|
Current Signal Performance |
|
|
Turbo Signal
|
Trade Date
|
Turbo Model Returns (Long & Short Strategy)
|
|
|
|
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Classic Signal
|
Trade Date
|
Classic Model Returns (Long & Short Strategy)
|
|
|
|
World
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Building on last week's gains, stocks continued to rebound over the five-day span. Monday's session turned out to be a challenging one, however, as early gains brought by solid economic data disappeared by the close to leave the S&P 500 with a modest 0.3% loss. Despite a disappointing reading on consumer confidence Tuesday, stocks were able to regain their footing and climb steadily throughout the day to more than erase Monday's losses, yielding the S&P 500 a 0.7% gain. With the improvement in market tone, the major averages rose again Wednesday, allowing both the Nasdaq Composite and S&P 500 to finish the session 0.7% higher. Stocks were able to hold onto their gains Thursday as the main indexes held to a tight trading range to finish little changed. Before the open Friday, the Labor Department released the much-awaited March employment report. The economy added 216,000 jobs in March, more than the 185,000 analysts expected, while the unemployment rate dropped to 8.8% from 8.9% the previous month. The positive news helped stocks move higher, with the S&P 500 finishing the last session of the week with an additional 0.5% gain.
For the week, the Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively gained 1.09%, 1.41% and 2.82%. All three ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio bested its U.S. counterparts with a 3.36% gain over the five-day span. The portfolio consists of the 5 top-ranked world ETFs as of March 25, which marked the beginning of the current 4-week holding period. Please note that since we have an active Classic Model 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 Classic Model "Description" page for all the details.
Our current Classic Model Cash signal and Turbo Model Buy signal remain in effect.
The stock
market and the economy
One of the favorite sources of news and discussion topics in the financial
media is the economy and speculation about its future health. Everyone
knows that economies, whether local, national or global, repeatedly
go through boom and bust cycles. These business cycles affect all
of us to some degree but many in the investment community pay particular
attention to them because of a fundamental belief that as the economy
goes so goes the stock market. As shown in the chart below, there
is little doubt that economic and market cycles are somehow linked
and that they influence each other, but we do not believe that many
of the much touted economic indicators can be used by investors to
accurately and reliably forecast the future of the stock market.
Economics,
often referred to as the "dismal science" since Thomas
Carlyle coined the term in the nineteenth century, are really the
study of how society behaves in the struggle between unlimited wants
and limited resources. Today, an entire industry thrives on the
creation, monitoring, reporting and interpretation of a multitude
of economic indicators such as employment, consumer sentiment, inflation,
interest rates, inventories, price of raw materials food or energy,
trade deficits and many more. The Commerce Department, the Labor
Department, academic institutions and numerous think tanks crank
out an endless stream of numbers. Econometrics then applies statistical
theories to economic ones for the purpose of forecasting future
trends. While much of this is way above our heads, the complex web
of causes and effects between the multitudes of variables in society
is backed by much research and for the most part seems quite logical.
Most of us can follow simple scenarios such as growing unemployment
negatively affects consumer sentiment, which in turn reduces their
level of spending causing increased inventories. The reduced demand
for goods causes prices to drop and manufacturers to slow down production
and so on and so forth.
The disconnect occurs when trying to interpret all of this data
in order to issue stock market forecasts. As with all market interpretations
the result is highly dependent on the interpreter's point of view,
the market context, and the then prevailing investor psychology.
Depending on these conditions the same set of economic data can
lead to diametrically opposed conclusions, which helps explain why
so many respected expert forecasts are dead wrong. This is best
illustrated with practical examples.
Example 1: Higher interest rates are bad news for
the stock market (and vice versa)
Or are they? Since 2008, the Fed has pushed interest rates as low
as they could in order to rescue a depressed economy. At first,
it is interpreted as a good thing for the stock market, but it is
often a perfect opportunity for highly regarded economists and pundits
to contradict themselves. They would later say that lowering interest
rates is not enough to restore confidence in the economy, and that
the roots of the desease are much deeper. The perception of what
the Fed does is highly subjective. Sometimes, what Ben Bernanke
says or does not say is more important than what he does.
