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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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After solid gains Monday, stocks retreated over the next four sessions to finish lower for the second week in a row. An upgrade of Cisco Systems and the announcements of several high-profile mergers provided a boost for stocks Monday, allowing the Nasdaq Composite to jump by 1.9%. The main averages proceeded to move higher in early trading Tuesday, but then reversed course to close modestly lower on an unexpected drop in consumer confidence. The next session saw stocks plunge following a weaker-than-anticipated reading for the Chicago Purchasing Managers Index (PMI), only to recover most of their losses by day's end. The real blow for the market came Thursday: several negative factors combined, such as a downgrade of Microsoft, an increase in weekly jobless claims and a worse-than-expected ISM manufacturing index, to send stocks precipitously lower. This time around, there was no recovery and the Nasdaq Composite finished the session 3.1% lower. The Labor Department said Friday that 263,000 jobs were lost last month, significantly more than the anticipated 180,000, and that the unemployment rate rose to 9.8%. While negative, the news is not that surprising, since employment is a lagging indicator and only starts improving long after a recession has ended. Stocks proceeded to post modest losses following the jobs report, albeit on reduced trading volume.
The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively lost 1.88%, 1.97% and 3.06% over the five-day span. Despite this week's losses, all three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio outperformed
its U.S. counterparts this week with a loss of 1.80%.
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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Volatility
and its impact on our investments
Following up on the Trend Timing School article from two weeks
ago entitled "Dealing with Risk", we will now
look into more details at the role of volatility with regards
to our investment techniques.
Investment logic as well as empirical evidence suggests that
higher risk comes with an opportunity for higher returns (or
higher losses as the case may be). As soon as we invest in anything
other than risk-free holdings like a savings account or U.S. Treasury
bills, we are accepting some amount of risk on our capital in
exchange for potentially higher returns. Every investor's challenge
is to manage that ratio favorably in accordance with their own
risk tolerance.
There are many different measures of risk such as beta, Sharpe
ratio and others. We will spare you the formulas and calculations
(which you can find on many sites such as Investopedia.com
or StockCharts)
and instead try to concentrate on the concepts. Most risk yardsticks
are really measures of volatility and standard deviation. This
comes from the notion (flawed in our opinion) that an investment
that performs consistently year after year (even with tiny returns)
is better than one with large return variations from year to
year. We do not believe that volatility by itself is bad, to
the contrary, volatility is a key ingredient in achieving higher
returns. Yes, just looking at traditional risk measures, the
Trend Timing system exhibits a lot of volatility, which we gladly
take any day in order to achieve the all important risk/reward
ratio.
Although we thrive on volatility, compared to speculators and
many traders who have much higher risk tolerance, Trend Timers
are typically long-term, low-risk types.
We all need to determine our own risk preference, and how much
we tolerate depends on many things such as age, financial objectives,
income requirements and time horizon. The real question we all
need to ask ourselves is "how much am I willing to lose
in order to achieve my investment goals?". In general,
the higher the age, the lower the risk tolerance because most
capital is used to generate current income and there is little
time left to recoup potential losses. Being able to hang in
there while we experience temporary losses is a prerequisite
in obtaining the gains. It is important to remember that many
Buy and Hold investors (according to most volatility measures,
Buy and Hold is lower risk than a Long and Short
strategy) cannot stomach the mounting losses during bear markets
and bail out at or close to the bottom. As trend following Trend
Timers, we do not have to stomach such disastrous losses because
we know we would be switched to benefit from the falling market
instead. In addition, we always have declines constrained thanks
to the 9% "after the close" stop loss signal and the
15% trailing-stop Cash
signal (for a refresher on the mechanics driving our automatic
Cash signals, please
visit our "FAQ" entry on the subject). Depending
on the investment vehicle and strategy used your actual losses
could be higher or lower and there is no hard limit on how much
stock investments could fall in a single trading day. Often,
just knowing exactly what the maximum downside is makes all
the difference in the world.
Looking at our "Results" page it
is striking to notice that the strategy judged the riskiest
by conventional wisdom - Long and Short -
has consistently outperformed the less risky ones over most
time periods, even on a risk-adjusted basis, the results are
even amplified if you use some leveraged techniques such as
options or leveraged ETFs (for more informations on the use
of options and leveraged ETFs with TimingCube, please visit
the weekly update on the subject: "How much leverage should I use on
my investments?"). The point we are trying to make is not
that you should commit all your money to the Long and
Short strategy, but rather that often, investments
which look the safest on paper turn out to be the worst when
looking at risk-adjusted returns instead of risk alone.
In the end, we firmly believe that the biggest risk most investors
face is the missed opportunity of achieving their life's wealth
building dreams. Too many do not have the discipline to save,
are afraid to start investing, fall off the wagon, or constantly
chase the next best investment advice. Accordingly, providing
you, our subscribers, with a non-emotional Model and the tools
and the support system that helps you remain firmly committed
is our first and foremost priority.
Overall, we believe that a central benefit of Trend Timing is
that it helps us reach for dramatically higher returns with
a known and very limited increase in risk which results in an
optimal risk/reward ratio we can live with and profit from for
years to come.
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FAQ of the Week |
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Question:
How can I see the performance of the TimingCube
signal using Bull/Bear mutual funds?
For some of us, mutual funds still are the only type of investments
allowed within our retirement accounts. For this purpose, some
of our long-time subscribers may still remember a tool on our
website that showed the performance of Bull/Bear mutual funds
when traded according to the TimingCube
signal. Since the generalization of ETFs and their greater flexibility
and efficiency, we have put less emphasis on mutual funds, but
the tool is still there although not as prominent as before.
You will find it on the "Our
Service" page at the bottom of the "Strategies"
section. Look for the "mutual funds can be used
to implement our strategies" link.
A click on that link will bring up a new window, at the bottom
of which you can select the Bull/Bear fund family to pick from
(Profunds or Rydex) as well as the level of leverage (single
or double) to be used. And voila! This will then show you the
return generated by our signal over the period you picked (our
model has been backtested as far back as the selected mutual
funds were in existence).
Warm wishes and until next week.
The TimingCube
Staff
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