TimingCube - Debunking the market timing myth - market timing myth,cash cows,mechanical strategy,backtesting,data-mining,technical analysis

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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
		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

After a relatively quiet start to the week, markets marched higher on Thursday and Friday, driven by a resurgent tech sector. First on Thursday, a short-covering rally boosted the deeply oversold semiconductor sector and fueled the rise of technology shares. Then on Friday, the resolution of the long-lasting Oracle/PeopleSoft acquisition dispute lifted the tech sector again and the entire market with it. Major indices have now recovered a sizable portion of the losses they incurred after July 1. However, the Nasdaq Composite remains below its 200-day simple moving average (SMA) and other indices are only slightly above it. For the week, the Nasdaq 100 and the Russell 2000 respectively gained 3.00% and 2.46%. The S&P 500 finished 0.92% higher.

Even though market action has certainly improved, our Model has yet to validate the move higher as a trend reversal. Our current Sell signal therefore remains active.

Trend Timing School

Debunking the market timing myth

A recent article by Morningstar analyst David Kathman (see Revisiting the Market-Timing Myth) caused a number of subscribers to question the feasibility and validity of market timing. This provides us with as good an excuse as any to tackle this frequently recurring nonsense. Since a wide majority in the financial industry, including brokers, investment advisors, mutual fund companies, pundits and the financial media staunchly assert that it is impossible to consistently beat the markets with timing, there is an endless supply of prose keeping the skeptic fires stoked.

Just to set the record straight upfront, if market timing is defined as predicting what the market is going to do in six months or one year, we do not believe that anyone can do that reliably and consistently. It simply cannot be done. If it means beating the market every year, month, week or day, we agree, no one can either.
On the other hand, we will not hesitate to take on anyone who proclaims that beating the market consistently with timing is impossible. To maintain that market timing requires one to predict the future is bunk! This is the myth that the financial industry has gone to great lengths to create and nurture for many years to protect their cash cows, or to hide their own inadequacies.

Some articles in the genre are at least deserving of consideration or offer some entertainment value. This one is at best a weak regurgitation of the equally bad article the author published in November of 2002: "Can Market-Timing Ever Work?", still devoid of any factual data yet reaffirming the baseless claim that "no mechanical strategy is going to help you consistently beat the market". The only prominent examples of market timing failures offered, the Motley Fool's Foolish Four and William O'Neil's CAN SLIM (of Investor's Business Daily fame), are in fact stock picking methods and not market timing systems. Nevertheless, the author goes on to ridicule and discredit the entire field of technical analysis, and any backtesting and data-mining techniques. Tons of research and evidence have been published for the validity of numerous technical analysis methods. Even in our recent semi-comical Trend Timing School editorial did we show that with a simplistic history-derived system such as "The January effect" someone could have a 78% success rate - more than most money managers will ever achieve.

Backtesting and data-mining are just modern buzzwords for studying stock market history. And if you have not been a student of the markets for a good period of time you are highly unlikely to ever be a good investor, advisor, or analyst!

The Trend Timing discipline as we describe it and practice it has nothing to do with predictions. It is a long term school of market observation, trend recognition, and trend following. The trends we are looking for are significant medium to long-term movements, not short term blips and bumps. The market tells us what it is doing, and we simply and unemotionally follow. It takes patience and it is not perfect. We want to participate in all meaningful market moves, and we do so as soon as a recognizable trend develops. We hope it is a long, sustained and profitable run, but if it turns out to be a head fake and a wrong signal, we regroup and wait for the next trend to develop.

We do not attempt to spot the tops or bottoms, no one can do so. A large part of our philosophy is one of risk avoidance. Above all, we believe that for any wealth building program to succeed it is imperative not to suffer the dramatic losses that the market is sure to deliver every so often, when investors least expect it. Many such bear events are devastating and life changing experiences for those holding all the way down. Putting aside the years it would take to recover, the emotional blow suffered frequently prevents the victimized Buy and Hold investor to ever participate in the stock market in a meaningful way again.

Yes, creating and maintaining a winning market timing system is hard and fraught with challenges. Privacy and secrecy is a prerequisite. There are many more market timing systems that fail than ones that deliver consistent market beating performance over the years. We recognize that there are too many flaky short term trading systems and get rich quick schemes out there.

As proof of the viability of Trend Timing we only have three years of live market-beating performance and fifteen-years of backtested history to offer. But even the recognized leader of investment newsletter monitoring, Mark Hulbert of The Hulbert Financial Digest, frequently reports that there are some market timers that consistently beat the market over long periods of time.

FAQ of the Week

Question: How can I apply the TimingCube signal to my 401(k)?

Many subscribers have 401(k) retirement plans through their current or past employer but, for various reasons, have not considered them as candidates to be directed by the TimingCube signals. Employers and 401(k) administrators frequently present the plans as inflexible "set and forget" plans that you should just leave on auto-pilot. True to our Trend Timing beliefs, we do not favor investment approaches that leave your assets exposed to the whims of the market. We deem the risk of severe downturns to be excessive. Despite the limited investment choices available in most plans, implementing the Model should be quite doable and profitable over the long run. Here are a few tips.

Since your investment choices most likely do not include the ProFunds or Rydex fund families, you will have to select Strategy 1 (Long Only). It is not the most aggressive or performant strategy but it has shown to consistently beat Buy and Hold. And you will be reassured to sit in cash during major market declines
All 401(k) plans offer a few equity mutual funds to pick from during Buy signals. Most have some type of a large cap fund which should be a good substitute for an S&P 500 index fund. Any fund described as small cap will be a good approximation for the Russell 2000 index funds. Even diversified equity portfolio funds that blend a mixture of domestic and international companies of various sizes should correlate well with our Model. During Cash or Sell signals you will park your money in cash, a money market fund, or any interest bearing fund that protects your capital
The majority of 401(k) plans we have seen have no restriction on the frequency of transfers between funds and they usually do not charge any fees or commission for the transactions
If you left a 401(k) with a previous employer's plan we would recommend transferring it to a Rollover IRA at a broker of your choice. It will keep all the tax deferred attributes of the 401(k) but gives you the flexibility to choose from many more investment vehicles and to implement all four of our strategies
Regardless of how you invest, we highly recommend you maximize your 401(k) contributions because they are one of the best ways to build the financial independence you need to retire. And in many plans, the employer will match at least some of your contributions, which is like getting a raise