What's new this week?
It was with full throttle optimism and excitement that we rolled out our Turbo Model earlier this year. After months of testing, poking, and prodding, we felt we had a big-time winner on our hands. We couldn't wait to share our new baby with you, our fellow investors and loyal subscribers.
It took a while for Turbo to get revved up; the first few months offered a mixed performance. As the market hit a wall in August, we wrote in our Weekly Update how past bear markets had been the fuel to push Turbo to peak performance in the past. We were hopeful that the new market phase would help Turbo find its footing. A few weeks later we have to admit our Turbo engine has a bit of sand in the gears. The performance has gone from mixed to bad to horrendous. Something must be done; and something has been done.
We sent our researchers back into the lab to try and find the source of Turbo's unexpected slide. It is with optimism, more guarded this time, that we announce our team has found and fixed some problems with Turbo. A new, improved Turbo trading Model will be released in the coming days. While we all recognize that what's lost is lost; we also recognize that investing is a marathon, not a sprint. We want Turbo to give us sprinter speed over a marathon course. It is our fervent hope that the new, improved Turbo engine will right the ship and return us to solidly green results.
For more details on the new Turbo Model and a discussion of the problems encountered by the original Turbo, read our Trend Timing School section below.
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Current Signal Performance
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Russell 2000
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S&P 500
(SPY)
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Classic Signal
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Trade Date
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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The appearance of a weekend agreement among France and German leadership regarding Europe bailout funding set markets up for a strong Monday open. The Nasdaq 100
continued the prior weeks gains, lifting more than 3% on the day and urging the rest of the market to follow along. Stocks were able to hold on to Monday's big gain through a modest Tuesday session, as investors bided time waiting for earnings season to kick off. Alcoa's weak earnings news failed to dampen enthusiasm Wednesday. Stocks marched timidly higher with good action from Dow Industrials
heavy-hitter IBM. Thursday's loss from JP Morgan kept financials under pressure, though tech stocks again showed relative strength with the Nasdaq 100 once again adding a modest gain to its powerful October run. Google's strong earnings after Thursday's close and another steady consumer retail sales report put recession concerns in the rearview mirror for awhile. The good cheer pushed oil prices up 3% on the day fueling a rally in energy shares to provide some needed accompaniment to the Nasdaq's relentless charge higher.
The S&P 500 (SPY)
added +5.93% for the week, its second straight weekly gain. The Russell 2000 (IWM)
zipped up +8.61% in an attempt to join the Nasdaq 100's (QQQ)
lofty +7.60% march upward. The weekly moves pushed all three indexes above their declining 50-day moving averages with the S&P 500 and Russell 2000 nearing their overhead 200-day line.
The top 5 World ETF portfolio, essentially a U.S. index list at this juncture, notched a +6.33% advance. With the Classic Model moving to a Buy signal tonight, World portfolio adherents should buy the top 5 World ETF portfolio positions from this weekend's ranking.
Our Classic Model and Turbo Model both are now on Buy signals.
Turbo gets recharged
As described in our opening notes above, we are readying
for launch a new and improved version of our Turbo Model. We do
not take this step lightly and hope you will understand that. We
spend many, many hundreds of hours developing Models that will offer
our subscribers consistent and profitable methods for navigating
markets. In our ten year history, we have only once made any Model
change. Few products can last so long without some tweak. We only
do so when it becomes obvious that the Model is no longer effective;
it no longer provides the service you deserve. It pains us greatly
that Turbo has reached this point. But perhaps that will ultimately
be a blessing in that it gets Turbo "healthy" early on,
leading to a long and prosperous life.
So what happened? How did Turbo sputter? We wanted to share with
you some of those details, if for no other reason than to educate
you further about what we are trying to achieve with the Model.
And why we believe Turbo has a very bright future.
Turbo toggles between a trend-following mode and a mean-reversion
mode. To some degree, the mode is determined by the level of volatility
in the market. In bull markets, volatility is typically not an issue
and we are looking to ride the trend for as long as it holds. This
is similar to our Classic Model, but with more sensitivity thrown
in to jump on the trends quicker and exit sooner. This mode led
to a long profitable signal from September 2010 all the way to March
2011. In bear markets, we see elevated volatility with sharp counter-trend
rallies. To profit from these quick swings in the market, we want
to focus on mean-reversion trades - basically looking for short-term
extremes in market behavior that will bring in buyers or sellers
sensing a short-term trading opportunity.
