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Turbo Signal
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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
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Classic Signal
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World
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Nasdaq 100
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Russell 2000
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A surprisingly positive Chinese manufacturing report combined with good earnings from Caterpillar to deal a setback to fears of global recession and drive markets to 2% gains Monday. The chinese report had far reaching consequences, completely reversing last week's plunge in copper, launching a breakout in emerging market stocks, and generally giving investors comfort to take on risk. The enthusiasm was dealt a harsh blow Tuesday when large-cap cyclicals 3M, Cummins, and U.S.Steel offered a dramatically negative counterpoint to Caterpillar's bullish outlook. Markets reacted by giving back almost all of Monday's increase. Better economic reports from durable goods and housing added to increasing optimism that Europe would get their deal done to ultimately deliver a bullish result from a seesaw Wednesday session. The Nasdaq Composite
was held back somewhat by a double-digit plunge in shares of retailer Amazon, which, along with Apple, had been a key Nasdaq 100
driver throughout the turbulent late summer months. Overnight agreement on a Europe bailout facility caused the big fireworks of the week: a surge in global stock markets, some European markets to the tune of a >5% surge upward. That led to a 2% gap up for domestic indexes at the onset of U.S. trading Thursday. The rally gained steam throughout the day leaving stocks ahead by 3-5% with many cyclical sectors breaking out in a big way. A contributing factor to the bullishness was a better-than-expected 2.5% domestic GDP result for Q3, fueled by strong consumer spending. Stocks held on to the week's gains during quiet Friday trade, with markets ending the day unchanged.
The fourth consecutive week of gains for stocks left the S&P 500 (SPY) higher by 3.73%, along with a huge 6.89% advance from the Russell 2000 (IWM), and a 2.86% rise for the Nasdaq 100 (QQQ). All three indexes have now jumped above their 50 and 200-day EMAs.
The top 5 World ETF portfolio added +4.02% this week. The portfolio holds the top 5 ranked ETFs from October 7th.
Our Classic and Turbo Models remain on Buy signals.
Investors do the Twist
Like it or loath it, the Federal Reserve certainly has tried
hard to buy time and provide a stimulative environment for business
to invest. Historically, the Fed sought to bring down interest rates
by influencing the ultra-short term Fed Funds rate, hoping that
the reduction in the short-term rates would ripple through bank
lending rates further out. In the first and second quantitative
easing (QE) plans, the Fed moved away from its historical confines
and wandered out directly into middle and long-term interest rates,
implementing a plan to directly buy mid and long-term U.S. Treasuries
as well as mortgages. Part of the impetus for this expansion
of Fed behavior was nominally to push mortgage rates lower and jumpstart
home purchases. However, investment has remained stubbornly locked
up with the economy struggling to gain lasting traction. Ben and
Co. were pushed to come up with additional ways to weaken rates
further.
On September 21st, after the usual pre-meeting leaking of expected
policy changes, the Fed announced "Operation Twist", a
program where the Fed uses the proceeds of maturing short-term notes
to purchase long-term bonds. The result being that the Fed is working
with the same pool of funds as before, just applying them/investing
them to a different part of the bond world (or the yield curve,
if you choose). This Twist should serve to lower the long-term U.S.
Treasury bond rate, at least temporarily, at the expense of perhaps
raising the short-term Treasury rate (which is already essentially
zero, so it's not like short-term rates will suddenly jump enough
to change anything).
At first, this focus on long-term rates seemed a bit odd. As the
Chart 1 below shows, the long-term U.S. Treasury bond was already
attracting tons of investor cash fleeing stocks and other risk assets.
The long-term bond price rallied 20% in short order from the stock
market's crash in early August, a truly huge move for a presumed
low volatility asset class.
Chart 1: U.S. Treasury bond prices soar as fearful investors
seek safety
As so many times during the past couple of years, the market was
doing the Fed's work for it. Investors were already full of fear,
shell-shocked by violent market behavior in August and early September.
When the Fed comes out on top of this to announce an intent to drive
rates down even further, investors take the news as evidence that
the economy must be even worse than feared. They also express disappointment
that the Fed is not implementing another round of true easing, not
adding new money to the market bailout pool. Risk
assets promptly sell off anew.
But the Fed, having engineered two market rallies through QE parts
one and two, knew better. Operation Twist was forcing the hand of
bond investors. They couldn't resist taking profits on long-term
U.S. Treasuries after such a huge rally. New investors wanted no
part of now sub-3% Treasury bond yields - (you're kidding, right?
tie up money for 20 years at 3%?!). Investors were pushed into buying
riskier assets, corporate bonds instead of treasuries, and rippling
on into buying higher-risk bank loans, high yield bonds, then stocks
as markets bottomed once Twist got going.
Chart 2: Operation Twist deals another blow to already weak
high yield bonds before launching them on a torrid rally
Part of the market bottoming equation was driving interest rates
so low that ten-year treasuries yielded less than stocks - a rare
event - and one that raises basic questions among investors. For
example, you can buy a ten-year treasury and lock in 2%; or get
2% for ten years from stocks with the chance you get at least some
appreciation on top.
Chart 3: Operation Twist tempts investors
by driving treasury yields below the S&P 500 dividend yield
Like the nonstop move higher in high yield bonds, stocks have done
an about-face since bottoming in early October. This week's news
accelerated an already massive rally. An agreement on the European
remedy for Greek debt/bank support removed near-term fear of a Euro
collapse. The same day investors welcomed a surprisingly strong
U.S. GDP report, thus assuaging fears of an imminent recession.
That's two of the major market monsters suddenly vanquished. The
week prior saw a hint that the third monster - a slowing Chinese
economy/hard landing - might also just be a mirage. Investors have
poured back into risk assets to deliver a record-setting monthly
advance and perhaps leave behind those monsters for a good while.
Let's Twist again, investors are singing this month.
Question: Where do I find signal drawdown data?
Our website endeavors to provide as much data as we can about the
history of our signals. When investing in anything, it's important
to understand how the investment might behave. From that information,
we can set our expectations appropriately. For example, look at the
statistics below regarding our Turbo Model:
From this data you can see that Turbo averages four signals per month,
some as quick as one day. Four signals equals two round-trip trades
- e.g. Buy, Sell, Buy, Sell. You know that Turbo is a "fast"
trading model rather than a Model like Classic that trades only four
times per YEAR. Part of being an investor is understanding not only
your objectives and risk tolerance, but also how much maintenance
you want to take on. Statistics such as this help answer those key
questions. The payoff for the high activity level of Turbo is the
lower drawdown and zippier return profile - you can make a lot more
money for your effort.
This table of statistics is updated daily and can be found by going
to the "Results" page and clicking on the word "Statistics" as shown:
Get familiar with our investment models by visiting the Results -->
Statistics tables as well as wandering around the other pieces in
the "Results" page. If you're entrusting your money to our Models, it's
best to know how your guides will behave!
Warm wishes and until next week.
The TimingCube
Staff
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