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November 26, 2007

Timing
by Bill Rempel

Timing attempts to provide market equivalent returns over the long term, with a substantial reduction in variability of returns. The two components of the Timing program are EZ+Macro and Fear/Greed. This system trades rarely and splits its allocations between ETFs tracking the S&P 500, the intermediate-term U.S. Treasuries, and cash.

Information is as of the close on November 26, 2007.

EZ+Macro

EZ Trend is up for the U.S. stock market as approximated by the S&P 500. While the U.S. Ten-Year Treasury price is also bullish by EZ Trend, my latest backtesting hasn't indicated that a position in bonds is warranted in this EZ+Macro configuration.

It would take more sustained action than we have yet seen this year, for this portion of the system to move, either partially or fully, to Treasuries.

Fear/Greed

The Fear/Greed model signaled a buy for the U.S. stock market in early November. It would signal a sell only if $VIX relative to actual volatility fell to a historically low level. This is a tough model to follow, as it demands a buy and hold when fear is high and most people would like to sell.

Panic days are not "sell" signals to this portion of the model. Only increased complacency, relative to the actual index volatility, would move this portion of the system to cash.

Model Allocation

S&P 500 SPDRs (SPY) - 100%
iShares 7-10 Year Treasury Bond Fund (IEF) - 0%
Cash - 0%

Tracking

There are no changes to the allocation from last week's message.

Commentary

The S&P 500 index is back near the lows of mid-August, as are the Russell 2000, the Nasdaq Composite, and the Dow 30. Interestingly, the tech-heavy Nasdaq 100 and small-cap-heavy NYSE Composite are still above their mid-August lows. So are the strongest industries and several of the emerging and Asian market country-specific ETFs. This is what some technicians refer to as a positive divergence, since not all sectors or indices are confirming the weakness in the S&P 500.

Today's action smacked of fear and panic. Of the ninety ETFs I track for Rotational, only seventeen avoided losses today, and eleven of those were either bond or currency ETFs; five experienced price gains over +1% today, and four of those were BOND ETFs. Today was a "flight to safety."

Systems can sometimes be psychologically uncomfortable to follow. Systems can sometimes be wrong. Regardless, I personally believe that it would make little sense to invest in devising a system to follow, only to countermand its signals with emotional responses and second-guessing.

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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