TimingCube - Range-bound markets - range-bound markets,periods of stagnation,flat line,downtrending channel,trendless markets

Follow TimingCube »

	Turbo Model				Classic Model


		Share

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

This week provided a set of mixed news. Some key companies announced better-than-expected earnings (Oracle, Ford), while others warned of poor results (Coca-Cola) or were downgraded by analysts (Cisco). On the economic front, inflation appeared to be under control but consumer confidence slipped instead of improving as expected. As for the major indices, they finished the week with slight gains but appear to be overextended. Take the Dow: for the third week in a row, it tried to crack the 10,300 mark only to fail, finishing just under its 200-day simple moving average (SMA). Both the Nasdaq Composite and the Nasdaq 100 remain below their respective 200-day SMAs too. A secondary indicator we like to follow, the Volatility Index (VIX), hit a multi-year low this week. VIX has an inverse relationship to the market: When it is low, it implies that there is too much complacency among investors and that we may be near a top.

For the week, the Nasdaq 100 gained 0.94%. As for the Russell 2000 and the S&P 500, they finished higher by 0.57% and 0.41%, respectively. Market action did not trigger any changes in our Model and our Sell signal remains in effect.

Trend Timing School

Range-bound markets

As investors, we are acutely aware that the markets have not produced any significant moves, up or down, for quite some time. Looking at the big picture over several years, as in the 5-year chart below, it is rather apparent that over the last year or so the market has not gone anywhere. Such prolonged periods of stagnation are not frequent but they occur from time to time. The last such significant stretch occurred in 1988 (another election year).The Nasdaq Composite Index tells the story for the market at large and brings home the point that for all practical purposes we are exactly where we were about a year ago, and that the market has not strayed very far from the flat line over that period of time.

The 1-year close-up reveals that the 2003 uptrend reversed in early 2004 and that there is a gently downtrending channel in place since then. The market has been stuck in a rut, exhibiting a range-bound pattern. The range is marked by successive cycles of attempted rallies followed by sharper drop-offs. The channel is defined by the declining tops of each successive rally attempt and each following bottom slightly lower than the previous one. This channel is consistent with our current Sell signal.

So what is the problem and why are some of us feeling discouraged and frustrated?
The slope of the downward channel is very shallow and with each successive up-down cycle we meander between gains and losses. It is very hard to give back gains and harder still for those that had no gains in the first place. Since the market has not trended significantly we have not experienced meaningful gains or, for some of us, our portfolios even show losses not reflected by the indices. For example if you joined the service during the month of August and took a short position while the markets were towards the bottom of the channel, the current rally attempt has you firmly in the red. This can also be the case for subscribers who primarily use the leveraged bear mutual funds. As we discussed in the November 28, 2003 FAQ of the Week, the leveraged bear funds do not track their indices very well in trendless markets and, more often than not, will drift lower and present us with losses even if the market is mostly flat. Any losses are painful and unwelcome, even if only temporary.

The prevailing investor mood is clearly one of worried uncertainty and is more news-driven than influenced by meaningful changes in the economic outlook. News can cause rapid shifts between fear and hope. Oil prices have been the subject of a lot of speculation and you can expect more volatility, not less. The Iraq and terrorism wars do not appear to be headed for a rapid resolution and the fear and insecurity they engender are likely to be with us for the foreseeable future. The presidential election question marks should be answered by early November, but the Washington policy deadlock is unlikely to go away regardless of who wins. In the absence of hard evidence about how fast the economy is really growing, whether it is slowing or accelerating and as a result, whether the market valuation is high or low, the financial markets will continue to drift in the current sliding channel going through short-term emotional cycles.

The key challenge in such markets is to sit tight and resist the temptation to trade the short-term moves or view every attempted rally as the beginning of a significant up leg. Many trading systems and money managers have lost their clients lots of money this year by attempting to trade the small fluctuations. Every time the market moves up from the bottom of the channel many technical indicators such as faster moving averages will trigger buys only to see the market turn around as it approaches the top of the channel, resulting in repeated buy high sell low action. Whipsaws have been a common theme for many traders this year.

The good news is that range-bound markets do not last forever. This one is rapidly becoming old as compared to historical averages. We know that sooner or later the market will breakout of its channel. We all want it to be soon of course but in the mean time we have the satisfaction of knowing that the longer we stay in the gradual drift downward, the more gains our short positions will accumulate. We do not know what will cause the breakout, if it will be to the upside or downside, or when it will come. We just know that our Model will detect a change in the broad market trend and position us accordingly. Until then, we will just have to be patient and take what the market gives us, however meager it may be.