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Turbo Model
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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.

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Market Update
Markets proved their resilience this week by moving higher in the face of one of the worst natural disasters in U.S. history and record oil prices that pierced the $70-a-barrel level before edging lower on Friday. It is of course too early to measure the full impact hurricane Katrina will have on the economy, but some experts predict it will likely be modest. That said, bond yields have moved lower as investors apparently think that a Katrina-induced slowdown will force the Federal Reserve to stop raising interest rates by the end of the year. Only time will tell.

For the week, the Nasdaq 100 and S&P 500 respectively gained 0.92% and 1.07%. The Russell 2000 did even better, finishing 2.26% higher. All three indices have now reclaimed their 50-day exponential moving average (EMA) and of course also remain above their longer-term 200-day EMA. There is no change as far as our Model is concerned and our active Buy signal remains in effect.

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Trend Timing School
The stock market impact of catastrophic events

The utter devastation left by hurricane Katrina in the Gulf States and the sheer horror in New Orleans are on a scale impossible to grasp. Authorities and the media are already projecting the cost of the catastrophe in hundreds of billions. No figure can be placed on the loss of human lives, but it will probably be months before we know the full extent of the material damage and economic loss. Experts say that the direct cost, although astronomical, will be dwarfed by that of the aftermath, with repairs and reconstruction on a gigantic scale, mass relocations of hundreds of thousands of people, and an entire region at a quasi economic stand-still. This catastrophic event is bound to have a profound and lasting impact, not only on the region, but the entire country for years to come. Everyone wants to know how it will impact the stock market.

We have written in the August 20, 2004 Trend Timing School article about the historical effects of catastrophic events on trends, but we need to warn against the general urge to forecast, and bet your wealth, on what the influence on the market will be, and when.

It is clear that anything so big must have an influence on the overall U.S. economy, and in turn on the stock market. In the first approximation there is no doubt that in the grand scheme of things the ultimate result is a huge net loss for society. How this translates in economic terms and actionable stock market tips are the favorite topics of Financial News programs lately, and there is no shortage of experts, gurus and pundits to share their inescapable vision with us.

The usual hot stock and sector predictors provide short term speculators with "can't miss" targets such as Home Depot and the construction sector. Others on the pessimistic side of the floor prognosticate various degrees of economic turmoil ranging from the mild to the all-feared R-word: Recession. Economists can devise the most compelling theories about how the natural disaster and its aftermath will add a long term economic drag and cause the U.S. Federal Budget deficit to balloon higher which, combined with our ongoing war obligations and rising energy costs, signify the end of the world economic recovery. They say that as this occurs the tax receipts will plummet only to bloat the U.S. Federal deficit even more, the dollar will drop sharply in value as will the stock market. Many energy experts formulate doomsday scenarios involving the partial destruction of our Gulf-based oil and energy infrastructure. The damage to drilling platforms, shipping terminals, pipelines and refineries is such they say, that long term decreases in energy production, transportation and processing are bound to create a sustained supply crisis, and an ensuing recession.

The funny thing with experts is that you can always find as many, with degrees and resumes just as impressive, who convincingly argue the exact opposite theory. There is a strong contingent who espouses the bullish point of view. They postulate that on the contrary, this natural disaster will exert a positive stimulus on the economy and trigger a spurt of business activity complete with new investments and job creation sufficient to stimulate the economy and the equity markets for the next few years.

Rather than taking sides we listen to historical evidence which tells us that it is futile to try to predict what the market will do when. Luckily, as Trend Timers, we do not have to attempt to understand what the market should do, or why it should do it, instead we look at what the market actually does. We let all the forces and factors that ultimately influence investor psychology and the markets play out, and if a particular catastrophic event has the power and the lasting effect to reverse the underlying predominant direction of the broad market, our Model will pick it up. Our feelers, primarily the price and volume action and the way they interact on the Nasdaq Composite Index , can sense the large and deep currents created by major shifts by institutional investors, the "big money". We invest with these deep market trends and are not interested in speculating about the effect of a catastrophic event.

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FAQ of the Week
Question: How do you assess IWM's recent change in investment policy?

Shareholders of the Russell iShares funds, including IWM, have recently received a revised prospectus which changes the fund's investment objective from a fundamental investment policy to a non-fundamental investment policy, and most wonder what it really means.

Maybe the most important difference between the old fundamental and the new non-fundamental investment policy is the fact that the latter allows the fund's investment objective to be changed in the future without shareholder approval. While this can potentially facilitate future changes, as long as the fund's stated objective remains to track the Russell 2000 Index, we are perfectly happy to keep IWM as a viable investment vehicle for our Trend Timing purposes.

Warm wishes and until next week.

The TimingCube Staff

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