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Current Signal Performance
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Classic Signal
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
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This holiday-shortened, light-volume week began with a nice consumer confidence report overcoming news that longtime but laggard retail stores Sears and KMart had a poor holiday season and would be closing a large number of stores. Stocks closed the day little changed Tuesday. Things heated up Wednesday with Iran threatening a blockage of oil traffic through the Straits of Hormuz and Eurodebt concerns returning as another round of Italian bonds were auctioned. Stocks were pushed over 1% lower on the fears; the U.S. dollar surged higher. A day later it was all forgotten. The Italian bond auction wasn't a disaster and domestic economic data was viewed as good enough for stocks to recover most of Wednesday's lost ground. Friday brought the tumultuous 2011 trading year to an uninspired end, limping into the close. The fractional losses were just enough to push S&P 500 negative for the year.
Stocks spent the short week in the tightest trading range since early July. The S&P 500 (SPY) dipped -0.70% for the week. The Nasdaq 100 (QQQ) only gave back -0.45%. The Russell 2000 (IWM) was nicked for -1.07%. The Nasdaq and S&P both sit just above their 50 and 200-day EMAs while the Russell wanders between those two reference lines.
This week's Classic Model Buy signal means that subscribers following our World portfolio should rebalance Monday to this weekend's top 5 ETFs in our World Ranking list. For the week, our current World portfolio dropped back -0.63%.
Both Classic and Turbo Models are on Buy signals.
We want to take what the market is giving, but what is
that really?
You may have heard that we can only take what the market
gives us. You cannot generate a 10% return if the market is not
moving 10%. The market is always moving, of course. It's just a
question of whether it's going our way or not. Over the past three
months, the Nasdaq 100 index has "offered" 46 percentage
points in total peak-to-trough movement while the index has gained
about 9% in that time. That ratio reflects the substantial volatility
of the market.
Chart 1: Nasdaq 100 covers a lot of ground over the past
quarter
 Schwab's Liz Ann Sonders recently noted that 2011 was not a very
profitable environment for most stock investors as it has been a
"trading" market more defined by raw action rather than
any trend one way or the other. Determining which way European leaders
were going to lean, and how the markets would read those leanings,
was almost impossible day-to-day. This Euro-centric market led to
large gaps up or down at the opening of daily U.S. markets, effectively
dealing traders a good or bad hand as the day began and taking away
a good chunk of our ability to grab what the market was offering.
If you were a day trader, opening positions early in the trading
session with the intent to close all or most of them by day's end,
you were relatively unaffected by these opening gaps in price. Your
game is to have large movements during the trading session - that's
how you profit. (Even though our Turbo Model can occasionally act
very twitchy, we are not day traders by any stretch - that's an
entirely different mental approach to making money.) Traders holding
positions beyond a day or two were also able to generate some gains
were they able to be on the right side of these gaps.
Chart 2 below breaks down the three months into its day-to-day
action showing these opening gaps (in the boxed areas) and highlighting
that the market looked somewhat different to people watching it
on a daily basis. Of particular note is the activity from mid-October
through the end of November. On our first chart, this looks like
a rich vein of opportunity with the bulk of the market's movement
occurring in this six week period. The daily detail, however, displays
how these opening gaps confused investors seeking direction while
most of the return offered - up and down - happened in only a handful
of heart-stopping days. For example, in late October the market
pushed higher appearing to have successfully consolidated the early
October rally. Then, stocks gave back 1/3 of the rally in two days
with most of that being a huge gap down on November 1st (shown in
the green box). Hopeful investors bought that drop, however, pushing
the market quickly back up only to suffer another gap down as European
issues returned to dampen the enthusiasm built up on October's positive
U.S. economic data. Another gap down (the red box) takes the wind
out of that attempt leading a week later to the end of the October
rally effort (the blue box).
Chart 2: Breaking down the trends reveals a rollercoaster
that was hard to profit from regularly
Bears looked to be back in control with October just a typically
sharp counter-trend bear market rally. Investors played it that
way pushing stocks downward with a retest of the September lows
looking like the next stop. No sooner had we become comfortable
with this scenario then the world's central banks chose to step
in. Over three days, punctuated by a 490 point single day for the
Dow Jones Industrial Average, stocks turned the month of November
from a loss of almost 9% to approaching breakeven in some indexes.
The market has been trading tighter since then, but offering no
better clues to its ultimate intentions - whether it will beat back
the bear and launch new highs, or not. December initially slunk
back downward only to reverse higher in the last couple of weeks
of the month to end with little notable progress other than to reaffirm
that the bears can't break this market's resilient spirit.
We have a Turbo Model built to profit whether the market is volatile
or not. Trading systems like Turbo generate a good amount of activity
hoping to be right more than wrong. By keeping losses small, the
winning trades can shine through building up gains into an ever-increasing
pile of wealth. Sounds good. But how has Turbo done during this
treacherous three-month stretch - one that looks to have "offered"
great short-term trends to play, but that we've noted was filled
with market monsters of all sorts.
Chart 3: Turbo struggles to read the market's tea leaves
ending up a modest winner
Chart 3 above shows the Buy signals as downward-sloping lines
while Sell signals slope upward. As happens with trading systems,
Turbo won some and lost some with the entirety of the return over
the three month period really coming from a single trade (shown
in the box). Turbo happened to be pointing the right direction when
central banks decided it was time to come together. Thus, a quick
8% gain on that trade. Otherwise, trades made over the quarter were
roughly a wash (not counting the open trade from September coming
into the quarter). Such is the nature of this market - offering
lots of movement, lots of action, but giving all but very short-term
traders little to really work with. The gaps at the open have been
brutal and have been responsible for a good chunk of the market's
movement. The gaps have often denoted a change in direction, but
We continue seeking to take advantage of what the market gives us.
As the past three months have shown, what looks like a fairly straightforward
idea - ride the trend up and down to greater profit - becomes downright
nightmarish sometimes. We know this spell of volatility will break.
We'll keep stepping up to bat looking to extend the count until
we get the fat pitch that allows us to bag the big gains. On to
2012 and our wishes for better trends to follow and profit from.
Question: When I add your trade returns I don't get the
total gains you quote?
We very often get questions about the returns we post. The question
typically comes from the following scenario:
Trade #1 +1.50%
Trade #2 +2.25%
Trade #3 +4.25%
Trade #4 +5.15%
Trade #5 +3.75%
A simple sum of these returns gives a +16.9% return. However, if
you had invested $1000 at the beginning and rolled the proceeds
into each subsequent trade, your actual return would look like this:
Trade #1 $1000 x (1+.015) = $1015
Trade #2 $1015 x (1+.0225) = $1038
Trade #3 $1038 x (1+.0425) = $1082
Trade #4 $1082 x (1+.0515) = $1137
Trade #5 $1137 x (1+.0375) = $1180
Taking the $1180 divided by the beginning $1000 investment delivers
a +18.0% return, higher than what you would get from simply adding
up the trade return numbers. The reason is the magic of compounding.
By reinvesting your proceeds from each trade, you are making money
not only on your original $1000 investment, but also on the reinvested
gains. Over a long series of very profitable trades, this difference
can be substantial.
All of the returns we show assume that the money is reinvested in
the following trade - e.g. the returns are all compounded. Dividend
reinvestment (aka DRIP) strategies work the same way - the beauty
of compounding by reinvesting your returns. Building wealth upon
wealth is the key!
Warm wishes and until next week.
The TimingCube
Staff
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Turbo Model
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Classic Model
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