TimingCube - The importance of profiting in both up and down markets - trend timing,down markets,financial media,money managers,financial advisors

October 24, 2003 Update

Signal Update

Current Signal Performance as of 10/24/2003
Signal Type	Trade Date	Return since issued
Buy	04/03/2003	+28.38%

Cumulative Returns since First TimingCube Live Signal (06/18/2001) as of 10/24/2003
Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
+78.34%	+185.02%	+229.67%	+765.29%	-19.79%

Note: Performance and Returns above are obtained by using QQQ as the investment vehicle.

Market Update

Following two consecutive weeks of new 52-week highs, the market has decided to take a well deserved breather. Analysts expressed disappointment with mixed numbers from Microsoft and scores of weak sales reports, which gave investors an excuse to take some profits. For the week the Nasdaq Composite index and QQQ are down 2.45% and 1.18% respectively. All considered these numbers are pretty tame compared to the nearly 6% drop we experienced a few weeks ago. Another encouraging sign is that today ended on a strong up note which helped erase much of the earlier losses.

Despite this week’s pull-back, the market uptrend is still in effect, and our signal continues to be a Buy.

Trend Timing School

The importance of profiting in both up and down markets

One of the founding principles of Trend Timing is that faithfully following the trend will enable us to profit in both up and down markets. While this notion is deeply ingrained with long term subscribers it goes against everything most financial media, money managers, and financial advisors preach. The prevalent "Buy and Hold" doctrine comes from a long standing belief that no one can accurately predict the market, and therefore that no one can time the market. "Buy and Hold" has been further reinforced by the 90s bull market which proved to many that you could buy just about any stock, hold it, and you would make a lot of money. In addition, how to profit in down markets is not something intuitive for most of us. Now let's review the facts.

We are living proof, with an independently verified track record, that a sound trend following Model can successfully time the market and consistently beat "Buy and Hold" over long periods of time. It is true that if you had invested $10,000 in the Nasdaq at the very bottom in October 1990 and held on to the very top of one of the longest lasting bull markets in history, in March 2000 you would have accumulated a tidy $277,000! However, human emotions being what they are, it is highly unlikely that you would have 1) invested at the very bottom, 2) held on through the crashes and corrections along the way, and 3) sold at the very top. Even if you had, a mechanical Trend Timing approach would have done substantially better. A conservative "Long Only" strategy which simply side-stepped the major downturns would have yielded about $355,000. The "Long & Short" strategy would have returned approximately $447,000, while the most aggressive "Long & Short with Margin" would have gained a mind numbing $4.7M!

Maximum returns are what everyone seeks but we believe that the most compelling argument in favor of Trend Timing is a psychological one. Trend timing allows us to successfully manage the emotions that sooner or later undermine any "Buy and Hold" strategy. We don't know many people who would stand-by while their life's savings – say the $277,000 in the example above – shrinks to less than $50,000. Yes, for those with short memories, the Nasdaq did return -83% from March 2000 to October 2002. In contrast, our "Long & Short" strategy yielded +492% during the same period. The tech bubble collapse was extreme but it highlights the emotional ups and downs investors face routinely. It is precisely these sorts of negative experiences that cause many investors to hop from one approach to another until they ultimately settle for the sub-par returns of ultra conservative investments.

As trend timers we can look at the concepts of timing and shorting the market under a very different light. Rather than perceived risky tactics, they are the key ingredients in reducing real market risk, helping us keep our emotions in check, and allowing us to stick with our wealth building Model for the long run.

FAQ of the Week

Question: Does the signal work with investments other than the Nasdaq and QQQ?

Last week's Trend Timing School topic provides us with the perfect lead into this frequently asked question. As was highlighted in the chart, many indices correlate extremely well with the Nasdaq Composite, making it an accurate indicator for the stock market in general. It is only a short leap to then conclude that our Model must work well with many other investments. It does!

While so far we have largely centered TimingCube on QQQ and Nasdaq related investments, we've done so primarily for clarity and simplicity. As we hinted at in the recent Subscriber Survey Report, we are preparing to expand the service to other indices in the near future. In the mean time, here's a list of indices and related tracking stocks that have worked well with our signal.

Market Index	Fund Name	Ticker
S&P 500	SPDR 500	SPY
Nasdaq 100	Nasdaq 100 Trust Series	QQQ
Dow Jones Industrials	Diamonds Trust Series	DIA
S&P 400 MidCap	SPDR Mid Cap 400	MDY
Russell 2000	iShares Russell 2000 Index Fund	IWM

This list is certainly not exhaustive but reflects our preference for index Exchange Traded Funds (ETFs) which trade like listed stocks, mirror a broad basket of stocks for diversification, are very large in size and have high daily volume for liquidity. There are numerous smaller funds which also performed well with our signal such as the ONEQ from Fidelity which represents the entire Nasdaq Composite, or the HOLDRS Semiconductors (SMH) which mirrors the SOXX index. Always remember that as a general rule, the smaller and more specialized a fund is, the higher the risk.

For our international subscribers, or anyone seeking global diversification, last week's correlation chart included the FTSE 100 index (UK) as a non-U.S. index example. In addition to the FTSE we've also been tracking the CAC 40 (France), the Hang Seng (Hong Kong), and the Nikkei 225 (Japan), and all have performed amazingly well with our Model. Various countries have somewhat different investment vehicles but all have the equivalents of index funds.

Another viable option for many people is to invest directly in some of the large stocks in the Nasdaq such as Cisco, Intel, or Microsoft. They correlate extremely well with our signals but lack the diversification of indices. Finally, for the many subscribers with retirement money which precludes the use of the more aggressive shorting and margin strategies, mutual funds which approximate the performance of various indexes can be very good choices as well. Implementation of our four strategies using the ProFunds and Rydex fund families is described in detail in the "Our Service" page.

Warm wishes and until next week.

The TimingCube Staff

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