TimingCube - Industry sectors - affiliates program, Industry sectors,sector rotation, Index sector composition, sector ETFs

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What's new this week?

Announcing new Affiliate Program
Right on the heels of the Referral Program announced last week which rewards subscribers with free subscription months for referrals, the new Affiliate Program rewards commercial websites for new subscribers they direct to us. For all the details on this program visit the "Affiliates" page.

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.

Market Update

Investors spent most of the week indecisive, not knowing which way to turn. The early part of the week saw mixed economic news and energy prices which resulted in very little action on the equity markets. On Thursday the market seemed to shrug off higher oil prices and, for the first time in a number of weeks, prices did not seem to move in opposite lock-step to that of the price of a barrel of crude. This was marked by a bullish rise which carried over into the Friday close.

Today brought both the week and the third quarter to a profitable close. For the week, the Nasdaq 100 gained 1.90% (6.99% for the quarter), the Russell 2000 1.88% (4.40% for the quarter), and the S&P 500 1.11% (3.15% for the quarter).

In view of the week's market action our Model still signals a Buy condition.

Trend Timing School

Industry sectors

At times, when broad markets are weak as they have been for some time now, it is tempting to look for ways to spice up our investment returns. Weak is a relative term, but looking at 2005 Year-To-Date returns of just 1.45% on the Nasdaq 100 , 4.51% on the S&P 500 , or even 11.44% on the Russell 2000 , while positive they fall short of most investor expectations. What some notice is that while the general market flounders, there always seems to be some sector which is going crazy. From there it is but a small step to think of optimizing returns by combining the TimingCube broad market Buy signal with the selection of the strongest industry sector.

Before discussing the issues and merits of such a sector timing investing approach, we must stress that the TimingCube signal is of no help in selecting industry sectors, and further, that many industry sectors are in fact not correlated with the broad market observed by our Model. Come to think of it, what is the sector composition of these so-called broad markets we follow? It turns out that the answer varies from one index to the next. Table 1 below shows the Nasdaq Composite Index sector composition with its top heavy representation of the Information Technology, Financials, and Healthcare sectors. The S&P 500 on the other hand has high concentrations of Financial Services (20.3%), Healthcare (13.4%), and Industrial Materials (12.2%). Surprisingly, the small-cap Russell 2000 has a sector composition very similar to that of the S&P 500.

Table 1 - Nasdaq Composite Index sector breakdown

Sector	Percent of Index
Information Technology	28.7%
Financials	21.4%
Health Care	17.4%
Consumer	15.0%
Industrials	10.2%
Materials	2.4%
Telecommunication Services	2.3%
Energy	2.3%
Source: NASDAQ Market Intelligence Desk

Unlike geographic diversification, which we have written about before (see the November 12, 2004 Trend Timing School article) and recommended because the major world markets are generally well correlated, industry sectors are generally not correlated. To demonstrate once and for all that broad market indices are not well correlated with specific industry sectors we ran a quick study of the relative performance of various sectors when traded with the TimingCube signal. Note that we used the handy "Performance by individual security or index" feature of the "Results" page to obtain all the numbers. It turns out that there are a number of ETF fund families like Barclay's iShares and Standard & Poor's Depositary Receipts (or SPDRs, pronounced "spiders") for full sector selection. Table 2 summarizes the cumulative returns since January 2004 and January 2005 for a variety of iShare sector ETFs.

Table 2 - Returns of various iShares sector funds compared to broad indices
(When traded with the TimingCube signal with a "Long and Short" strategy)

iShares Fund Name	Ticker	Cummulative Returns
iShares Fund Name	Ticker	Since January 1, 2004	Since January 1, 2005
Dow Jones U.S. Energy Sector Index Fund	IYE	48.94%	60.45%
Dow Jones U.S. Utilities Sector Index Fund	IDU	11.48%	17.67%
Dow Jones U.S. Basic Materials Sector Index Fund	IYM	3.65%	13.21%
Russell 2000 Index	^RUT	22.03%	11.90%
Dow Jones U.S. Industrial Sector Index Fund	IYJ	7.66%	5.71%
S&P 500 Index	^GSPC	13.07%	4.60%
Dow Jones U.S. Technology Sector Index Fund	IYW	6.61%	3.88%
Dow Jones U.S. Consumer Goods Sector Index Fund	IYK	35.09%	2.88%
Dow Jones U.S. Consumer Services Sector Index Fund	IYC	15.56%	3.22%
Nasdaq 100 Index	^NDX	7.05%	2.20%
Dow Jones U.S. Financial Sector Index Fund	IYF	4.31%	-0.26%
Dow Jones U.S. Telecommunications Sector Index Fund	IYZ	4.05%	0.36%
Dow Jones U.S. Real Estate Index Fund	IYR	-25.45%	-5.47%
Dow Jones U.S. Healthcare Sector Index Fund	IYH	11.09%	-7.62%

Clearly, history has shown that when the sectors which dominate an index move strongly, investments tracking that index will do great. It so happens that the Technology, Financials and Healthcare sectors have looked tired and weakening for almost two years, dragging the broad indices down with them. In contrast, the strong and rising sectors, namely Energy, Utilities and Basic Materials, are up as much as 60% this year alone, yet are barely represented in the broad indices. Inquiring minds will ask "What would the Energy sector fund (IYE) have returned for 2005 Year-To-Date with Buy and Hold?" The answer is 43.33%. But, just because that is less than 60%, do not jump to the conclusion that it proves that our signal is well correlated with the energy sector. Looking at the returns since the beginning of 2004 the picture reverses with Buy and Hold ahead with 87.23% versus 48.94% when applying the TimingCube signal. One more time, all together now:

"the TimingCube signal does not correlate with industry sectors".

So you are left to your own devices, or are you?

While we do not believe anyone can accurately forecast future sector rotation and timing, there have been a number of momentum-type approaches showing good results. Probably best known are the sector rotation theories and principles introduced by Sam Stovall. In his book, "Standard & Poor's Guide to Sector Investing 1995" (McGraw-Hill, 1995), he chooses nine sectors (Basic Industry, Cyclicals, Technology, Industrials, Energy, Staples, Services, Utilities and Finance) and rotates through each in function of economic cycles. He describes a technique aimed at buying the sector that is about to take off, selling it at its peak and then buying the next sector. Another source of help can be found at StockCharts' "Sector SPDR PerfChart" which gives detailed snap-shots of which sectors have been strongest over the past three months. By watching these numbers on a daily basis, one can extract the respective momentum of various sectors.

While experienced and rigorous investors can profit handsomely with such sector investing techniques, it is important to remember that it is not for everyone and certainly not risk free. Sector funds can not only be some of the most rewarding, but also most treacherous and volatile investments around. These funds do not necessarily mirror an index and can have huge company concentrations, with 2 or 3 stocks making-up over half of the fund's assets. And in case we forgot to mention it, they are not well correlated with the TimingCube signal .