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Turbo Model
Classic Model




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.

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Market Update
It was a bad week for stocks. After hesitating in mixed fashion on Monday, the markets took a turn for the worse. Small caps were hit particularly hard, with the Russell 2000 seeing its worst one-day drop since July of 2003 (-2.84% on Thursday). The Nasdaq Composite saw daily volumes exceeding the 2 billion mark twice, on down days. While most indices had recently clawed back above their respective 50-day moving averages, they plunged back under, with the S&P 500 even sinking below its 200-day average. Nevertheless, with the indices between 3.95% and 6.42% below their most recent highs, this is well within the range of a normal pull-back, not even a correction.

Ironically, with energy prices in clear decline and oil at 9-week lows, fear of inflation became the new concern for investors this week. A number of reports showed up-ticks in several price indicators, but what caused the real damage were repeated statements by Federal Reserve officials about inflation reaching the upper ranges of tolerable. This was widely interpreted by investors as a sure clue to further interest rate hikes down the road. Still, there was not broad sector participation in the decline which was really led by the energy and interest rate sensitive areas like mortgage lenders and construction.

For the week the Russell 2000 fared the worst with a 3.51% loss, ahead of the Nasdaq 100 and S&P 500 which gave back 2.86% and 2.68% respectively. Despite the week's negative tone our Model has not signaled a change and we remain with a Buy.

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Trend Timing School
Investors and traders

The definitions for these two terms abound but we like the traditional ones which paint investors as having a view on the longer term market direction, and traders being focused on exploiting the shorter term market starts and stops. At times when markets are range bound without sustained trend, or when they pull back in reaction from recent highs and we are forced to give back some of the earlier gains, the temptation is to ask: What if I could trade these short term fluctuations? For the adventurous, there are many types of trading around, but it is important to understand their characteristics and how they differ from one another, and from Trend Timing.

Instead of black and white definitions, traders and investors coexist in a wide continuum of styles. At one extreme of the scale we find the day traders who hold their positions for minutes or maybe hours, but typically less than a day. Next come varieties of swing traders and trend traders with increasingly longer horizons ranging from a few days to maybe a few weeks. After that, the trend investors, as exemplified by us Trend Timers, who follow intermediate market moves lasting a few months on average. Finally at the other extreme are buy and hold investors who bank on the market going up for years.

The techniques used by traders vary greatly but by and large they are mostly rooted in technical analysis and are either of the trend or range type. Range trading techniques attempt to exploit short term imbalances such as in the bid-ask spread, or overbought-oversold conditions. Instead, trend type traders will focus more on momentum and direction from indicators like moving averages and MACD.

Maybe more important then varying trade holding periods, these investing styles have much more pronounced differences with respect to winning trade ratio and average gain per trade. As a rule, the shorter the trade duration, the smaller the winning trade ratio and the average gain per trade (but don't jump to the conclusion that buy and hold is the best). Trading techniques generally top out at 2-to-1 winning ratio trade with many systems below 55%. In contrast our longer term Trend Timing Model has delivered a 4-to-1 winning ratio. Rapid trades have very low average gain per trade, in the fractional or low single digits. The TimingCube signal has returned an average 10% per signal since inception.

Maybe the biggest characteristic of trading systems is that they tend to be very specialized and only work in very specific conditions. Some will only work well when markets are choppy; others when a sustained range bound channel is in place, and so forth. The fact is that in the recent past many trading systems have been whipsawed into numerous trades at losses or breakeven. When markets remain stuck in an area covering less than 10%, even the most aggressive traders will have trouble squeezing out profits.

In any case, as Trend Timers we don't have the guts for it. Trading is hard work and often the numbers stack up against you. We don't want to trade 15 or 20 times per year. We believe the optimal tradeoff in risk/reward, as well as work/stress/reward, is a longer-term trend following approach. Even if our patience gets seriously tested during trendless market periods.

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FAQ of the Week
Question: How can I calculate the cumulative return of successive trades?

Probably the most common investor mistake is to calculate cumulative returns by adding the results of individual trades instead of compounding, which involves multiplication. This is why, for example, a gain of 50% multiplies your money by 1.5.

To explain a practical case we calculate the cumulative return for the Russell 2000 for the last three trades since October 28, 2004, with a "Long and Short" strategy. The numbers are straight from the returns table on the "Current Signal" or "Results" pages. The compounding of 6.08%, 4.39% and 8.19% is:

((1 + 0.0608) * (1 + 0.0439) * (1 + 0.0819)) - 1 = 19.80% (a multiplier of 1.1980)

For anyone intrigued with returns formulas, you can also find explanations of all major calculations we use in these pages in the July 9, 2004 Trend Timing School article entitled "Annualized, average, compound, cumulative and yearly returns"

Warm wishes and until next week.

The TimingCube Staff

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