Trend Watch

By: Wealth Anchor | Wed, Nov 9, 2005
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Terminology

For those who are first time reading Trend Watch, please click here to understand the term definition and/or how to interpret it.

Part I - Market Comments

Before we decided to publish the newsletter Trend Watch based on our proprietary timing system, we had a serious internal debate. It's about what content we should put in the newsletter. Since the top rule is to strictly follow all the signals issued from WATTS (Wealth Anchor Trend Timing System) with no exception at all. Some of us thought that there was no need to put out any subjective technical information and analysis, mainly because It's useless. If the result of the analysis was consistent with the WATTS's signal, it's redundant. If the result of the analysis was not in line with what WATTS said, then it would be certainly overruled by WATTS.

Most of us, however, thought that we were in a very competitive market (the investment advisory newsletter market) and added some more info might help the subscription rate. Besides, it would be safer to keep the technical analysis as an auxiliary means to watch the market. The debate was ended and won by the majority side. We determined to add some technical analyses in the newsletter.

We don't know by far whether or not the decision helps to ramp up the subscription rate. But there is one thing for sure. The thought to add the technical analysis as the auxiliary means of reading the market didn't work out well. Putting more information and the analyses from different angles in the newsletter may sound reasonable and logical. Yet it doesn't do us any good with respect to our final goal -- bringing more profit to our investment. Even worse, the view from the technical analysis if it's not consistent with the system view of WATTS could confuse or even blind subscribers. This, in turn, may cause the result that some subscribers can't take the required action according to the WATTS signals.

Simply speaking, more information and technical analyses don't necessarily add more values to the decision making of the investment and generate more turns to the investment. The mind of human beings is quite complex. It doesn't operate 100% rationally and logically. Although most people thought they were rational, they were actually controlled by their mind and didn't even know that.

That's why we always emphasize keeping the investment simple. Being financial literal is one thing. Being a good investor who knows how to control emotion is another thing. Most people don't realize it. They are misled by the wrong impression and lost in the endless financial analyses and reports. They thought that the reason they didn't get the good return on their investment was they read too few. Quite the contrary, the truth they didn't do good on investment may be they read too much and make a easy thing too complicated.

We are not saying that one has to be a lazy fool to make money in the market. We are saying that one must know where to draw the line when he is exploring in the financial markets. Where to draw this line? One must always keeps in mind that the first and only purpose of investing in the market is to make money not to learn financial knowledge. If learning and reading something can help the purpose, do it. If it doesn't help the purpose, don't do it. It doesn't only waste your precious time, but may also drag your investment performance in the long run.

Why did we say so much above? In the last weekly update, we talked about a bearish market analysis from the traditional technical angle, the volume and market analogy. In the meanwhile, we mentioned that the downward trend identified by WATTS was at the verge of trend unlocking. It meant that the trend was rapidly weakening and could be ripe for a trend reversal. Surprisingly or not, WATTS detected a trend reversal up on Monday and issued the BUY signal that night.

We found out that some subscribers had hard timing following the BUY signal because our technical analysis was so convincing that they wanted to stick with it. They forgot that the technical analysis was the auxiliary means and WATTS was the master signal. They somehow thought that servant can overrule master when they thought it's decent to do so. At that time, we clearly figured out that putting in more information could really cripple our subscribers sometimes, not helping them as we expected.

The story afterward was quite simple. The Nasdaq Composite was up more than 2% after WATTS issued the short-term BUY signal Monday night. Whoever didn't follow it buying on the dip of Tuesday was stuck. Period.

We regarded the consequence as our fault. We are the editor of the newsletter. We should make our point very clear. What's our point? It is that Trend Watch is totally based on the signals issued by WATTS. If its past performance satisfies you, you should stop there and simply follow it. Lot of subscribers tried to outguess WATTS. It was something we always suggested subscribers not to do. But finally, we made ourselves an accomplice helping them doing so by putting the probably unnecessary technical analysis. We'll fix it in the future.

Now, we understand that it is more important for us to train our subscribers to follow the signals than putting in more technical analyses just in order to boost the subscription rate.

All right, let's stop all the murmurings right here and get back to WATTS. What does WATTS say now? It looks pretty well. The signal readings went smoothly up as a good and healthy trend should do. Pleas hold your long position tight. We may issue a Portfolio update alert soon to increase the long position soon.

In the meantime, please don't be confused by the intermediate-term SELL signals. The intermediate-term signals are for the backdrop of our system view. We don't issue any BUY or SELL signals based on it because it's too late for any possible trend turning point. But it does contribute a few things to the overall WATTS system. First, it can clearly identify the starting and ending points of an intermediate-term market trend. Second, it tends to issue the intermediate-term signals 2 weeks later than the short-term signals, which we can use to gauge the short-term system view.

