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Current Signal Performance
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Classic Signal
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Trade Date
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Traders were somewhat sparse the Monday after Hurricane Irene swept
through the Eastern U.S. However, their enthusiasm for stocks was
high. Insurance stocks rallied on the lower than projected damage
from Irene. A better consumer spending report further fueled stock
gains pushing the Nasdaq 100 up 3.3% for the day. Tuesday added to
those gains with investors looking past a dismal consumer confidence
report to push stocks up a touch further, with notable strength in
cyclical shares, perhaps overbeaten during August's panic. Wednesday
began with a strong open and a 1% gain midday. Stocks drifted lower
from there before recovering in the final 30 minutes to post fractional
gains and make it seven of eight winning days for the S&P 500. Thursday
saw the winning streak end. No particular news to drive the downdraft
as economic reports were mixed. The S&P 500 gave up 1.2% on the day.
The selling picked up speed Friday with a very poor labor report giving
investors reason to flee stocks and seek safety ahead of a holiday
weekend. The S&P 500 fell back another 2.5% to conclude a truly up
then down week.
After looking like stocks would add a second consecutive week of strong gains, the rally fell apart
late in the week. The S&P 500 (SPY) gave up hefty gains to
end the week with a 0.10% decline. The Nasdaq 100 (QQQ)
got a little more pop early in the week to hold on to a 0.28%
gain, while the Russell 2000 (IWM)
dropped 0.94%.
Our World portfolio offered material improvement
over the domestic indexes gaining 1.97%.
With tonight's change in the Classic Model to SELL,
the World approach calls for staying in cash if you
follow the "Long Only" methodology, or taking a short
Nasdaq 100 (QQQ) position if the "Long and Short"
strategy is your guide. Go to the Classic Model "Description"
page for details.
Our Classic Model changes this evening to a SELL
signal while our Turbo Model remains SELL.
Rebuilding?
We have written a couple of weeklies this past month reflecting
our observation that the market appears to have transitioned from
cyclical bull to cyclical bear. The primary thought/data behind
this viewpoint is simply that:
- a four-consecutive month market slide is rare if not unheard of in cyclical bull periods
- the four-month skid including such violence as shown in August is not a typical correction in a healthy market
Given that we've outlined the bearish technical view over the past
few weeks, let's ponder the idea that August was just a cleansing
correction. What gives the bulls hope for such a case to be made?
And what needs to happen for the bullish case to gain more credence?
In other words, what would make us question that a bear market is
indeed underway?
Looking at a weekly chart shows that the market has not broken through
a clear longer-term support level - bouncing strongly off this reference
over the past couple of weeks. These bounces off of recognized support
levels serve to inform investors the point at which the bullish
case will be defended, the point at which investors view value to
be compelling given the current economic outlook. The idea being
that new information would have to be materially worse to cause
buyers NOT to step up again at this price point.
Chart 1: Stocks halt August decline at key weekly support
Since the deluge of weaker economic reports early in the month,
the fundamental data has become a bit more mixed, with a stronger
consumer spending reading earlier this week and a couple of other
decent economic reports. Investors seemed optimistic about Ben Bernanke's
speech (even though he basically offered that the Fed had little
further ammo in its arsenal) and hopeful that September's Fed meeting
and/or Obama's jobs speech would offer constructive help for the
economy and avoid the double-dip recession some fear is in the offing.
Bulls can point to the utter panic which enveloped investors off
and on throughout the middle of August and certainly argue that
it represented a nice buying chance, a market overreacting to shadows
rather than hard fact. Whereas the August panickers had visions
of September 2008 in their heads as they sold, the bulls could recall
last summer's Bernanke Jackson Hole speech and subsequent 6-month
rally.
We can measure the bulls' progress in repairing the market's psychic
damage by looking at some key price steps along the path to recovery.
In a bear market, we would expect these lines to offer resistance
against which the bulls run out of steam to push further higher
and the market turns back downward. Stock's recent rally has already
recovered the last slice of declines, as shown below, thus clearing
Step One on the path to rebuilding.
Chart 2: Bulls look to recover from the storm and rebuild
investor confidence
So, bulls see a chance to buy on the cheap believing that, while
concerns are ever-present, corporate earnings remain strong and
the Fed continues to be a friend to investors. Bears view the recent
rally as a typical bear market counter-trend rally setting up the
first stairstep while expecting the rally will fizzle out at the
heavy resistance somewhere in the 1220-1250 price range of the S&P
500
before returning to the August lows, or lower. We see below
on Chart 3 the stairstep pattern common in bear markets, with sharp swings
up and down creating a series of lower lows.
Chart 3: Stocks have rallied from support but face heavy
resistance overhead; the first of the bear market's stairstep pattern
or not?
While fighting the Fed has been a fool's errand since November 2008,
we think it's easy to imagine investor confidence remaining lackluster,
at best, as we enter a grueling presidential election cycle that
will certainly be filled with nonstop talk about how bad the economy
is. With Europe still having made little progress to patch their
boat, the U.S. economy flat, the Fed essentially out of options,
and a cyclical bull market struggling to deliver any gains in its
third year (consistent with history), all of the issues that have
underpinned the market's brutal August remain unresolved. Our Classic
Model, having spent the past month now in Cash, is rightly nervous
as we turn the page into September. A close above S&P 1250,
while not a particular trigger in our Model, would present an opportunity
to consider whether the bulls might be right.
Question: Is there any systematic point at which to average
down in the Turbo signals?
As we promised recently, we are going to use our Weekly Updates and
FAQ of the Week section to provide further tips and ideas for maximizing your
success with our signals. After painfully riding the market down through
the first couple of weeks in August, our Turbo Model found its footing
to deliver a couple of profitable trades including capturing a chunk
of the market's recent rally. Turbo gave up on the rally too soon,
however, leaving us swimming upstream with the latest Sell signal.
The Sell signal has wandered around a 5% loss through much of this
week. We have spoken before of adding to your Turbo Model trade at
key points. We further augment that idea this week by providing more
information on the Turbo Model's history.
Below is a chart showing the distribution of Turbo Model returns.
You can see that the vast majority of signals deliver a 0-2% positive
return. There are a few highly positive returns stretching out to
the right. Turbo is not immune to losing signals, posting a loss roughly
1/3 of the time. However, the distribution data shows us that it is
pretty unusual for Turbo to log a loss greater than 5%. From the data,
a greater-than-5% loss has occurred only 14 times out of 450+ signals,
a 3% chance of occurrence from history.
Chart 4: Turbo Model return distribution
In our view, it makes some sense to add to your Turbo Model position when the loss exceeds 5%. The odds are highly in your favor that at least some recovery will occur to justify your added funds. You don't have to rely solely on this data, of course. The current signal began roughly midway in what looks like a textbook counter-trend rally. You would expect the rally to run up near a clear resistance point before struggling and dropping back, as it has done late this week. This rally ran a quick 10% approaching that clear resistance as shown on the charts above. You have the worst month of the year, per history, with September. You have what many are viewing as the onset of a bear market with investor sentiment poor. And you are working with a Model that rarely delivers a loss much in excess of 5%. Nothing is a sure winner, of course. The preponderance of evidence suggests that adding to a bearish Turbo signal in a bearish environment when the market is nearing resistance is a low-risk trade. This week's market action has once again borne that out as Turbo has moved from a >5% loss to end the week in better shape.
Warm wishes and until next week.
The TimingCube Staff
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Turbo Model
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Classic Model
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