TimingCube - The four market quadrants of Trend Timing - market quadrants,bull and bear markets,buy signals,sell signals,EMA cross-over

December 19, 2003 Update

As we approach the end of year stretch we want to reassure everyone that we plan to continue operating as usual, without interruption of service. We will monitor the markets every day they are open, update the "Current Signal" page daily after the market close, issue signals if the Model triggers any, and publish our Weekly Updates on the regular Friday schedule.

The entire TimingCube Staff would like to take this opportunity to thank you for your continued support and to express our Warmest Wishes for a Happy Holiday Season and a Prosperous New Year!

Signal Update

Current Signal Performance as of 12/19/2003
Signal Type	Trade Date	Return since issued
Buy	04/03/2003	+33.11%

Cumulative Returns since First TimingCube Live Signal (06/18/2001) as of 12/19/2003
Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
+84.91%	+202.22%	+241.82%	+817.50%	-16.84%

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

Market Update

The market started the week in an unexpected way: after gapping up 30 points at the open on news that Saddam Hussein had been captured, the Nasdaq Composite immediately reversed course and plunged almost 80 points before finding support just above the 1,900 level on Tuesday. It then fought its way back up to finish the week higher by 0.10%, while QQQ gained 0.62%. The Dow performed better and was up 2.35% for the week. Since the beginning of December, investors have been rotating money out of the sectors that have outperformed this year, such as tech stocks and small caps, into more conservative blue chip investments. This explains the Dow's relative outperformance of late. Yet, selling pressure on the Nasdaq Composite has proved limited so far, as the index is within striking distance of its 52-week high.

The week's action had no impact on our Model and our current Buy signal remains active.

Trend Timing School

The four market quadrants of Trend Timing

In the we introduced the notion of buying and selling in both bull and bear markets, and presented our definition of bull and bear markets. This week we will introduce the four market quadrants of Trend Timing and describe their respective characteristics and how they relate to each other.
Understanding which quadrant we are in helps us control our emotions by knowing what comes next and properly setting our expectations accordingly.

Referring to the chart below we see that quadrants 1 and 2 occur during bull markets and quadrants 3 and 4 during bear markets. Quadrants 1 and 4 represent Buy signals, 2 and 3 are Sell signals. Quadrant 2 corresponds to a correction, and quadrant 4 to what is often called a bear market rally. The movements between the quadrants are typically horizontal or vertical, not diagonal. Cycling through the quadrants generally happens in a clock-wise pattern, but with interspersed back and forth horizontal movements as the arrows indicate.

Since the average duration of our signals is much shorter than the typical bull or bear market, we will spend more time moving horizontally between quadrants than vertically. Our signals, as backtested to 1989, last an average of 130 days or slightly over 4 months - with Sell signals a short 60 days compared to Buy signals that are over three times longer at almost 200 days on average. A study of markets since 1900 shows that the average bull market lasts about three years and the average bear market lasts one and a half year. This means that while in a bull market we are likely to move back and forth between quadrants 1 and 2 about eight times before the next bear market drags us into quadrant 3. Conversely, once in a bear market we can expect an average of four signals, and the associated horizontal moves, before being promoted back up to quadrant 1 with the ensuing bull market.
The importance of all this does not lie in the specific numbers or durations - which tend to vary widely - but in the knowledge of what to expect in each situation. Specifically, we learn that quadrants 1 and 3 are the strong, "steady state" phases of the market while quadrants 2 and 4 are intermediate adjustment periods the market uses to work out excesses before resuming its predominant bull or bear trend. When we are in quadrant 2 Bull/Sell we know that the predominant long term market force is bullish, that the Sell is likely to be of a relatively short duration, and that the most likely next step is for the bull market to resume its upward movement with a quadrant 1 Bull/Buy. A quadrant 2 correction will eventually prove to be more than a correction and a quadrant 3 bear market will be confirmed by an EMA cross-over (refer to the for definition). Once in a bear market, the situation is reversed and so is the market psychology.

In summary, here are some of the things the Trend Timing quadrants teach us to expect:

We will spend about two thirds of our time in the upper quadrants - in a bull market
We will spend about three quarters of our time in Buy signals
On average, our Buy signals will last three times longer than our Sell signals
A quadrant 2 Bull/Sell tends to be shorter than a quadrant 1 Bull/Buy
A quadrant 4 Bear/Buy tends to be shorter than a quadrant 3 Bear/Sell
When in a bull market correction - quadrant 2 - we are eight times more likely to resume with a Bull/Buy than plunge into a bear market
A bull market correction is a correction until the market tells us otherwise
When in a bear market rally - quadrant 4 - we are four times more likely to resume the bear market decline with a Bear/Sell than at the start of a bull market
A bear market rally is a bear market rally until the market tells us otherwise
We make money in all four quadrants

FAQ of the Week

Question: What is the market impact of all TimingCube subscribers trading at the same time?

Some of you are worried that when we issue a signal the potential exists for the collective trading we execute as a group to actually impact the market, and in turn render the service impractical.

At the time we write this we have a little over 2,800 active subscribers. We are very proud of our rapid growth during the last couple of years but at the same time we recognize that, as far as financial newsletters go, we are dwarfed by some that have been operating successfully for decades and claim tens or even hundreds of thousands of subscribers. Unlike many of these newsletters which advocate individual stocks we issue broad market Buy and Sell recommendations which you execute using a wide variety of investment vehicles. Although we started with a strong Nasdaq/QQQ focus for simplicity, we routinely show that our Model is highly correlated across various market indices. This inherent diversification comes through loud and clear in our summer subscriber survey where you tell us you use stocks (77%), mutual funds (71%), Exchange Traded Funds (51%). In short, our real impact on the markets is very limited and, since we trade so infrequently, very short-lived. The Trend Timing family can grow merrily for a long time before we consider closing our doors to new members.

Warm wishes and until next week.

The TimingCube Staff