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Trend Watch

Week July 9, 2005 Update

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

The WATTS system once again proved itself to be a very outstanding trend timing system. When the market was very bearish and most people expected a lot more downside to come last week, we firmly asserted the following.

"Conversely, this ratio was somewhat improving in the past few days. When the market sentiment is bearish combined with an improving ratio, we regard it as more like a buying opportunity than the other way. Of course, since the current ratio is just a little higher than the support, we remain cautious to the possibility of its breaking down.

In the mean time, the WATTS's signal reading has been improving, too. The signal on the Nasdaq is always BUY and steadily climbing up (we are surprised too). While the signal on the S&P 500 is SELL, the reading wasn't declining as it should and instead, it went sideways and possibly waiting for a upside reversal."

The leading indicator cited above is the Nasdaq/S&P ratio, that is, the relative performance of the Nasdaq Composite index to S&P 500 index. If the Nasdaq is outperforming the S&P, the ratio goes up. If the S&P is outperforming than the Nasdaq, the ratio in the chart goes down. Let's review this indicator once again this week. Clearly, as you can see from the chart below, instead of breaking down, the ratio rose to break to the upside resistance.

The original purpose of developing the Wealth Anchor Trend Timing System (WATTS) is to reliably and effectively detect the trend reversal in the market. The proprietary mathematical and statistical model of WATTS is evidently proved to distinguish a normal but sharp pullback from a trend reversal this time. The signal reading on the Nasdaq has been stably climbing. It's like that WATTS doesn't even know there was a correction in the past 2 weeks. It keeps saying that the trend is up.

For the new subscribers, some would be confused with the SELL signal on the S&P. As a matter of fact, The discrepancy of the signals on the Nasdaq and S&P from WATTS has a very reasonable explanation. And we explained that to our subscribers before.

The design of the WATTS system is influenced by the data sample size. For the S&P, there are only 500 stocks in the index and that's all WATTS can calculate and decide whether or not the trend has turned. For the Nasdaq, WATTS calculate more than 3,000 stocks listed in the Nasdaq Exchange.

Simply speaking, a 500-stock data sample may not be large enough to precisely detect the trend reversal. It would be too sensitive of detecting a trend change. That's why we always lean toward the signal reading on the Nasdaq to be our final judge. From our own experience, the latter is always more reliable and trustworthy.

The SELL signal on the S&P only lasted for 2 weeks (6/24/05 to 7/805) and generated a -1.7% hypothetical loss. Since we knew it could be just a whipsaw from the beginning and focused our attention in the BUY signal on the Nasdaq and the leading indicator, we only suggested to reduce the long exposure in the market and never turned bearish.

For those who are interested in the past performance of WATTS, the chart below shows the live signal this year. More past signals : http:/www./wealthanchor.com/page_001.html

WATTS issued a new BUY signal on the S&P after the market close yesterday (7/8/05). The intermediate-term signals remain BUY. Since now all the signals including the leading indicator are confirming with each other, we suggest that subscribers move back to 100% long position if you are a short-term investor. Please refer to the section of the Model Portfolio for the detailed allocation.

Some of the subscribers asked us why we don't provide more market analysis and charts for them to review. The reason is that we want to keep our report as simple and clear as possible. There are too many charts and technical analysis nowadays. From our point of view, the chart and technical analysis is a human-based analysis and could be very subjective. The academy tried to prove that the technical analysis doesn't work, but our system is not a technical analysis.

Actually, the only thing that the academy has agreed with is that the trend in the market does exist and does work in the long run. And that's exactly what we do. Stay with the trend. Don't guess the market direction. Relax and let the compounding power works for you to build up the long-term wealth.

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 5/10/2005 1962.77 2112.88 +7.65%
S&P 500 BUY 7/8/2005 1211.86 1211.86 +0.0%

Last Closed Short-term Signal

Index Signal Type Issued Date Closing Price When Issued Price on Closing Date (7/8/05) Hypothetical Return*
NASDAQ          
S&P 500 SELL 6/24/2005 1191.57 1211.86 -1.7%

WATTS Intermediate-term Signal Status

Index Signal Type Issued Date Closing Price When Issued Closing Price Last Friday Hypothetical Return*
NASDAQ BUY 5/27/2005 2075.73 2112.88 +1.79%
S&P 500 BUY 5/27/2005 1198.78 1211.86

+1.09%

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 100% SPY
Mutual Fund None None
Stock Trading Account (Non Margin Account)

Self-managed Retirement Accounts (IRAs, 403b...)
Stock & ETF 100% QQQQ 100% SPY
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 100% High-growth US Stock Fund 50% High-growth US Stock Fund, 25% Balanced Fund, 25% Short-term Bond Fund or Money Market
WATTS Intermediate-term Signal Stock Trading Account (Margin Account) Stock & ETF 90% QQQQ, 10% Cash 60% SPY, 40% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)

Self-managed Retirement Accounts (IRAs, 403b...)
Stock & ETF 90% QQQQ, 10% Cash 60% SPY, 40% Cash
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 90% High-growth US Stock Fund, 10% Short-term Bond Fund or Money Market 60% High-growth US Stock Fund, 40% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

We just finished a long educational comments in the past 3 weeks. Let's take a break. There is no optional reading material this week. If you are interested in our last long educational comments about market timing, please click on the following link to read the optional reading material in those past issues.

Part I of "Say No to Marketing Timing?"-- http://www.wealthanchor.com/trendwatch_143501.html
Part II of "Say No to Marketing Timing?"-- http://www.wealthanchor.com/trendwatch_101215.html
Part III of "Say No to Marketing Timing?"-- http://www.wealthanchor.com/trendwatch_161429.html

 

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