Tactical Execution

Hello and welcome to Financial Audio, an information series providing listeners with detailed and tactical guidance on today’s complicated financial world. My name is Patrick and I’m your host. You can find written versions of these podcasts at FinancialAudio.com and I encourage your candid feedback at the same location. Today, we’ll be talking about market timing platforms so let’s get started.

In the last chapter, we focused on the sell side of investing. When do you get OUT of a trade? When’s the right time to SELL? And earlier, we focused on finding the right time to BUY. Clearly, this is the whole game. Knowing when to buy and when to sell is the million dollar question and there are a lot of people around the world trying to figure it out, people just like you and me. Well, as it turns out, a number of people have developed systems that generate buy and sell signals and they SELL memberships to these systems so YOU don’t have to worry about it. All you have to do is follow their signals and trade your portfolio accordingly.

Is this a good idea? Well, I guess that depends on your own trading experience and the confidence you have in your trading intuition as compared to the confidence you have in one of these platforms – and that’s exactly what we’ll be discussing today.

Alright. So these systems are generally called Market Timing Systems and we’ll be taking a look at a few of them. Most of these systems are based on automated trading platforms and we’ll be discussing those in the next chapter. But for now, let’s do a little research and see what’s out there. If you put the words Market Timing System into Google, it kicks back (as of this recording) about 2½ million results.

So who are all these people? Do you trust them? Scroll through the pages. You’ll be amazed at all the websites claiming incredible returns. Are their advertised results actually accurate? Are they attainable in real life? Well, as it turns out, there’s a third party company that specializes in tracking and comparing all these various market timing systems. In fact, they actively track over 600 market timing systems. It’s called TimerTrac.com and it costs about $75 for a 3-month membership. So with this information series in mind (as well as my own investment objectives), I got a membership and looked at the winning platforms. Here’s what I found.

I was looking for the most successful platforms for trading the NASDAQ 100. The NASDAQ 100 is an incredibly powerful index of largely technology-based companies including Google, Microsoft, Intel, Cisco, Yahoo, Apple, Oracle, eBay and Amazon to name a few. Those are some big names! It also includes some other progressive companies like Starbucks Coffee and Whole Foods. The point is it’s a fairly wide index but it still has a beta of about 1.5, meaning it’s about 50% more volatile than the S&P500.

Now, as it turns out, the information wasn’t nearly as useful as I was hoping. The platform only delivers tracking statistics for timing systems they get direct data feeds from and this whole concept is so new that most of these systems haven’t been feeding live data long enough to get properly ranked. I mean; there were a few that have been around for a while but even a time frame of 2 years left most systems unranked.

Also, it seemed like there were different winning systems for every time horizon I picked. The winning systems for the past 2 months were different than those for the past 18 months. I did a little research and it turns out a number of these systems had bad signals before and were recalibrating their platforms as a result. Of course, they didn’t know about these problems until it as already too late so TimerTrac.com show the poor trades, even though adjustments have been made since.

In the end, I compiled a list of winning systems that showed up on at least one time horizon and then researched the membership dues for each one as well as the number of trades they were recommending. Personally, I wasn’t interested in a system that would have me trading more than 20 times per year and that eliminated a bunch right off the top. The membership dues ranged from $25 per year all the way up to $790 per year – and the average returns provided weren’t that different. Anyway, I purchased a membership to the $25 one – it’s called SignalTrend.com – and am curious to see how it works out. It’s been in a buy position since July 2006 and hasn’t generated a single trade since.

I think TimerTrac.com can be a valuable tool in the future but I think it’s just too early to get a good idea which platforms are truly providing superior returns. It’s also hard because we’ve basically been in a bull market since late 2002 so the true benefits of these systems has yet to be fully tested. The biggest benefit would be the identification of a bear market before major losses accumulate. Perhaps we’ll get an idea of that soon but as of this writing, it’s hard to tell which system is truly better.

Let’s take a look at a few that popped up high on the Google search. Now, for those of you who aren’t that familiar with modern search engine technology, let me just take a minute to explain what you’re looking at. For Google, the organic search results come up in the center and primary part of the page. Those are the sites that were presented first according to Google’s complicated ranking algorithm. Those are the ones we want.

