The entire TimingCube
Staff expresses its gratitude
for the privilege of serving you during 2010 and
wishes you Happy Holidays
and a Healthy and Prosperous
New Year 2011
will be no Weekly Update on Friday December 24,
during the holiday shortened week. They will resume normal
schedule on Friday December 31.
U.S. Stock markets will be closed on December 24 in observance of Christmas Day.
Signal Performance as of
Stocks traded within a narrow range all week to finish little changed. The main indexes gapped higher at the open Monday, but quickly reversed course to leave the Nasdaq Composite with a 0.5% loss by the close. The Federal Reserve announced Tuesday that it is leaving interest rates unchanged and that it will maintain its accommodative policy. The news was widely expected and had little impact on the market as stocks were almost unchanged on the day. With concerns over Spain's debt problems back to the forefront and a resulting rise for the dollar, the major averages faced increased selling pressure Wednesday and lost ground, with the S&P 500 shedding 0.5%. Stocks were able to regain their footing during the next session following positive economic data, as weekly jobless claims and the Philly Fed index of manufacturing activity both came in better than expected, allowing the S&P 500 to recapture 0.6% by day's end. Trading volume was very high the last day of the week, as Friday was a so-called "quadruple-witching" day, which marks the quarterly expiration of options and futures. Yet, price action was very tame as the S&P 500 finished the day almost unchanged while the Nasdaq Composite posted a modest 0.2% gain.
The Russell 2000 (IWM) and Nasdaq 100 (QQQQ) respectively gained 0.35% and 0.06% over the five-day span while the S&P 500 (SPY) lost 0.14%. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 0.36% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of December 3, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details.
Our current Cash signal remains in effect.
bonds correcting or about to change their long-term trend?
The past few weeks have seen a significant shift in markets.
What began as a sharp selloff in municipal bonds has expanded
into a noticeable pullback in bonds of almost all stripes.
Even high yield bonds, which have been holding their own
against stocks for the past two years, have been left out
of the recent stock rally. In fact, the recent stock rally
has been surprising in its focus. Take a look at Chart 1
below to see how the past six weeks have been dramatic in
terms of big picture winners and losers.
Chart 1: Higher risk domestic stocks lift off
Two big surprises:
The Treasury bond selloff has occurred in the face of the
Fed's QE2 bond buying program, which should be supporting
bond prices, but isn't. To be fair, this sharp drop in bond
prices is just an unwind of the sharp ramp that occurred
when Eurodebt and U.S. double-dip fears swamped markets
- Emerging market stocks, a leader in most equity rallies,
have been completely left out of this recent move.
- An equity-like plunge in long-term U.S. Treasury prices
in only two months - bonds are safe investments?!
Chart 2: S&P and Treasury Bonds have been a
Stepping back to a long-term view of Treasury bonds shows
that the decades long bull market in bonds has not yet changed
Chart 3: Long-term Treasury yields still trending
But for how long? Recent market action suggests the historic
flow of money into bonds and record-low interest rates are
nearing an end. To whit, a string of 99 consecutive weeks
of bond fund inflows recently snapped. Investors are clearly
taking profits from income-producing assets. Everything
yield-related, from oil and gas trusts, to REITs, to corporate
and high yield bonds have seen some amount of weakness in
recent weeks. Stocks, in particular small and mid-cap U.S.
stocks, have been the beneficiaries.
It's hard to know how significant recent divergences in
stocks and bonds are. End-of-year tax-related selling and
asset allocation rebalancing could be temporary forces behind
recent moves. As we move into January, we might get a clearer
picture of whether we are witnessing a more permanent shift
from bonds to stocks. If so, stocks could see a strong 2011
if only from a fractional unwinding of the massive buildup
in bond funds.
How do stocks move higher given all the financial problems
Perhaps the most perplexing aspect of investing can be explaining
market movements. Talking heads and commentators feel compelled
to ascribe a given day's market action to some particular
input, when actually the market is made up of many different
people with many different objectives, theories, constraints,
and knowledge. For every investor that thinks stocks are
cheap, there are others who view stocks as too expensive.
For every person fretting about budget deficits or healthcare
plans, there is another who is excited by the prospects
of cloud computing or a secular bull market in commodities.
This stew of investor inputs is what makes a market.
We find one of the most damaging behaviors investors can
have is trying to apply some sort of predetermined attitude
or mindset to the markets. For example, many investors missed
a substantial chunk of the 2009 stock rally because they
continued to believe that the U.S. budget deficit, housing
crisis, et al. - name your preferred worry - was so overwhelming
that stocks were surely mad in being optimistic about anything.
This is too narrow a view of markets, however. Think about
a multi-billion dollar pension fund who must find a return.
They can't sit on cash or in short-term T-bills forever.
They must take some risk. The point being there are huge
investors in the market who simply must buy stocks ... at
some point. Also, consider that corporations have cut labor
and expenses way back through the course of the past decade.
Their caution in rebuilding their workforces continues to
weigh on employment figures. But their profits are, as a
result, soaring. If stocks are fueled by profits, this fuel
is certainly available.
There are always contradicting economic indicators and the
world and its markets are never free of worry. Investors
are a combination of sound economic thinkers and emotional
human beings who can tilt easily and frequently toward rationality
or lack thereof. For this reason, we prefer the technical
analysis approach to investing that distills investor behavior
down to a picture of supply and demand. Are investors buying
or selling stocks? If buying, what sectors are they favoring?
Ours is not to question why they are doing this, or whether
they are "sane" in their actions, or not. Rather,
our objective is to profit from collective investor action
- in either direction.
Are we concerned the Euro may fall apart? Sure. Are we concerned
that the U.S. budget deficits are too high? Yep. Do we think
the Fed is doing the right or wrong thing? Depends on the
day. While discussion of such topics is interesting, we
find that it can be dangerous to our investment accounts
to put much credence in our particular view of the world.
It's the collective view of investors and the ultimate movement
of markets that determines our gain or loss. That's the
view we want to take stock of, pardon the pun. And so, our
Model is built to try and read those tea leaves and distill
investor actions into a healthy brew that builds our wealth.
Warm wishes and until next week.