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Signal Update |
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Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
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World |
U.S. |
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Nasdaq
100
(QQQQ)
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Russell
2000
(IWM)
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S&P
500
(SPY)
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Market Update |
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Stocks kept powering higher again this week. News that China could retaliate after the U.S. decided to initiate sanctions against Chinese tire manufacturers sent the major averages lower at the open Monday. The weakness did not last long, as bullish investors bought the dip, allowing stocks to rebound and finish the day in the black. Positive economic news, such as a better-than-expected 0.8% increase in industrial production last month, combined with Fed chairman Bernanke's statement that the recession is likely over to yield more gains for stocks over the next two sessions. The rally was especially strong Wednesday, as the Nasdaq Composite jumped 1.5% on heavy trade. Stocks then finished the week little changed from Wednesday's levels amid mixed economic reports: while the Philadelphia Fed index of manufacturing activity made a two-year high in September, home building data for August proved to be disappointing. The market's resilience allowed the Nasdaq Composite to finish the week at levels not seen since September of last year.
The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively gained 4.19%, 2.22% and 1.86% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a
2.77% gain this
week. The portfolio consists of the 5 top-ranked world ETFs
as of September 11, which marked the beginning of the current
4-week holding period.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Dealing
with risk
The fact that most of us invest to grow our wealth leads us
to concentrate primarily on aspects which can increase performance
such as specific ETF selection, yet few are those who recognize
risk management as a crucial contributor to long term investment
success. And it is no accident or coincidence that Trend Timing
is fundamentally a culture of risk management.
The risks we take with our investments are related, at least
to some extent, to the rewards we seek. Even with the best money
management techniques and discipline, the stock market exposes
the investor to certain risks. For illustration sake, someone
who cannot accept any downside risk to their capital has little
choice but to park it in a savings account or equivalent (due
to fires and burglars, it is our expert opinion that the cash
in the mattress alternative presents excessive risks!  ).
Even then you will note that while your bank account presents
little risk in terms of dollar value, you still face the very
real threat, a near certainty in fact, of seeing the purchasing
value of your capital erode through inflation.
The whole point is that for all of us it is a matter of finding
our own optimal tradeoff between expected results and a level
of risk we can live with. By seeking higher returns than the
2% savings account interest we must also accept increased hazards.
Even bonds, the next step up on the risk/reward scale, trade
higher yields for a price which can fluctuate, up or down. Corporate
bonds or junk bonds ratchet-up the risk/reward ratio some more.
The stock market is widely recognized for best long-term historical
returns, between 10-15% on average. Average being the key word!
Since as investors we do not live market averages but the day
to day extremes, a key starting point for any risk management
strategy is to properly set expectations. If you don't know
what the risk is you are unlikely to take steps to protect yourself.
We frequently hear the retort about trend following only working
during bear markets which, while meant in a derogatory sense,
we take as a compliment because it actually holds the key to
Trend Timing's risk management approach. That nothing beats
a buy-and-hold strategy during a bull market is a time-worn
truism. Quite naturally, since a trend must first develop before
it can be detected, the trend follower does not seek to trade
the tops and bottoms (no one can do so consistently). To add
to the timer's woes, not all the trend changes detected will
develop into a larger correction, and many end up being but
minor pullbacks or false alerts entirely. In contrast and to
his credit, the buy-and-hold investor smartly is in the market
from the first day of the rally to the very top. Which just
happens to be exactly where the buy-and-holder's smarts and
luck run out, and where the risk management magic of Trend Timing
kicks in.
What comes after major tops varies from mild pullbacks (anything
up to 10%), to the more infrequent corrections (10 to 20%),
and finally the bear markets (anything of -20% or more). Even
not going back to the great depression of the 1930s, there have
been many bear markets. As we all know, the most recent one
occurred in 2008. Just a few years earlier, but seemingly beyond
the common mortal's memory span, the tech bubble wipe-out of
2000-2002 saw buy-and-hold Nasdaq
investors lose 78%. Today, following last year's rout, they
are still down almost 60% from the March 2000 peaks!
As in all things when it comes to risk/reward management we
advocate a balanced approach. Here are some of the ways Trend
Timing helps manage investment risk:
- Avoid
all major corrections and bear markets and, for those seeking
higher risk/reward, profit from them by implementing a Long
and Short strategy. While we do not attempt to
time every little pullback or even every correction, our
Model will protect us from the major ones. While years can
go by between such major corrections, and sadly many would
be timers give up before getting to the reward part of the
equation, they are what Trend Timing is all about. It is
during these infrequent periods that our investing discipline
leaps ahead of the competition.
- Limit
drawdowns with Cash
signals. When a new signal is issued, a 9% stop from the
entry point protects us during the most vulnerable phase.
However, once our investment has grown by 7% or more, it
makes sense to ratchet-up the trailing stop to 15% so that
the decline required to trigger a Cash
signal remains at 9%, as with our original Cash
signal. Once our current position has gained 15% or more,
we are only giving back paper gains, not losing real money
as on entry.
- Soften
exposure to any one market or index through diversification.
We have encouraged diversification even amongst various
U.S. indexes because they represent different facets of
the domestic stock market. We also have been strong proponents
of spreading internationally which, with the addition of
the World ETF Ranking service goes beyond
risk mitigation through diversification but also promotes
risk avoidance by focusing on the strongest markets.
- Last
but not least, provide a manageable alternative to investing
with our guts, or worse, with our opinions. The TimingCube
system provides the unbiased mechanical guidance and emotional
support (we hope) to avoid the biggest risks facing any
investor: strategy hopping (chasing the last best performer)
and emotional trading in general.
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FAQ of the Week |
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Question: How do you select topics for the Trend Timing
School?
Ultimately, we here at TimingCube
have the responsibility to choose which topics to write about
but oftentimes they are suggested by subscribers, and we thank
you for that.
This week's question is really a disguised way of soliciting
your input because frankly, beyond the School's obvious Trend
Timing curriculum topics, we would much prefer to write about
the investment topics that interest you the most. Please drop
us any ideas you have at support@timingcube.com.
We look forward to hearing from you. Thank you.
Warm wishes and until next week.
The TimingCube
Staff
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