You’ll notice a series of sites listed down the right hand side of the screen and they’re labeled (at the top) as Sponsored Links. You’ll also notice one or two sites listed at the very top of the page. That area has a slightly different background color and it’s also labeled as Sponsored Links. All of these sites are displayed there because they PAID for those positions. So they’re NOT showing up because they’re the best sites for the words you searched for. They just paid Google some money and are showing up on the first page as a result. And while some of these sites can be interesting to look at, I recommend you stick with the organic results for your underlying objectives.

Okay, the very first listing is a website called TimingCube.com – the very first listing. That means that according to Google, this company is the very best website on the internet for the words Market Timing System. If you click through to the site, you’ll immediately see a table comparing the cumulative returns achieved by following their buy and sell signals compared with the buy & hold returns of the S&P500 – and it’s a HUGE difference. So what does that actually mean? Well, to find out, click on the Results tab at the top left.

This takes you to a long screen with a ton of information. Browse around on this screen and read about their platform. It’s pretty impressive if you think about it. I mean, they’re saying this platform generates buy and sell signals that can provide annualized returns of 40%+. That’s pretty amazing. Now, they actually break down the results into four categories; long only, long with margin, long & short and long & short with margin. For those of you who are unfamiliar with these labels, I’d like to spend just a couple of minutes defining them for you.

When you buy something LONG, you are buying it and hoping it appreciates in value so you can sell it at a higher price. If you’re selling something SHORT, you’re actually borrowing the security from someone else’s account, selling it and then hoping it goes down in value so you can buy it back and replace it at a lower cost. In other words, when you buy a security long, you profit on the UP side. If you sell a security short, you profit on the DOWN side.

Now, some people may intuitively think short positions are more risky than long positions but that’s only true in the most extreme situations. In terms of day-to-day trading, the risk is very similar. The added risk comes in if the underlying security has an incredible price appreciation. In that scenario, you still have to replace it at some point and could theoretically lose more than your original investment if the security’s price goes up enough.

In a long position, you can only lose what you invested. Either the price goes to zero or it doesn’t. I can’t go BELOW zero. But when you’re short, the price could theoretically go up so much that it could wipe you out entirely. Anyway, I’m probably not doing a very good job reassuring you but the fact is, the risk quotient is roughly similar for regular day-to-day trading, particularly if you’re trading a diversified security like an Exchange Traded Fund.

The next label that requires explanation is MARGIN. Everyone always freaks out when they hear that term. Fact is; margin is a loan your brokerage gives you that is collateralized by the balance in your account. So if you have $1000 in your account, the brokerage will lend you another thousand and use YOUR thousand as collateral. That allows you to invest $2000 even though you only have $1000 yourself. That works out to 2:1 leverage so you would double your returns and losses by using all of your margin. If the security you own goes UP by 1%, you would make 2% on YOUR investment. Likewise, if the security goes DOWN by 1%, your account balance would drop by 2%.

Obviously, as a loan, the brokerage charges interest on the borrowed money so that would impact the leverage somewhat but the rates are usually pretty reasonable. The thing you need to watch out for is getting “called out” when the security’s price goes down. You see; the brokerage is using YOUR money as collateral for the loan. So if you have $1000 and they lend you another thousand, that’s one-to-one and everything’s fine. But if the value goes down by 5%, your $1000 would drop to $900 and you’d still owe the house $1000. So now, they’ve lent you MORE than you have in your own account. If the price went down further, the situation gets worse. And eventually, the brokerage will automatically sell you OUT of the position to recover their money before your ability to repay becomes uncertain.

This is a bit off topic but it’s worth noting that real estate purchases commonly allow leverage of 20:1 or more and nobody bats an eye. If you put 5% down on a house and assume loans totaling 95% of the purchase price, you’re now at 20:1 leverage. That’s why real estate can be such an incredible investment – because the leverage magnifies the return on your own money dramatically. The thing is; real estate prices are admittedly much more stable than stock market prices. It’s admittedly a different game when you’re talking about a security that can go up or down 20% or more in value within a week or two. Even still, it’s an interesting comparison and hopefully, it will temper your reactions when you hear the term margin.

