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Turbo Model




Signal Update
Current Signal Performance as of 11/28/2003
Signal Type
Trade Date
Return since issued
Buy
04/03/2003
+32.81%

Cumulative Returns since First TimingCube Live Signal (06/18/2001) as of 11/28/2003
Long Only
Long Only with Margin
Long & Short
Long & Short with Margin
Buy & Hold
+84.49%
+201.13%
+241.05%
+814.19%
-17.03%

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

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Market Update
After a two-week slump, markets returned to their bullish ways. For the week, the Nasdaq Composite gained 3.50% while QQQ was up by 3.36%. The economic picture continues to improve: GDP growth for the third quarter was revised upwards to 8.2%, the largest increase since 1984, while jobless claims hit a 33-month low. This is all good news for stocks and investors are paying attention. The market uptrend remains intact and there is no change in our Model: our current Buy signal is still in effect.

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Trend Timing School
The difference between Trend Timing and Momentum Investing

The Trend Timing Model we advocate and follow is often confused with other forms of market timing and something called Momentum Investing. In the November 2003 issue of Stocks, Futures & Options magazine there is a good article on this subject which extensively quotes an active TimingCube subscriber as well as our President (Note: you can find an electronic copy of the article on our "In the News" page by clicking here). Despite our contributions to the article, the author describes Momentum Investing and Trend Timing as synonymous. Since numerous newsletters and financial commentaries preach momentum principles it is important to clarify the differences so there can be no confusion with Trend Timing.

As detailed in a number of previous Trend Timing School editorials we focus on identifying the predominant broad market trend and issue Buy and Sell signals accordingly. In contrast, proponents of Momentum Investing do not concern themselves with market trends at all. Rather, they identify the sectors or investments - typically individual stocks or mutual funds - which have exhibited superior results in the recent past. The fundamental tenet of Momentum Investing is that investments that have already outperformed the market in the past are likely to continue their winning ways. This belief builds on the notion that most investors are like sheep and will tend to flock to the most recent winners and keep chasing the hot stocks and funds. While this approach was pretty popular during the long bull market of the 90's, it had fallen out of favor after the bubble burst and is now regaining support with the resurgent bull market. This points to one of several potential flaws in the momentum theory. We know that during bear markets the majority of stocks and stock funds go down. Even if you identify the recent best performers you may still be chasing the market down. Another sensitive aspect has to do with the time periods used to a) identify "recent" winners and b) hold on to these winners before upgrading to the next winner. There does not seem to be a consensus on what the ideal periods are but the "observation" phase varies from a few months to as much as a year, and the "hold" period tends to be a few weeks. This leads to frequent trades which can be cumbersome and costly. What investment vehicle to use is another source of intense debate. The more aggressive proponents argue that only individual stocks can give you fast and big returns. This of course goes against the safer notion of diversification.

As a conclusion, we'd like to reiterate our commitment to Trend Timing - identifying and following broad market trends - as a higher performance, lower risk, "all weather" approach to investing instead of the much written about Momentum Investing.

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FAQ of the Week
Question: Why are the ProFunds and Rydex leveraged funds not always consistent with the index they track?

Some of our astute subscribers have noticed that the leveraged funds from both the ProFunds and Rydex fund families do not always perform as expected. In theory, the ProFunds UltraOTC (ticker symbol: UOPIX) and the Rydex Velocity 100 (ticker symbol: RYVYX) should double the performance of the Nasdaq 100, similar to buying QQQ on full margin. Conversely, the ProFunds UltraShort OTC (ticker symbol: USPIX) and the Rydex Venture 100 (ticker symbol: RYVNX) should return double the opposite of the Nasdaq 100, as if you would short QQQ on full margin. Well, theory does not always work as expected. There are minor differences attributable to trading on the market close instead of the open, and fund expenses, neither of which explain some of the discrepancies. While disturbing, this behavior is perfectly normal once you understand how the funds operate and how compounding works.

These funds are designed to produce the intended performance on a daily basis. If you analyze the daily track record of the funds you'll see that they do an amazingly good job day by day. So why doesn't this translate into consistent tracking over longer periods of time? Blame it on compounding.
Let's look at a couple of specific examples to illustrate the phenomenon. The first example shows five mostly trendless days during which the index just bounces up and down, compared to a fund that attempts to double the opposite of the index performance. During the week the index returned a -5.47% loss so it would be logical to expect the fund to return -5.47% x -2 = +10.94%. Although the fund perfectly achieved its -2x objective every day, for the week it returned only +7.81%, which is almost 30% less than expected in just one week. The reason is that losses always count for more than gains (if you lose 50% of $1 you have to gain 100% to get back to $1) and this negative bias is amplified by compounding. So the longer a trendless market lasts, and the higher the volatility, the worse off you are in a leveraged fund.

Example 1 - Trendless market

 
Index
Start $
End $
Fund
Start $
End $
Day 1
-5%
$10,000
$9,500
+10%
$10,000
$11,000
Day 2
+5%
$9,500
$9,975
-10%
$11,000
$9,900
Day 3
-5%
$9,975
$9,476
+10%
$9,900
$10,890
Day 4
+5%
$9,476
$9,950
-10%
$10,890
$9,801
Day 5
-5%
$9,950
$9,453
+10%
$9,801
$10,781
Result
-5.47%
+7.81%


On the bright side when the market mostly follows a clear trend, up or down, the leveraged funds can do substantially better than expected. In our second example below we compare the performance of the same fund to an index that keeps falling. After five down days the index has lost -22.62% and you would be thrilled if your leveraged bear fund returned the expected -22.62% x -2 = +45.24%. Yet the fund manages to exceed your lofty expectations by returning a staggering +61.05%.

Example 2 - Trending market

 
Index
Start $
End $
Fund
Start $
End $
Day 1
-5%
$10,000
$9,500
+10%
$10,000
$11,000
Day 2
-5%
$9,500
$9,025
+10%
$11,000
$12,100
Day 3
-5%
$9,025
$8,574
+10%
$12,100
$13,310
Day 4
-5%
$8,574
$8,145
+10%
$13,310
$14,641
Day 5
-5%
$8,145
$7,738
+10%
$14,641
$16,105
Result
-22.62%
+61.05%


While these are theoretical examples, there are numerous instances in our recent history that demonstrate this occurrence perfectly. Looking at our Sell signal from 2/5/2001 to 4/11/2001, the QQQ lost -31.10% while our bear funds did much better than double, with ProFunds UltraShort OTC returning +76.37% and Rydex Venture 100 +75.69%. The implication of all this is that these funds are not always perfect investment vehicles, but understanding how they work allows us to make informed decisions. Trend Timing always does better in a trending market and these investments are no different.

Warm wishes and until next week.

The TimingCube Staff

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