TimingCube - Turning points - Fed Chairman Alan Greenspan, Fed Chairman Ben Bernanke, GDP growth, VIX, Volatility Index

Follow TimingCube »

	Turbo Model				Classic Model


		Share

What's new this week?

We have added to the "In the News" page a presentation given recently by Serge Dacic, TimingCube Co-Founder and Executive V.P., to a group of investors in Dallas. The presentation is accessible as Camtasia downloadable movies which let you view the material presented while listening to the speaker.

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.

Market Update

This week, the budding rally ran into some serious headwind. Monday saw a strong continuation of last week's action with a Bernanke inspired rally. President Bush nominated Ben Bernanke to succeed retiring Fed Chairman Alan Greenspan, which the markets took very well as he represents a continuation of the Greenspan policies. The fact that last Friday's volume had been artificially boosted by triple witching options expiration made Monday's volume look correspondingly low. Despite a solid round of earnings reports, with about 70% of reporting companies results beating expectations and a very low 14% missing, the market tone turned sour from Tuesday on with renewed fears of inflation and a slowing economy. Indices declined most on Thursday, with the Nasdaq 100 taking a 1.7% bruising.

Finally on Friday the markets got buoyed by the higher than expected GDP growth in the July to September quarter. The reports suggest strong spending by both businesses and consumers despite the hit of hurricanes Katrina and Rita, and high energy prices. The surge went a long way to undo the damage inflicted during the mid-week slump.

For the week, volatility spiked again, with the indices finishing mixed. The S&P 500 fared the best by avoiding mid-week losses and managed to gain 1.60% for the week. The Russell 2000 inched forward by 0.37%, but the technology-laden Nasdaq 100 lost 0.51%. During the week most indices seemed to resist near their 50-day moving averages and the downward slopped trend line drawn through the declining tops of the last three months. All three indices are above their respective 200-day moving averages (barely). The Nasdaq Composite 10-day Exponential Moving Average (EMA) has flip-flopped back above its 200-day EMA for a bullish quadrant 1Bull/Buy. Note that when the EMAs are in such close proximity to each other they can trade places easily, making this bull/bear indicator of limited value until some clear separation emerges between the two. While the rally has come under serious attack this week, our Buy signal remains in effect.

Trend Timing School

Turning points

As we experience the recent market behavior with increasing frustration and apprehension with every gyration, it intuitively feels like a market in transition, trying to decide which way it wants to go. In fact, such transition periods are very real, some say necessary and healthy for the market, and more importantly, they precede every significant move. Market turning points are characterized by sharper changes in direction, rising anxiety and volatility. The bad news of volatility is the emotional toll of sudden and frequent direction changes, alas including occasional whipsaws, but the good news is that volatility spikes foretell that a market turning point is at hand.

We wrote in the February 18, 2005 article entitled "Volatility as a market trend indicator" that we like to follow the CBOE Volatility Index, VIX for short, as a secondary indicator, although it plays no part in our Model. It is of limited use as a trend when looking at its inverse relationship to the market. The long held belief that "When volatility is low, it is an indication of a top; when high it is an indication of a bottom" is simply not accurate. However, the use of upward volatility spikes as an indicator of major market turning points, namely bottoms, has been remarkably consistent.

Volatility as measured by the VIX, has been coming down for years. It reached a multi-year low around 10 during July of 2005 before starting a renewed rise. It now stands at around 14. Some market technicians like to attribute specific "anxiety levels" to VIX values, but considering that the all-time high for the VIX stands at over 172 (achieved during the October 1987 crash) we do not believe that the scale and the absolute values matter as much as the relative change.

Looking at Chart 1 below, we can readily see that large upward VIX spikes consistently coincide with market lows as illustrated by the S&P 500 index.

Chart 1: Volatility as turning point indicator

The stock market is said to be the reflection of the ensemble of investor feelings and expectations. Since volatility is really the best representation of investor emotions, the expression of the battle between fear and greed, it is thought to have merit as an indicator for spotting major market inflexion points. Volatility reflects how violently prices move in a short period of time. During periods of market up-trends, gains accumulate, greed prevails, and anxiety wanes. The rationale is that there is too much investor complacency driving volatility down, which happens when markets top out.

Being in a Buy signal we would like to believe, and use the VIX indicator as confirmation, that the increased volatility we see now is a sure sign that an intermediate low has been achieved and that we are due for a significant up leg. Incidentally, for those rooting for a strong bullish move, the six winter months from November through April are historically the strongest. Mark Hulbert just published a study showing that since 1970 the Dow Jones Industrial index gained on average 8.36% during those months, as compared to -0.03% for the rest of the year.

On the other hand, instead of looking at the two year "big picture" in Chart 1 which shows a sloping up-trend with a succession of higher highs and higher lows, we could focus on the past three months and see a bearish series of lower highs and lower lows, confirmed just this week by a bounce off resistance lines. This, of course, could be the beginning of another strong leg down in the secular bear market that (arguably) started in 2000.

The downside of volatility as an indicator of market turning-points is that it is not fail safe. There have been times when volatility has been known to increase for prolonged periods of time until they finally signaled a bottom. Still, the most obvious drawback of higher volatility is volatility itself. As can be seen from our published signals, both past back-tested and recent, some of the major market turning points that generated big gains were preceded by high volatility which at times induced whipsaws even in our system.

The bottom line is that, yes, we are being buffeted around some by the brisk winds, and we might well get whipsawed some more, but we are committed to follow our Model's trend to be positioned for when the big move happens. We believe the turning point is at hand.