Uncategorized, Weekly Update

Investment Models + ETFs – Timingcube Was There When It All Began

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Published August 17, 2018


TimingCube’s timing was very fortunate. We started publishing our market-beating signals in the summer of 2001, a year or so after the bloom had been ripped off the rose of the dot.com market boom. Investors had enjoyed a nearly non-stop romp through the latter half of the 1990s, with the stock market more than doubling over a 5-year period. The downside of that excess hit investors hard as the calendar turned to the 2000s. Our models had protected our personal investments. We went public with the news and our unique market signals in that summer of 2001, launching TimingCube in the relatively nascent internet-only investment newsletter space.

One of the unique aspects of our investment approach was our desire to profit in BOTH up and down-trending markets. In 2001, there were a scarce few ways for individual investors to profit from a down-trending market. Rydex Investments had mutual funds which offered an easy way to short the market. Beyond those funds, investors had to find shares to actually short, or buy options, both methods that were beyond the scope of most investors. The answer came a few years later in the form of exchange-traded funds (ETFs). In the early years of TimingCube, ETFs were in their infancy as shown in this chart:

Chart 1: The explosive growth of ETFs opens up the world of long/short investing

The explosive growth of ETFs opens up the world of long/short investing

It turned out we were a bit ahead of our time. ETFs offering the easy opportunity to short the market were introduced in mid-2006. The financial crisis demonstrated how important shorting the market could be as an investment in and of itself, or as a piece of a broader portfolio approach. ETFs grew and grew from there, becoming a dominant force in the investment industry, especially as the current bull market ran and investors became comfortable with a passive investing approach, which focuses on low costs – one of the original selling points of ETFs.

ETFs have become such a force in the investing world that investors pay far less attention to analyzing individual stocks than they used to. The movement of an individual stock can be traced to the movement of the market overall, to the movement of the stock’s sector – e.g. if money is flowing into internet stocks, then all internet stocks benefit, or to information specific to that stock. Thirty years ago, the news about an individual company drove that company’s stock price. The chart below shows how the information about an individual stock used to explain over 70% of that stock’s movement (the bottom, red line in the chart below). As ETFs have become more popular, investors buy sector ETFs which in turn buy the individual company stocks in that sector. There is no company analysis that goes into that decision. A hot sector means every stock in that sector is being bought to some extent, regardless of how the company is doing. As a result of this increasingly popular investment method, the behavior of the sector/industry has grown to account for almost half of an individual stock’s movement. This has led the impact of sector on an individual stock price to be twice what it was just a few years ago.

Chart 2: What drives an individual stock’s price – overall market, sector, individual stock news?

What drives an individual stock’s price – overall market, sector, individual stock news?

In parallel with the rise of ETFs has been cheaper and cheaper access to greater and greater amounts of data. The explosion in the internet and “big data” has made quantitative, model-driven investing more and more accessible. We are proud to say that we were at the forefront of two of the most transformative industry trends of our generation – using models to drive investing, and using ETFs as the vehicle for investing. Over 17 years later, TimingCube, and our follow-on sites like FP Research, continue to offer investors investment models that seek to generate excellent returns with minimal risk, profiting regardless of whether we are in a bull or bear market. Our approach, a unique niche investment approach when we started, has become much more mainstream. It will be fascinating to see how investors respond to the next bear market; how the increasing use of models and ETFs impact the ability of investors to navigate the turbulence successfully. We know that our subscribers will be just fine. Watching our models ride through two bear market storms has proven that.

Market Update

Stocks continue to be defined by late summer turbulence. Nonetheless, support remains for the S&P 500 at 2800 after another test this week, while most domestic market indexes hold within striking distance of new high ground. Turkey’s currency crisis continued weighing on investors in the Monday session, driving stocks lower by -0.4%. The Turkish currency bounced back Tuesday and so did the stock market. The relief rally recouped all the prior day’s loss with a +0.6% lift. Retailers began their week of earnings in strong form with Home Depot (HD) handily outperforming. The retail ETF (XRT) rose +2% on the day. The surging U.S. dollar combined with building stockpiles of crude oil and a weakening economic report from China all served to give stocks a headache Wednesday. The broad market tumbled -0.8% with the Nasdaq losing well over -1%. Retailers came undone when big box store Macy’s (M) underwhelmed investors with its report (despite raising its outlook and beating earnings projections!). The big M was slammed by -16%. Anything related to commodities and/or affected by the rising U.S. dollar (read: international stocks and bonds) also got taken to the woodshed Wednesday. Buyers bought the dip yet again, however, as rumors of U.S.-China trade talks gave investors some optimism that the tariff wars might ease. The S&P 500 added +0.8% while the Dow Industrials, which have been far more sensitive to the trade issues, rose by double that amount. Friday continued the rebound with China-U.S. talk rumors once again the fuel for optimism. The market hopped higher by +0.3%. Retailers bounced back with Nordstrom (JWN) and Walmart (WMT) both jumping on good earnings reports. By contrast, semiconductor makers can’t get any love these days. Nvidia (NVDA) and Applied Materials (AMAT) both offered better-than-expected earnings; soft guidance, however, sent their shares tumbling leading the Nasdaq to underperform.

Investors this week again showed a preference for buying any weakness in the market. A brief visit to 2800 on the S&P 500 (SPY) found buyers for the fourth time in five weeks. The index managed a +0.67% rise, its sixth gain out of the past seven weeks as stocks, domestically, continue to mostly grind upward. The Nasdaq 100 (QQQ) has encountered a touch more challenge recently as noted by the semiconductor comments above. For this week, the Nasdaq dipped -0.37%. The small-cap Russell 2000 (IWM) continued treading water, up +0.49% on the week. Unlike the S&P 500, neither of these indexes has been able to build on an early July pop upward. But neither have they shrunk back, coiling for their next move.

Warm wishes and until next week.