TimingCube - Institutional investors speak volume - institutional investors,trading volume,price movements,big money,smart money

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What's new this week?

We posted a new article from the Atlanta Business Chronicle on the "In the News" page.

Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

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
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

Pushed by lower oil prices, markets moved higher for the second straight week. The rally would have been a lot more convincing if it had been accompanied by rising volume, but it was simply not the case. In fact, this week's trading volume on the Nasdaq turned out to be the lowest of the year, clearly showing once again that institutional investors are not participating. As we have stressed many times before, a rally cannot last long without expanding volume. Despite the bounce, it should be noted that all major indices are still below their 200-day simple moving average (SMA). The Nasdaq 100 gained 1.60% this week while the Russell 2000 and the S&P 500 finished higher by 0.68% and 0.86%, respectively.

The week's action had no impact on our Model and our active signal remains a Sell.

Trend Timing School

Institutional investors speak volume

In their relentless quest for reliable leading stock market indicators, many in the investment community have come to recognize institutional investors as a force to be reckoned with. Numerous studies have shown that as a group they have a huge influence on individual stocks and the market in general, which is why so many try to understand and emulate what institutional investors are doing.

What are institutional investors? No, they are not the Buy and Hold investors that lost nearly everything during the last bear market and got committed to mental institutions as a result. Those are "institutionalized investors", and should definitely not be followed. Rather, institutional investors are financial organizations that share one common trait: they manage and invest assets on behalf of someone else. They include banks, insurance companies, mutual funds, and pension funds, and are often referred to as "the big money" or "the smart money". They own the majority of shares of many publicly traded companies, the largest ones in particular, and they account for most of the trading taking place on stock exchanges, frequently above 70%.

As powerful financial establishments their resources are vast. They employ analysts and researchers, buy the best and timeliest information available and utilize the most advanced analytical tools. As a result, their professional money managers are more often than not the first to react to changes in a company or the economy. Some dispute how sharp the smart money really is and argue that there is maybe more of a cause and effect relationship. The stock market ups and downs being a product of offer and demand, it stands to reason that institutions and the large assets they command have an impact. They are the elephants in the swimming pool (the market). The more elephants jump in, the more the water level (the price) rises. When the elephants go home, the water drops sharply.

Unlike elephants, institutional investors are not so easy to track. They don't like to make a splash and seldom announce their trading intentions, and their public reporting tends to by high-level and infrequent. They are not a monolithic group and their varied objectives lead to countless strategies and investment vehicles. The competition between money managers is fierce. Some are faster decision makers, superior timers or stock pickers, or more subtle in concealing their moves. They all want to be like Warren Buffett but some are simply better at it than others.

Regardless of whether institutional investors are smart enough to anticipate changes in the economy and the stock market, at TimingCube we are firm believers in their collective sway on the markets. Further, our years of research have led us to conclude that changes in trading volume, and the direction of price movements during these changes, are the most reliable telltale sign of what institutional investors are up to. Therefore, our Model primarily relies on volume as an "institutional investor detector" to recognize changes in the broad market trend, and issues Buy and Sell signals accordingly.

FAQ of the Week

Question: Which of the four strategies are riskier?

With the simplicity of our Buy/Cash/Sell signals, one of the few decisions we need to make as Trend Timers is which strategy - or blend of strategies - to implement (see the "Our Service" page for a detailed explanation of each). The decision ultimately should be dictated by our individual risk tolerance.

Determining the lowest and highest risk strategies is a no-brainer, they are Strategy 1 (Long Only) and Strategy 4 (Long and Short with Margin) respectively. Choosing between Strategy 2 and Strategy 3 is trickier as it comes down to balancing the risk of margin investing against that of selling short. Many investment text books use the theoretical worst-case loss scenario to (erroneously) declare shorting as more risky. The reasoning goes as follows: the maximum you stand to lose when investing on full margin is twice your investment (your money plus the money you borrowed from your broker) if the security plunges to $0; whereas your losses could be infinite when selling short because there is no limit to how much the security could gain in value.

Enough with theories! The market indices we invest in are not going to $0 or infinity any time soon, and even if they did, a Cash signal would be triggered with a 9% or 15% move against our signal. When invested on full margin your holdings move up and down twice as fast and this volatility translates into higher risk. In case a Cash signal gets triggered by the Nasdaq Composite Index moving 15% against our signal, a fully leveraged position would lose 30% or more depending on the investment vehicle. This is why we place Strategy 2 (Long Only with Margin) above Strategy 3 (Long and Short) on the risk scale.

Relative risk of TimingCube Strategies

Since Strategy 3 has the second lowest risk but consistently delivered the second best performance results, we believe that Long and Short offers the best risk/reward ratio and we recommend it as the core strategy to use. This is a good place to remind subscribers that we do not advise using Strategy 4 (Long and Short with Margin) for more than 20% of your portfolio. Despite the spectacular historical performance results, we know very few investors that could stomach the wild swings or the potential 30%+ drawdowns.

Warm wishes and until next week.

The TimingCube Staff

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