The sharp drop in August kicked off a period of heavy volatility
and moved Turbo from a trend mode to a mean-reversion mode. We described
in our Weekly Updates the birth of a new bear market. In the past, this
bear market period offered a rich and rewarding trading environment
for Turbo. While emerging markets, small and mid-cap stocks, and
other indexes have showed the usual stairstep downward pattern typical
of bear markets, our focus Nasdaq 100 index
stubbornly held on,
choosing to swing wildly within a 10% channel. The channel was just
big enough to cause Turbo to misread the Nasdaq's moves as changes
in trend rather than mean-reversion moves. Thus, Turbo stuck with
the trades far longer than it should have, dealing us losses along
the way. Compounding the problems was the closeness of the 50-200
day moving average indicators - a key bull-bear reference point.
You can see from Chart 1 below the boxed period where these reference
lines swung across each other multiple times rather than holding
to a clear direction. This caused Turbo confusion as well. Finally,
we point to the circle on the chart back on May 31st. This odd little
price spike - a one-day wonder - threw Turbo off the scent of a
nice short trade as you can see that the index continued its move
downward after that one day. It's been one problem after another
for Turbo; and the Model needs to be robust enough to not let these
dynamic market shifts throw it completely off-course.
Chart 1: The original Turbo model finds 2011 to be tough
sledding
To recast Turbo, we insist that we not solve the "latest"
problem at the expense of history. That means that any improvements
in the model must result in BETTER performance across the board,
not just over the troubled past few weeks, but over the entire ten
year history of the Model testing period. That approach insures
that we are truly building a better engine; one that has a higher
likelihood of success through all market types (after all, we've
seen quite a variety of markets over the past decade!). Our new
Turbo Model shows substantially better results in all our testing.
Now, it's showtime and we hope that reality will at least approximate
the tests.
We hope this change makes sense to you. We are looking to win in
this very important world of investing - where winning is in delivering
consistently profitable trades for your money. That is our only
objective in making this change. It's time we cut our losses, roll
the original Turbo engine back into the garage, and install a new,
improved Model. The new Turbo Model looks good, has a nice roar,
and it's time to accelerate our portfolios.
Question: Why the quick change in Classic signals?
This week's Classic Model Cash signal came on yet another sharp intra-range
rally. Such rallies have thusfar failed to break out of a wild trading
range that developed after the market's dramatic plunge in early August.
Every time stocks run back up to the top or bottom of the range, we
naturally wonder if this is the moment when it breaks higher or lower
- desperate as we are for signs of an end to this whipsawing trading
range and beginning of a longer tradable trend.
There are signs that this rally might be a bit more robust than prior
efforts to move higher. Notably, the Nasdaq 100
, its large-cap brother,
the technology SPDR ETF
, and dividend stock ETFs
(which cover a wide
range of sectors), all have appeared to stretch beyond their September
highs. As we pointed out a couple of weeks ago, there remain many
cyclical and economically sensitive areas that are still holding in
downtrends, or are consolidating after dropping once in August, and
again in September. Ideally, we would like to see some of these sectors
join the rally. They will need to for the rally to have legs.
Also of concern has been the tremendous lack of volume in this rally.
As shown below in Chart 2, volume has been falling almost each day of gain, suggesting
that the bullish traders are running out of steam, or are not being
supported in their newfound enthusiasm by large institutional investors.
It's this lack of volume that has kept Investors Business Daily (IBD)
on the sidelines of this rally. While IBD is not really a trend timing
system, it does offer whether the investing door is "open"
or "closed" as a prerequisite for making new investments.
The door has been "closed" until Thursday of this week,
and even then, IBD noted the lack of enthusiasm behind the moves of
its focus "leading" stocks.
Chart 2: Volume has been higher in the drops and weaker on
the upswings
These question marks turned our Classic Model to Cash rather than
Buy earlier in the week, an indication that signs were still a little
cautious about the rally.
Friday's market action, however, offered further evidence of the market's
newfound bullish tone. Energy stocks joined the breakout party while
small and mid-cap stocks showed healthy moves. More important for
our Classic Model, the Nasdaq Composite index
gapped higher to clear
its September high point. Even our cautious Classic Model could no
longer ignore the change in mood among investors, issuing a Buy signal
this evening.
At this point, the market seems somewhat overbought and due for some
digestion of this torrid advance, especially among Nasdaq 100 stocks,
which have very quickly returned to within 1% or so of their yearly
highs. For those of you who remain a little nervous about this market's
intentions, it's easy to average into the signal, giving it a few
more days to prove itself. Market bottoms often occur in October,
and this point is not lost on most professional traders. Still, all
the issues the market viewed negatively just two weeks ago have seen
little resolution. After two amazing weeks of stock gains, it wouldn't
hurt to be a little more prudent than usual in committing to new buys.
If the rally is for real, there should be plenty of upside to come.
If not, it should quickly encounter sellers. Prudence remains a good
approach.
Warm wishes and until next week.
The TimingCube
Staff
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