Example 2: War is good for the economy and the
stock market
While this theory has long ago been proven to be fundamentally flawed
by economists, investors and politicians hold on to the myth. The
simplest way to explain this one is with the "Broken Window
Fallacy". The story goes something like this: a punk throws
a rock through a storefront window which has a visible set of consequences.
The shop owner has to pay the glass maker $1,000 to fix it. This
$1,000 causes the glazier to purchase more raw materials from other
merchants and hire employees to make the window, who in turn can
spend their new earnings. The logical conclusion is that the punk,
far from being a vandal, is actually an economic benefactor to society.
Economists then like to point out that he has actually caused a
net decline in the economy. Instead of having a window and $1,000
the store owner now only has a window. He could have spent the $1,000
to buy a suit, so he would have a window and a suit, and the $1,000
he paid for the suit would have generated the same economic boon
as when he paid the glass maker. In similar fashion the war has
to be funded by a combination of reduced spending elsewhere, higher
taxes and/or higher debt, all of which are bad for the stock market.
Example 3: Rising unemployment is bad news for
the stock market
Or is it? Research tells us that it depends on which phase of the
economic cycle we are in. Announcements of rising unemployment tend
to be good news in economic expansions during which investors worry
more about interest rates. News about higher unemployment reduces
the risk that the Fed will increase interest rates. The same exact
news will on average be perceived as bad news during an economic
contraction, as investors tend to be more worried about corporate
dividends and equity risk premiums which can be negatively affected
by layoffs.
Now that we better appreciate the difficulty in using economic leading
indicators to forecast the stock market we can also point out that
in fact the stock market itself just happens to be one of the most
reliable leading indicators of the economy's future direction. Not
the other way around. In mysterious ways the stock market anticipates
what is coming. A bear market always reaches its bottom while the
recession is still worsening, well before economic recovery begins.
The falling interest rates and prices provide the consumer a glimmer
of hope which in turn triggers the next bull market cycle and in
turn a recovery begins. As the economic recovery gains steam, prices
start inching up, the Fed ends up raising interest rates all over,
and consumer expectations start declining as the stock market peaks.
And so on.
As Trend Timers we prefer to watch the market itself for clues of
what it is doing. Following the market trend is much simpler and
more reliable than reading economic tea leaves.
Question:
How to interpret individual signal returns for the Turbo Model?
From the "Signal Returns" section of our Turbo Model "Results"
page, you can download a file that lists all signals with their actual
trade date, along with the corresponding return for the Long
and Short strategy applied to the Nasdaq 100 (QQQ)
, Russell 2000 (IWM)
and S&P 500 (SPY)
vs Buy and Hold. The file is in CSV format and is meant to be opened
with a spreadsheet program such as Excel but it can also be read by
any text editor such as WordPad. Interpreting
the return of each individual signal is very simple. First of all,
we want to point out that all dates shown are actual trade dates,
meaning that the corresponding signal was issued after the close
the previous trading day. Secondly, calculations assume that each trade is
placed at market open on the trade date and remains in effet until
the next signal.
Let's take
an example to illustrate all this. In the abstract of our Signal
Returns file below, we can see a Buy
signal with a corresponding trade date of 09/08/10. As stated above,
the actual Buy signal
was therefore issued after the close the previous trading day, that is on
September 7, 2010. We acted on it at market open on September 8,
2010 by starting new long positions that remained in effect until
the next Sell signal was
issued. Moving up one line in the file, we can see that the trade
date for the next Sell
signal was 03/16/11. Again, this means that the actual Sell
signal was issued after the close on March 15, 2011. We acted on
it at market open on March 16, 2011 by closing our long positions
and initiating new short positions. To summarize, our long positions
were opened at market open on September 8, 2010 and closed at market
open on March 16, 2011, lasting just over 6 months. As is shown
in the file, the corresponding return using QQQ as the trading vehicle
was 20.58%. It was 25.27% using IWM and 17.89% using SPY. Please
note that since the signal was a Buy
and we therefore held long positions while it was active, the returns
achieved by the Long and Short strategy are identical
to Buy and Hold results for the period.
Warm wishes
and until next week.
The TimingCube
Staff
|