So, how does it look right now? Pretty good. It's on the verge of issuing the new BUY signals already. We are expecting an intermediate-term BUY signals anytime next week. The last intermediate-term BUY signal issued by WATTS was long ago in May following the short-term signals in 2 weeks. We are glad to see that the short-term and intermediate-term signals are going to line up. It always mean a strong and profitable trend ahead.

In the section of Model Portfolio, we allocated 25% long for intermediate-term investors despite of the SELL signals. There is no conflict. While the signals are still SELL, it's adequate to start building the initial long position when the system issued a short-term BUY signal in a weak intermediate-term downtrend.

Part II - Signal Update

WATTS Short-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ BUY 10/31/2005 2120.30 2169.43 +2.32%
S&P 500 BUY 10/31/2005 1207.01 1220.14 +1.08%

Last Closed Short-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price When
Liquidate (10/31/05)
Hypothetical
Return*
NASDAQ SELL 9/19/2005 2145.26 2120.30 +1.18%
S&P 500 SELL 9/19/2005 1231.02 1207.01 +1.99%

WATTS Intermediate-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ SELL 8/18/2005 2136.08 2169.43 -1.54%
S&P 500 SELL 8/18/2005 1219.02 1220.14 -0.00%

Last Closed Intermediate-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price When
Liquidate (8/18/05)
Hypothetical
Return*
NASDAQ BUY 5/27/2005 2075.73 2133.08 +2.76%
S&P 500 BUY 5/27/2005 1198.78 1219.02 +1.69%

WATTS Bottoming Zone Alert

Index Current Signal Issued Date Last Signal Issued Date
NASDAQ None None Level-I Alert 4/15/2005

Part III - Model Portfolio Update

Model Portfolio provides investor who doesn't know how to react to the WATTS's signal a simple guideline of how to manage his/her portfolio. If you are interested in following this guideline table, please Read This Important Note first.

Model Signal Account Type Equity Type Most Aggressive Portfolio Least Aggressive Portfolio
WATTS Short-term Signal Stock Trading Account (Margin Account) Stock & ETF 100% QQQQ 25% SPY, 25% QQQQ,
50% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)
Self-managed Retirement Accounts (IRAs, 403b...)
Stock & ETF 100% QQQQ 25% SPY, 25% QQQQ,
50% Cash
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 100% High-growth Fund, 0% Money Market or Short-term Bond Fund 25% High-growth Fund, 25% Balanced Fund, 50% Money Market or Short-term Bond Fund
WATTS Intermediate-term Signal Stock Trading Account (Margin Account) Stock & ETF 25% QQQQ, 75% Cash 25% SPY, 75% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)
Self-managed Retirement Accounts (IRAs, 403b...)
Stock & ETF 25% QQQQ, 75% Cash 25% SPY, 75% Cash
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 25% High-growth US Stock Fund, 75% Short-term Bond Fund or Money Market 0% High-growth US Stock Fund, 25% Balanced Fund, 75% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

1. Feeling Seasick? - http://www.marketwatch.com/news/story.asp?dist=morenews&param=archive&siteid=mktw&guid=%7B4504B0BF%2D318A%2D4624%2DB872%2DDEB69FAA0654%7D&garden=&minisite=

This article was discussing the real market volatility and the human emotional recognition. I short, the author proved that your "feelings" were not always correct. Or we should say, they were wrong most of time.

We totally agree with this point and may say the similar thing in our market comment section. But we have one more thing to say here. We found that the market volatility usually went up significantly in the trend turning period. It's an interesting finding. We'll continue to study this phenomenon and see if we can get something from it.

The market changes fast. If you are interested in getting the latest signals and model portfolio update, please subscribe to the 1-month trial offer. Click on the "Get Free Trial" at http://wealthanchor.com/subscribe.html. If you are interested in the past performance of WATTS, please click here.

 

Wealth Anchor

Author: Wealth Anchor

Wealth Anchor L.L.C.

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• The WATTS signal info and the associated market commentaries may not be distributed, in full or in part, including posting links to our website, without our written permission.

• We reserve the right to immediately terminate the subscription of any Trend Watch subscriber who distributes the Trend Watch info without our written permission.

Risk Reminder:

• Subscribers should understand that all investments involve risks. The company is not responsible for any action taken as a result of reading the information provided by the company.

• Subscribers should be patient and follow all signals for at least a reasonable period of time before jumping to the conclusion of the WATTSs performance.

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