As we alluded to in the Market Update above, our Trend Timing approach is 100% mechanical, rigorously unemotional, and leaves no room for analysis or interpretation of data or news events. Opinions and rationalizations, however educated and inspired they may be, play no part in determining the market trend. The market tells us what the trend is and the current signal is what the Model tells us it is, period.

At the same time it is important to acknowledge that we are emotional, sensitive and sentient beings. Most of us do not live as hermits in caves. Everyday we are flooded with news and information, and we get exposed to the opinions of many. Friends, co-workers, cab drivers, talking heads on TV all tell us what they believe the market is going to do and why. Our entire upbringing and education trains us to seek answers and direction. As Trend Timers we have the luxury of already having the answer. At all times we know exactly on which side of the market we should be. The remaining challenge we have is to maintain our cool and find the conviction and peace of mind to stick with the program.

Instead of drowning under information overload, and being continuously prodded and swayed this way and that way by conflicting forces and impulses, we should be hunting for evidence that reinforces our current stance and belief (the current signal). As an alternative to constantly being critical and skeptical, Trend Timers should be confirmation seekers.

This highly selective filtering technique is somewhat counter-intuitive. If anything, our natural self-preserving tendencies would have us look for signs of danger and bad news. However this new attitude can become automatic and subconscious in rather short periods of time. It can work miracles for our mental health much like positive thinking can help overcome despair. The good news is that it is rather easy to do. At any time you can find just about as much evidence pointing to the markets going up as proof of the contrary. The trick is to train our brains to filter out opposing information and instead focus on facts and news corroborating the current trend and on any theories or statements that uphold the signal in progress.

We suspect that most of us can instantly rattle off a handful of reasons why the market is going up. Yet a quick scan of the news will yield an equally impressive list of irrefutable evidence that all is not well with the economy and that the markets are headed lower, affirming our active Sell signal. Here are just a few obvious ones:

• Most technical indicators show the markets are in a major overbought area. One such example is the Moving Average Convergence Divergence (MACD) indicator which is a widely followed momentum oscillator pointing to an imminent downward correction
• Higher energy costs. The price of crude oil seems to post new records every other day, including a new one today at $53.31 a barrel. Many analysts say that the demand-driven cost increases will continue, even without any major disruption in the supply chain
• Slower job growth. Hiring is clearly slowing as evidenced by weaker-than-expected reports by the government as well as a major uptick in layoff announcements by major corporations. September announcements jumped by 45% to an 8-month high
• Market rally lacks breadth. No recovery or market rally is sustainable without broad participation, especially by the manufacturing sector. The same cyclical materials, oil, and defensive industries like wood, paper, and cement have led since August. Large-cap technology and large-cap pharmaceuticals look terrible and earnings warnings are prevalent
• The U.S. dollar is chronically ill and poised at the edge of a cliff. Many economists warn that unless something is done immediately about the unprecedented triple U.S. Budget, Current Account and Trade deficits the dollar has nowhere to go but down, fast. With two on-going wars, mounting debt payments, and tax cuts to boot, a solution is unlikely to be found any time soon
• Rising interest rates. We are at the beginning of a new era of rising interest rates. The Fed has begun, and clearly stated its intent, to continue raising interest rates to combat inflation. An old Wall Street saying is "don't fight the Fed"

Anyway, to make a long story short, you can find incredible encouragement, strength and resolve by focusing on anything that verifies and confirms your current position.

Subscribers that implement one of the Long Only strategies can spend extended periods of time in cash mode during Sell signals and, if and when the Model issues a Cash signal, we might all be faced with the same situation. All our published results assume a 0% return while our money is parked in cash, but in general you should try to do better than that.

The most basic choice of cash equivalent fund that your broker offers (this is frequently the default option) is called something like "cash reserves", pays no interest and typically has expenses in the 0.5% to 0.75% range. So between expenses and inflation you are actually losing money. We feel that the minimum acceptable is a "money market fund" that pays interest that at least exceeds the fund's costs. Current yields for money market funds are around 1%.

If you want to be more aggressive you can chose from a wide range of "bond funds". Bond funds invest in various debt instruments issued by governments and corporations and come in tax-free or taxable flavors. Besides offering higher yields than cash equivalent funds, bond funds also come with risks to your capital, meaning that despite any earned interest you could end up with less money than you started with. This is due to several factors such as issuer default risk, inflation risk, but first and foremost interest rate risk. The price of bonds is inversely related to changes in market yields. When interest rates go up, the price of bonds goes down and vice-versa.

While it is possible to find bond funds that yield anywhere from a couple of percentage points all the way to 15% per year or more, you want to be very careful with the higher yield funds. In order to achieve the higher returns the fund manager has to invest in lower grade issues frequently referred to as "junk bonds" (where the issuer has low credit worthiness), and take higher risks through leverage (where the interest rate induced price fluctuations are amplified).

The bottom line is that you want to balance your quest for higher yields with the level of risk to your capital, especially since from historical lows we have now entered a new era of rising interest rates.  

Warm wishes and until next week.

The TimingCube Staff