Now, if you remember from last chapter, we discussed some new Exchange Traded Funds that reverse AND magnify the results of some common indexes like the top 100 NASDAQ companies. Also remember that some retirement accounts do NOT allow you to trade short. So the amazing thing is that you could take full advantage of the long & short with margin returns by buying and selling these Exchange Traded Funds. By using those that magnify the market’s returns, you’re essentially getting the margin for free. And by using those that reverse the market’s returns, you’re profiting from the short positions without actually having to trade anything short. So a very viable trading strategy would simply be to follow the signals generated from TimingCube.com and use the Exchange Traded Funds offered by ProShares to assume the positions recommended.

Now, it’s also worth noting that TimingCube did NOT get these impressive returns verified by TimerTrac.com. The returns verified by TimerTrac.com were far lower and the reason is that TimingCube had some really bad trades in 2006 and got whipsawed three times in a row, destroying their returns that year. They have since adjusted their platform to avoid that in the future but that’s not tested in live trading. And the returns displayed on their website are all based on the back-testing of their new platform and that’s why they don’t match the verified returns. Is that fair? Is it shady? I’ll let you decide.

Let’s go back to our Google search results and look at the next few listings. The second listing is for StockMarketTiming.com and you’re welcome to click through to that website to look at it for yourself. It looks pretty good but the returns claimed by these guys are a far cry from the returns claimed by TimingCube. They also state that their platform generates between 20 and 25 signals per year so you can get an idea how often you’d have to be involved in the market. TimingCube doesn’t reference this statistic but the charts on their website show the activity and it looks like it might be substantially less than this one. Anyway, the websites are there and I encourage you to do your own research.

By the way, the cost of TimingCube is about $400 per year and the cost of StockMarketTiming is just under $300.

The third listing says “Market timing for trading; does it work? No”. It’s worth visiting this site to read what they’re saying. They’re actually not talking about the same thing. They’re talking about systems that attempt to proactively predict a change in market direction before it takes place. This is similar to a point I made in a past chapter. Never bottom guess. Never try to guess where the bottom is. Wait until you have confirmation. Wait for a break-out of some kind. The platforms we’ve discussed so far do exactly that. They’re based on reliable technical indicators and do NOT arbitrarily predict bottoms and tops without confirmation. So read the site if you like but rest assured it’s referring to a very different exercise than the one we’re looking at here.

The fourth listing is Timing-Signals.com. This is another interesting platform that has a variety of different programs. Some kick out frequent signals and others kick out fewer signals. You can follow whatever program you like and the returns are generally impressive – similar to TimingCube. Again, I think you’re well advised to browse the site and read up on their platform.

The point is you can spend a lifetime trying to figure all this stuff out OR you can use a service like this and see what happens. Am I guaranteeing these platforms will always be right and will consistently deliver predictable returns? Absolutely not. It would be irresponsible for me to make a claim like that. I don’t know what indicators those platforms are looking at. I don’t know how they’re calculated or what benchmarks actually trigger one signal over another. But I suspect there’s a good technical foundation for their signals and I’m sure they provide valuable insight. In fact, I’m planning to use the leveraged Exchange Traded Funds provided by ProShares in my OWN retirement account to see what returns I can achieve by following the signals exclusively. And I truly believe the fees are nominal considering the potential upside. Do your own research. See what you think.

Incidentally, there are plenty of sites offering buy & sell signals. There are tons on the right hand side – you know, the Sponsored Links – that have systems for sale. Check them out. Look at a variety of platforms. There are lots of smart people out there and you might be able to save a ton of time by letting them do the work. Again, it’s your call. I’m just encouraging an open mind and some good old fashioned research.

If you’d like to see what I’M doing in the market, just create a FREE account and login at FinancialAudio.com and then click on Market Position. Now, it’s important I tell you that I’m NOT a licensed Financial Advisor. This is FREE information and I do NOT accept money to give investment advice. I’m just giving you a little glimpse into my own trading activity, that’s all.

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Again, you can find written versions of these podcasts at FinancialAudio.com and I do offer workshops, seminars and keynote speeches as well as a variety of more advanced information products so please email me at Patrick [at] FinancialAudio.com for more information. I’m also doing a series on innovative marketing and strategic business positioning. That series is called Tactical Execution and you can find it on iTunes.

Stay tuned. There’s a lot more to come. In the meantime, think big, take action and invest strategically. Bye for now.