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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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Returning to bullish mode, stocks moved higher every day this week to recover all of last week's losses and then some. The main indexes got off to a good start Monday, thanks to a bullish report from Goldman Sachs on the banking sector and news that the ISM index of service activity rose for the first time in 12 months, providing yet another sign that the economy has turned up. Gartner Group's projection that semiconductor sales will rise 10% in 2010 helped boost stocks further during the next session, allowing the Nasdaq Composite to rally an additional 1.7%. A string of positive economic news provided more ammunition for the bulls: the retail sector reported that same-store sales finally rose last month, after a year-long decline, while less jobless claims were filed last week than anticipated. Investors kept buying for the rest of the week to send the S&P 500 to its highest weekly close since September 2008, despite comments by Fed Chairman Bernanke that the Central Bank will eventually have to wind down its accommodating measures in order to avoid a resurgence of inflation. The very fact that such a statement was issued clearly shows that the Federal Reserve believes that the economy has started to rebound.
The Russell 2000 (IWM), S&P 500 (SPY) and Nasdaq 100 (QQQQ) respectively gained 5.90%, 4.65% and 3.91% over the five-day span. 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 6.19%
gain. 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. Please note that the World portfolio
is being rebalanced today, as the current 4-week holding period
is now over.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Another
mid-signal entry point approach
Our current Buy
signal is now six months old and in the midst of a market sporting
a fresh cyclical bull period. The last time we were wearing
our new bull market shoes the Buy
signal endured for more than a year. We obviously have no idea
where the market is headed. But it's not out of the question
that we have many weeks and perhaps even months before any significant
selling turns our signal the other direction.
This begs the question of how to enter the fray with any new
money. We have proposed in past weeklies that dollar-cost averaging
is a good strategy for working your way into the market mid-signal.
Another approach is to become a bit of a contrarian and seek
out lower risk opportunities to dive into the market. Using
standard moving averages as your reference point certainly works.
The RSI indicator provides another good intrasignal method for
such lower risk entry points. (If you need an introduction to
RSI, take a quick read of this week's FAQ
below.)
First, let's observe some typical behavior of the RSI indicator
as shown in the Chart 1 below:
1) During a bear market, the RSI will rarely become overbought.
But it can become oversold and extremely so.
Conversely,
2) During a bull market, RSI will rarely become oversold but
will be frequently overbought and sometimes extremely so.
Chart 1: RSI indicator typical behavior
Recognizing these two points, we can build rules for putting
money to work mid-signal. We simply need to understand whether
we are in a bull or bear market, know which way our TimingCube
signal is pointing, then look for extreme RSI conditions that
give us a lower risk entry point. Given that the RSI with a
period of 14 does not offer these opportunities very often,
we can shorten the duration of our RSI and see more frequent
entry points, if needed.
The Chart 2 below contains both the S&P
500
and RSI indicator. It shows the current Buy
signal from early April 2009 and, using an RSI with 5 periods,
draws a box around some mid-signal entry points that have appeared
thusfar. You can see that you will not necessarily enter at
the absolute low point for that particular swing. But you will
guarantee that you are not buying at the top and you are getting
a better price than just tossing your money in randomly. If
the market keeps falling and a Sell
signal gets issued, your investment will have less far to fall
since you will have bought in after a chunk of the decline had
already passed.
Chart 2: S&P 500 and RSI indicator with mid-signal
entry points
Having a structured method for your investment decisions is
critical to long-term success. With an understanding of broad
market cyclical behavior and the TimingCube
signal on our side, the RSI indicator and other mid-signal entry
strategies give us a nearly complete set of tools with which
to drive our investments in a disciplined, methodical manner.
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FAQ of the Week |
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Question:
What is the RSI indicator?
The RSI indicator measures the strength of gains and losses
in a stock over a given number of periods. Fourteen periods
is the typical default value used. If the RSI indicator is increasing
in value (line is rising), that means that the average gain
of the past 14 periods (or how ever many periods you've chosen
to use) is greater than the average loss over that same period.
The RSI indicator is on a scale of 0 to 100. Per convention,
any reading below 30 is considered "oversold" meaning
that there has been a preponderence of downside action in a
stock. A reading above 70 is the contrasting "overbought"
condition. The RSI can be used in several ways. Most intermediate
term traders, such as those of us following the TimingCube signal,
will use RSI to indicate extreme conditions in the market. The
Chart 3 below shows the RSI with 14 periods
for the S&P 500
index thusfar in 2009. You can see the oversold condition highlighted
on the chart back in March that marked the low point for this
year. There have been two recent overbought conditions for the
S&P 500. The overbought condition does not mean that a rally
is nearing an end, it just means that the strength of the move
has been substantial. As discussed in the above Trend
Timing School, an overbought condition is a normal feature
of a bull market whereas an oversold condition is typical of
bear markets. The more interesting opportunity is finding overbought
conditions in bear periods and vice versa - oversold conditions
in bull periods. Those can be excellent entry points for contrarian
investors.
Chart 3: RSI
with 14 periods for the S&P 500
Warm wishes and until next week.
The TimingCube
Staff
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