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Trend Watch


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

There is not much to say about the market this week. The market climbed higher as expected last week. The WATTS's BUY signal on the Nasdaq has generated a almost 10% return in the past 2 months. As a trend follower, the only thing we can do right now is follow the trend and stay put. Sometimes, keeping investing simple is probably the best strategy.

It, however, might be interesting to make an educational guess on where this upward trend may end. WATTS hasn't shown any weak signs yet as far as we can see. But how long can this trend last?

The two charts below are the 2 leading indicators we always monitor. The first one is the major leading indicator, which is more stable but less sensitive (for new subscribers, please click here to read the description of the indicator). The second chart is the relative performance of the NDX (Nasdaq 100) index to the DJIA (Dow Jones Industrial Average). It's similar to the first indicator. But as the old sayings goes, "the devil is in the details." Carefully reviewing those 2 indicators will bring us an early sign of the market trend reversal.

Since the NDX and DJIA consist of much fewer component stocks than the Nasdaq Composite and S&P 500 (NDX - 100 stocks, DJIA - 30, Nasdaq Composite - all stocks listed in Nasdaq Exchange, S&P - 500 stocks), their relative performance sometimes will reveal the deeper information of the market mystery.

As you can see from the charts, the major leading indicator (Nasdaq to S&P) has significantly broken up its June's high and keeps climbing higher without hesitation. This confirms what WATTS signals. The trend is still up without any question. But is the second rally after the June's consolidation as strong as the first one?

Let's turn to the second chart. The secondary leading indicator (NDX to DJIA) is telling us a different story right now. It hasn't broken up its June's high so far. Does this mean anything? Yes. Please compare those two indicators in the period of March to May. While the major leading indicator was significantly breaking down its March's low in May, the secondary leading indicator was refusing to confirm. And that marked the turning point of the last trend eventually.

Evidently, this secondary leading indicator is refusing to confirm the upside breaking of the major leading indicator. Will this mark the turning point of the current trend? We shall see. But if the last experience is worth anything, there is still a bit of room for the secondary indicator to go higher.

Trend Watch has nothing to do with the technical analysis. What we analyzed here is to back up what WATTS signals not override the WATTS's decision. And we emphasize that this is nothing more than an educational guess. For the next 1 to 2 weeks, it's either that the secondary leading indicator catching up with the major indicator or WATTS will start to show the signs of the weakness.

As usual, we don't guess. We just follow what the market tells us.

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 2156.78 +9.88%
S&P 500 BUY 7/8/2005 1211.86 1227.92 +1.33%

Last Closed Short-term Signal

Index Signal Type Issued Date Closing Price When Issued Price on Closing Date (7/8/05) Hypothetical Return*
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 2156.78 +3.90%
S&P 500 BUY 5/27/2005 1198.78 1227.92 +2.43%

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 Stock & ETF Not Available Not Available
Retirement Account (401k) 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 Stock & ETF Not Available Not Available
Retirement Account (401k) Mutual Fund 90% High-growth Stock Fund, 10% Short-term Bond Fund or Money Market 60% High-growth Stock Fund, 40% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

1. Have the 2000-2002 bear market's losses been erased?: http://biz.yahoo.com/cbsm/050714/225674684c674ce18242a9ea9321a6e6.html

The point of the linked article is nothing about if an investor has recovered from the 2000-2002 bear market's losses. Instead, it's talking about the issue of the stock market benchmarks. That is, there is no absolute answer to the following simple question -- does your portfolio outperform or underperform the market in 2000 to 2005? Well, that totally depends on which index you pick to compare with.

Yet what we really concern here is what the title says -- have you recovered from the 2000-2002 bear market losses? Or worse, you don't even want to think about or talk about this question.

As an investor, have you ever thought about this question? What if the period of 2005 to 2010 is a deja vu of 2000 to 2005? What would your portfolio be doing? Can your retirement account bear another 5- year no growth? If it's possible that the future 10 -15 years is still a range-trading market just like 2000-2005, what should you do as to your retirement account or investment portfolio?

The Age of buy-and-hold strategy may have passed. From 1980 to 2000, investors don't need any help and would do pretty well just buying and holding stock. Such a good time is gone. By historical experience and academic research, the long-term market performance has to go back to the historical mean, no matter what, just like people would die. That means that in the future 10 to 15 years, the market performance will be lousy and the buy-and-hold strategy will totally fail.

Investors usually know when to buy but don't know when to sell. This is not a problem in a long-term bull market at all. But in a long-term range-trading market, the buy-and-hold strategy kills most of your return. We are not saying that what we said must be right. We are just saying that what if the history repeats itself, and then as an investor, what should you do?

Simply ignoring the possibility of such a scenario is probably not a good idea. We don't want to say something that sounds like promoting our own investment service. That's not our intention. We just hope that our subscribers can seriously think about this question for the sake of yourselves. The answer doesn't have to be trend investing. You can have your own solutions, but at least, you have to think about it.

2. The best of the first half's worst stocks: http://biz.yahoo.com/cbsm/050713/c19b1e3ac4194267849c4f070baa2cc7.html

The strategy demonstrated in the article is like the Dow 10 or Dow 5 strategy. You pick up the worst performers in the last year or any period you like and bet on their turning around. Although this article gives the very positive comments on such a strategy, the more serious and academic research doesn't quite support it.

3. New warning for buyers: Get a CLUE: http://biz.yahoo.com/brn/050713/16050.html

We understand that this article has nothing to do with investing, but we consider that it can add some value to our subscribers' financial health. Better get a CLUE when you buy a house next time.


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