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Thank you for the overwhelmingly positive feedback!

You answered our call for feedback about the Weekly Updates in great numbers and the near unanimous verdict is that you find them useful (one subscriber thought they were superfluous). A general summary of the responses would be that you like them just the way they are, that you find them not too long, not too short, easy to read and understand, educational, and weekly seems to be the right frequency. A few fell they are a little too long while others would welcome more in depth articles. Some of you wished they were more frequent, twice a week or even daily. We are clearly not in the business of daily market commentary and, as reinforced by today's Trend Timing School editorial, worrying about day-to-day market action is contrary to our investment philosophy.

In conclusion, with such great demand it looks like we will just have to keep the Weekly Updates coming for another year (too bad, we were hoping to take Fridays off ).


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.

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Market Update
Markets started the week by moving lower, until the Nasdaq Composite and the S&P 500 found support at their respective 50-day simple moving averages (SMA) on Tuesday. Indices then started to move higher, finishing the week on a high note with big gains on Friday. One explanation for the rally is that today marked the start of the fourth quarter and mutual fund managers put money to work after getting rid of losing positions they had on their books for Q3. For the week, the Nasdaq 100 and Russell 2000 respectively gained 3.85% and 3.37%. The S&P 500 finished 1.93% higher. It remains to be seen whether this rally has staying power. Both the Nasdaq Composite and the Dow are still below their respective 200-day SMAs. The Nasdaq Composite remains stuck within the downtrend channel we covered in our September 17, 2004 Weekly Update (see our Trend Timing School editorial entitled Range-bound markets). Finally, the Volatility Index (VIX) closed the week at a new multi-year low, implying that investors are again becoming too complacent.

Despite the week's action, our Model is staying put and our Sell signal remains active. A few subscribers have asked us how far we are from a possible Cash signal. Here is the answer: if the Nasdaq Composite closes above 2015.36 and our Model does not flash a Buy signal before then, a Cash signal will be issued. The reason is that the Composite would have then risen more than 15% above its closing low of August 12, triggering an automatic Cash signal. We are not there yet, but should it happen, we will simply close our existing positions and move to cash until a new signal is generated.

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Trend Timing School
Dancing the jitterbug

If at times - like today for example - you feel confused, distrustful, hesitant, hurt, jittery, nervous and stressed out, you are not alone. Not that having company in distress necessarily makes one feel better, but it is a good indication that you are experiencing perfectly normal and expected investor emotions.

On occasion the stock market actions are simply baffling and to the typical investor it seems like short-term movements have no rhyme or reason. This happens to be a very astute observation because the majority of the time there simply is no logic or pattern to temporary market jitters, despite all the drivel coming from the talking heads pretending to explain it all. This is why we frequently quote the old investment truism: "The markets move in mysterious ways". This is also why we reject any attempts, by us or anyone else, at rationalizing or explaining why the markets do what they do.

Just like the wicked witch in the Wizard of Oz that sent a jitterbug after Dorothy and her friends to take the fight out of them, the stock market regularly throws us unexpected curve balls as a way to shake out the weak and gullible. Jitterbugs that worry about short-term market movements and either get spooked into switching position or attempt to trade the small swings get exhausted and will eat up their capital by being repeatedly whipsawed by their emotions. Individuals with such a short time frame and inadequate discipline should not invest in the stock market. Experienced investors and Trend Timers take a longer view and, despite the many trials and challenges, stick with the major market trends for as long as possible and do not lose faith.

When a surprising short-term development happens to go in the direction of the current trend and favors our present investment position we should avoid getting overexcited and not regard the temporary gain as "in the bag", just as we shouldn't get quickly disheartened when the move goes against us. Long-term wealth building is all about steady and persistent execution of the plan, endurance and conserving energy.

Remembering what the best contrary indicator is (see the February 6, 2004 Trend Timing School article) you generally should do exactly the opposite of what your emotions and gut feeling tells you to do. Times like these, more often than not, should be used to add to your position, not to liquidate. Just like the many pullbacks and corrections we experienced during the long 2003 Buy signal turned out to be great opportunities to "buy the dips", rallies occurring during broad downtrends frequently come to pass as profitable shorting occasions. This has even occurred during the present Sell signal. Take for example the end of June when the Nasdaq Composite Index approached the top of its declining channel around 2050. Many got the jitters and threw in the towel. Anyone that controlled their nerves, resisted the temptation to run for the exit and instead added to their short position is now well ahead of the game.

As always, we do not know if the current up move is just a temporary rally or the beginning of a sustained rise, and we are certainly not about to start guessing. Regardless, we will let our Model detect the predominant underlying market trend, and if a change occurs, a Buy signal will be triggered (or a Cash signal in case we reach the 15% stop).

In the mean time, instead of becoming investment jitterbugs, we will remain calm, conserve our strength and stay the course.

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FAQ of the Week
Question: Does dollar cost averaging work for both Buy and Sell signals?

The short answer is yes. Dollar cost averaging is a method for lowering your risk when entering a new position. We reviewed the dollar cost averaging technique in the March 05, 2004 Trend Timing School editorial, but since we were in a Buy mode at the time, we only discussed the long scenario. In a short situation the risk management benefits of the technique work just the same.

First of all, if you implement a short strategy by investing in one of the bear mutual funds, since you buy shares of the fund the traditional long reasoning applies, i.e. when the price of the fund's share (NAV) goes down your fixed dollar purchase buys more shares, and when the price goes up it buys fewer shares.

If on the other hand you implement the Sell signal by short-selling an ETF or stock, the dollar cost averaging behavior is the mirror image of what it is in the long scenario. If the market moves against the Sell signal by going up, your fixed dollar installments will short fewer shares and in the end your losses will be less than what they would have been had you shorted the entire amount up front (because you have fewer shares to buy back when the time comes to cover the short). If instead the market cooperates and goes down you will be shorting more shares. Your potential gain will be somewhat less than if you had shorted the entire amount up front, but for most people this reduced potential gain is well worth what it buys you in protection against larger losses.

In addition, dollar cost averaging safeguards you even more against sharper changes in market trend. If the market moves strongly against the Sell signal while you are dollar cost averaging into the position and a Buy signal is triggered, your losses will be substantially less than if you had shorted the entire amount up front.

Warm wishes and until next week.

The TimingCube Staff

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