	Sell
08/31/1998	-8.56%	Sell
04/03/2000	-7.64%	Sell
01/02/2001	-7.23%	Sell
10/27/1997	-7.16%	Sell
12/20/2000	-7.12%	Sell
04/12/2000	-7.06%	Sell
09/17/2001	-6.83%	Sell
03/12/2001	-6.30%	Sell
01/05/2001	-6.20%	Sell

Arguably, one of the potential flaws in this theory is that crashes triggered by external events independent of the market (i.e. not detected by our Model), such as major natural disasters or terrorist attacks, can occur at anytime. True, but after such point events, as exemplified by the September 11, 2001 induced mini-crash after the markets re-opened on September 17th, markets tend to recover their losses promptly.

We are not implying that you should go full margin every time we issue a Sell signal, but we are suggesting that, for most investors, there is certainly no issue or extraordinary risk in applying the same 80/20 (80% non-leveraged / 20% leveraged) allocation during Sell signals as we recommend during Buy signals.