Trend Watch

By: Wealth Anchor | Wed, Nov 30, 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

Another new change in the newsletter layout. We've rearranged the Signal Update section. The first 2 tables are now the current signal status for short-term and intermediate-term. The last closed signals are put together following the current signal status. Hope this change would help subscribers to read the signal status more easily.

Turn to the market. Usually, Thanksgiving week is a up week in terms of seasonality with the first half of the week weak and the second half strong. Maybe that's because everybody is in a mood that he needs to buy something when the holiday season is coming. The WATTS short-term signal is still a firm BUY and the market responds to it without any objection.

Let's talk about the intermediate-term signal first. We usually rely on the intermediate-term signal to gauge our big picture view of the future market trend. It's very often that several short-term BUY/SELL signals are packed in an intermediate-term signal period. That means that the major trend is mainly dominated by the intermediate-term system and the short-term system is more like the secondary movement in a major trend.

That being said. We want to see that a short-term signal is followed by an intermediate-term signal as soon as possible to confirm that the major trend has indeed turned. Most of the intermediate-term signals will be issued in 1 to 4 weeks after the short-term signal is issued. The typical average time for that to happen is 2 to 3 weeks. In the WATTS history including data back-testing, there is one case that the short-term BUY signal has been issued for 6 weeks but the intermediate-term signal is still on the other side indicating that the major trend hasn't changed and is still down. That case is occurring in May to June of 2004. Finally, the short-term system gives up and falls back to SELL. The intermediate-term system wins. The major trend continues to decline till August 2004. With the help from WATTS, we would enjoy the short-term strong up move in the market to make some quick and sweet money but know that the major trend in the market is still down and don't bet the farm on the up side.

This Thanksgiving week is the 4th week after the short-term signal. We still have no intermediate-term BUY signal by far. The historic experience tells us that the longer the signals conflict lasts, the less possible the major trend has turned. But it's just the 4th week and the intermediate-term signal reading is exactly on the turning point and any increase on the reading would send the system to issue the intermediate-term BUY signal. Both scenarios could happen. We won't be surprised to see either the system issues the intermediate-term BUY or the short-term system falls back to SELL. Please don't think that we are an opportunist. That's exactly what's happening from the WATTS perspective. We just plainly expressed it.

For whatever reason it is, there are some subscribers who missed the opportunity window to load up the long position at the beginning of the short-term BUY signal. Or they did follow the signal and load up the long position but they sold their positions into a quick market rise. The rule number one and probably the only rule we have installed is follow all the signals. You can incorporate all other advanced techniques that you like to increase your profit. But more than often, you'll find that your performance is being hurt by such an attempt. But please don't get us wrong. We respect the savvy and well-experienced investors/traders to apply our signals in any way. The above and following caveat is for the junior investors only.

Please review the WATTS signal performance. The live signal performance in 2005 is 30%-ish as of today. If you like the numbers you have seen, please make your life easier and just follow what WATTS says. If you are not satisfied with the WATTS performance, you probably should look for the other source for guiding your investment instead of trying to fix the system and make it better. We have continued to put in resources to perform research and system analysis trying to improve WATTS but it's very difficult to improve a good enough system. In a financial environment of the low interest rate and a almost flat range-trading stock market, any return more than 10% should be considered good and more than 15% should be respected.

A valid question would be that what a new subscriber should do if he subscribers to Trend Watch in the middle of a signal. For example, you just joined the group now. What do you do? If you are inexperienced and don't know how to handle it, our suggestion is that you should take the current signal with full respect but accumulate your positions with a more cautious pace. Namely, using a average-up strategy to build up your long positions. You should buy an initial position such as 20% of you total capital designated to the WATTS signals in the first minor correction you would see. Don't buy another lot of long positions until you have a profit on your initial lot. If everything goes well, you should be able to buy the next lot in the next minor correction at a higher price. Yes, at a higher price. Don't add any positions if your initial lot is under water. Then, repeat this same procedure till you've bought all your capital in.

Other than the conflicting system view from WATTS, the Dow Theory is having an important signal non-confirmation in the stock market. Although this technical analysis has existed more than 100 years, we still value it at the highest scale. Please read the Optional Reading section for the detailed discussion of the topic.

The market changes fast. If you want to know whether or not WATTS issues the intermediate-term BUY signal finally or the short-term system falls back to SELL, please subscribe to Trend Watch. We also offer a 30-day free trail . http://wealthanchor.com/subscribe.html

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 2263.02 +6.73%
S&P 500 BUY 10/31/2005 1207.01 1268.25 +5.07%

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 2263.02 See Model Portfolio
S&P 500 SELL 8/18/2005 1219.02 1268.25 See Model Portfolio

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%

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. The cloud around the silver lining - http://www.marketwatch.com/news/story.asp?dist=morenews&param=archive&siteid=mktw&guid=%7B17EB2B14%2D4F71%2D4964%2DBC96%2DAC5A674789F1%7D&garden=&minisite=

For those of you who don't know what the Dow Theory is, please read in the article to understand it. The article did a good job on introducing this oldest of market timing systems. And please also pay some respects to it. If something can exist for more than 100 years and still kind of popular, there must be something valuable inside it regardless you can or can't see it.

We are having a upside non-conformation on the Industrial Average and Transportation Average. Now what? From the Dow Theory, we don't know when to officially announce that the non-confirmation is final and the market is topped. It doesn't tell you that. And we agreed to what Richard Russell said. A confirmation becomes less meaningful the longer it takes to happen.

What Richard Russell really wanted to say is that while the market looks strong but it's quite close to its destiny on the long side. Does that ring any bell? If not, please re read the Market Comments section again. It's kind of matching the WATTS system view. A strong short-term BUY in the context of a stubborn and reluctant-to-rise intermediate-term SELL. Even the phenomenon is very similar. "The historic experience tells us that the longer the signals conflict lasts, the less possible the major trend has turned". In Dow Theory, it's "A confirmation becomes less meaningful the longer it takes to happen".

We don't know why the views can be so close from the 2 totally different market timing systems. But it does surprise us. We know it from our deep heart that those 2 timing systems share no same components in their blood. How can they say the same thing in a similar style at the same time? Probably, that's why the market is so charming.

We are glad to see the Dow Theory is showing the same sign as WATTS is. But let's be open and don't expect anything to happen. Let it comes to us, no matter it is the bearish or bullish.

For more details about Trend Watch, its past performance or past issues, please go to our website: http://wealthanchor.com/Trend_Watch.html.


 

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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