TimingCube - The difference between Trend Timing and "scandalous Market Timing" - investors,profits,mutual funds,trend timing,illegal trading,market timing

November 21, 2003 Update

Signal Update

Current Signal Performance as of 11/21/2003
Signal Type	Trade Date	Return since issued
Buy	04/03/2003	+28.49%

Cumulative Returns since First TimingCube Live Signal (06/18/2001) as of 11/21/2003
Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
+78.50%	+185.43%	+229.96%	+766.53%	-19.72%

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

Market Update

Despite good economic news, markets moved lower this week. Terror-related events and news caused some investors to become nervous and book profits. It is also the time of the year when large institutions, especially mutual funds, do some tax-related selling, putting additional pressure on the markets. For the week, the Nasdaq Composite index lost 1.88% while QQQ was lower by 2.31%. It should be noted that the selling was orderly: there was no big increase in volume on the down days. This indicates that large institutional investors were not rushing for the exits. The week's action had no impact on our Model and our current Buy signal is still active.

Trend Timing School

The difference between Trend Timing and "scandalous Market Timing"

If you have read the newspaper or watched TV news lately you are most likely aware of the growing number of mutual fund scandals attributed to improper and potentially illegal trading activities frequently described in the media as market timing. Before going any further, you can rest assured, there is nothing illegal in the Trend Timing system we advocate. Since the traditional definition of market timing in the investment community is to shift assets between equities and cash - or between long and short equity positions - in anticipation of future market direction, we do not believe that the market timing terminology is appropriate to describe the activities under investigation. However, since many people including New York Attorney General Eliot Spitzer and Securities and Exchange Commission Chairman William H. Donaldson have used the term in connection with the illegal activities, it is worth reviewing exactly what they are.

The practices broadly lumped under the market timing appellation include late trading and rapid trading.
While the New York stock market officially closes at 4 p.m. eastern, which is also the cut-off time for funds to value their shares, some mutual fund companies have been accused of letting favored customers trade shares after this deadline. This late trading provides obvious opportunities to unfairly profit at the expense of other shareholders by, for example, acting on good or bad news released after the close. This is illegal preferential treatment for select customers, not market timing.
Rapid trading is the technique of frequently switching in and out of certain funds to exploit stale pricing. Stale pricing happens most often in international stock funds where at times prices can be out-of-date by several hours. Price discrepancies also occur in funds dealing with currency exchange or interest rate related instruments much used in hedge funds. The practice of dealing in minute and temporary price differences is sometimes called stale price arbitrage. It is illegal but it is not market timing either. Rapid trading is also easily confused with frequent trading which occurs with some popular momentum strategies which recommend frequent shifts between different stocks or mutual funds. Momentum Investing will be reviewed in a future issue.

To summarize, what all of this means to us Trend Timers is:

Trend Timing has nothing to do with the mutual fund industry scandals or the fraudulent trading activities broadly referred to as market timing.
If you invest in mutual funds, the index tracking funds that work well with our Model tend to be less susceptible to these illegal practices. Nevertheless, you should be vigilant and stay clear of mutual fund families that are under investigation or have been charged with illegal practices.

FAQ of the Week

Question: Do we have to wait until we are down 9% before a Sell signal is issued?

Some of you got confused by the 9% from entry point rule associated with the Cash signal we described last week and others have expressed concerns because of the week's market decline. To clarify, the Cash signal and the 9% rule are safety measures mostly designed to protect us during the early phase of a signal - and have never yet been triggered by the Model we use. Having been in a Buy position for over six months and being up over 28%, it is highly likely that a Sell signal would be generated long before we ever get in the vicinity of a Cash signal.

This being said, the decline from recent highs has not yet exhibited the characteristics of a trend change. In particular, we have not experienced significantly increased volume on down days. We've had similar declines during the last few months and in retrospect they've proven to be good buying opportunities. As usual, we will not let our emotions dictate our investment decisions but rather trust the Model to tell us which way the market is actually going. The next signal might come next week or in six months, so in the mean time we are comforted by the knowledge that patience and consistency is what long term wealth building is all about.

Warm wishes and until next week.

The TimingCube Staff

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