|
Current Signal Performance
|
|
|
Turbo Signal
|
Trade Date
|
Turbo Model Returns (Long & Short Strategy)
|
|
|
|
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Classic Signal
|
Trade Date
|
Classic Model Returns (Long & Short Strategy)
|
|
|
|
World
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Friday's caution regarding the European Union's ability to craft a solution to their debt troubles carried over into Monday's trade. Stocks fell throughout the morning hours before buyers once again stepped in to rescue the day, leaving investors with modest gains on the session. Tuesday offered the same pattern, early weakness followed by afternoon strength with investors fixated on news from Italy regarding the fate of Berlusconi's government coalition. Despite the decent strength of stocks, Italian bond yields were ramping upward perilously close to the 7% mark that had sent Greece, Ireland, and Portugal into the land of bailouts. Berlusconi's resignation over night failed to prevent Italy joining the 7% club Wednesday morning and reigniting contagion fears. Stocks plunged at the open and fell further during the day to close with hefty 3-5% losses. A better earnings report from Cisco Systems coupled with an improved Italian bond auction to uplift investor's spirits Thursday. Indexes bounced back around 1%, only partially recouping the Wednesday drubbing. The market showed further resiliance Friday, responding to a resounding Italian vote in support of budgetary measures that gave confidence to the country's lenders. A light Veterans Day session ran up about 2% higher early and hold flat from there (the bond market was on holiday).
The stock indexes showed again their resolve, overcoming yet another wave of Eurodebt
concerns to finish well. The S&P 500 (SPY) added +0.94% while the Nasdaq 100 (QQQ)
broke even with a +0.09% week. The Russell 2000 (IWM) dipped slightly giving back
-0.29%. All three indexes remain above their 50 and 200-day EMAs.
The top 5 World ETF portfolio added +0.50%
this week. The portfolio holds the top 5 ETFs from the November 4th
ranking; an identical list to the prior month, we observe.
Our Classic and Turbo Models remain on Buy
signals.
Defining the goal
Ask most investors what their primary investment objective
is and they will reply the obvious: "to make money". Ask
what that means, e.g. "how much money?" and the answers
begin to scatter. Some investors want to "get rich" having
heard about the wonders of finding the next moonshot stock. Those
are typically younger investors who have not endured the emotional
pain that stocks can inflict - witness this week's -40% trashing
of one-time market darling Green Mountain Coffee Roasters (GMCR).
Those who have observed stocks from a distance are often aware of
the downside risks of buying stocks, though it's usually only a
vague feeling that investing in stocks carries more perceived risk
than other choices.
Long-term investors know well that markets move up, and they move
down. They know that stocks generate a 10%ish return over long periods
of time. But that 10% average can mean a great year of plus 20-30%
as well as a bad year of minus 10-20%. They understand the question
is maybe "how much money?", but it is perhaps more "how
much downside/risk am I willing to experience?". They might
recognize that investing in bonds has long been a rewarding venture
with fairly consistent 5-8% returns and rather few headaches. Of
course, there is a large difference between compounding 5% per year
and achieving 10%. Over a 20 year investment horizon, the 10% compounded
return will grow almost 7x while the 5% return offers a relatively
modest 2.5x benefit.
To achieve the 10% long-term average from stocks, most academicians
and financial planners would argue to just stay the course, stay
invested, be disciplined, and so forth. However, that advice can
ring hollow for investors who don't have decades to wait for that
10% average to re-emerge. Thus, we are left with questions of how
to appropriately set our expectations for what returns we should
expect from investing in stocks. Our first response is usually to
rely on an easy benchmark such as the S&P 500. It's routine
in the industry to measure performance against the S&P 500.
Thus, we use it for comparison as well. Most investment managers
focus on beating their benchmark as their primary focus. To beat
the S&P 500, two methods are often applied:
- over- or under-weight
sectors based on the economic cycle, and/or
- push cash levels
up or down depending on market cycle.
The mentality of striving to beat the S&P 500 is different from
the thinking required to just deliver positive returns. For example,
beating the S&P by raising and lowering cash levels suggests
you buy every significant pullback so that you are invested in any
recovery. If the market dips further, that's not really a problem
for you because you are just tracking the market. You can BEAT the
market by avoiding even a small amount of weakness and getting a
slightly lower entry price for your investment. This week offered
a prime example of this type of thinking. When the market cratered
Wednesday as Italian bond yields spiked higher, investors were offered
an opportunity to enter stocks at a lower price. Buying here and
just holding on would beat the market. Similarly, focusing on defensive
sectors when the economy is slowing is an obvious way to beat the
market. With financial stocks still struggling, just a slight shift
from financials to utilities, consumer staples, or healthcare would
deliver enough of a difference to the market to outperform it. The
trick then becomes being onboard when financials do recover; otherwise
you are unperforming that recovery. Thus, beating the S&P insists
that you buy when others are selling, hold on from there, and/or
making slight shifts in sector weighting.
We are not satisfied with beating a bad market though. To generate
consistently positive "absolute returns", however, you
must minimize losses and seek to deliver positive gains all the
time. That game is much more difficult. You cannot abide losses
of any real magnitude. Hence, one becomes active, trading out of
stocks on ANY weakness to avoid suffering a loss. Day traders provide
an excellent example of this mentality. They cut losses very, very
quickly and just seek to bag a series of "singles", small
positive returns that pile up over time. They might lose half or
more of the time. But by keeping their losses very small and hoping
to have relatively larger winners, they remain net positive - regardless
of what's going on in the market. To a large degree, they are not
really concerned with the macro picture, and perhaps not with fundamentals
at all. It's all about price action and capturing movement in their
favored direction.
Expanding this mentality and making it a multi-day, multi-week endeavor
leads to our thought-process for trend-following. We want to identify
a market direction, invest along with that direction assuming it
will carry on for awhile. This approach may or may not beat the
S&P 500 at any given time because that is not really our focus.
However, we do expect that we will be less exposed to severe corrections
and crashes that set folks chasing the S&P 500 substantially
back on their heels. If we catch the bulk of the upside moves, minimize
our exposure to the downside moves, and even profit a bit from the
downside moves, then we increase our ability to deliver positive
returns far more often than not. Doing so, in a secular bear market
where markets go down as well as up, is a winning approach over
time - with the by-product that we end up beating the S&P 500
over time and doing so with less volatility and risk.
That's our investment objective - a strategy that consistently wins
with winning defined as positive returns each year that compound
our wealth.
Question: Is that change in leadership happening in the Nasdaq
100?
Our Weekly Update comments last week spoke to how the market
was looking for a new cast of momentum stocks to take the market higher. We watched
with interest this week as our focus index, the Nasdaq 100 ETF
?, saw some shifts in leadership that might give a glimpse of the future. Most
important, the stock that has made the Nasdaq 100 the leading index performer
this year - Apple - exhibited signs of fatigue. Investors appear to be taking
their profits from the stock's heady run. Chart 1 below shows
Apple's stock performance relative to three other Nasdaq 100 heavyweights - Oracle,
Intel, and Cisco Systems. The highlighted area shows Apple's underperformance
is weeks-old at this point, and perhaps accelerating this week as Apple falls
while other tech stocks find new enthusiasts. Indeed, Oracle, Intel, and Cisco
all avoided September's selloff and have marched solidly higher ever since while
Apple has treaded water and, this week, come close to violating key support.
Chart 1: Is Apple's outperformance over?
Warm wishes and until next week.
The TimingCube
Staff
|