Tactical Timing System to Get a Facelift

By on May 24, 2006

Originally published on:

January 26, 1997

A market correction appears to have begun from the Dow 6,900 level. The Dow will likely drop to between 6,000 to 6,300, which would be a correction of 8 to 13 percent; one of the stiffer drops experienced over the last six years. Before the Dow completes this downward move, we will probably see a retest of the top achieved this past week. After failing to breach the 6,900 level this coming week, the market will probably drop for most of the month of February. The big stocks will finally receive their comeuppance for the strong outperformance they have exhibited the past year. Expect stocks like Microsoft, Intel, Nike and Coca Cola to be extremely weak in the coming weeks. The above is just my opinion based on many years of market observation and, of course, could very well be in error. Short term trading based on this prediction is not encouraged.

Tactical Timing System to get a Facelift

An adjustment to the Tactical Timing System will go into effect soon. The Tactical Timing System was originally developed to adjust allocation between cash and equities in 30 percentage point increments. Due to low volatility, the timing signals have been almost non-existent this decade. Sometimes it is better to do nothing, but the dearth of signals has caused some poorly performing equities to remain in the “real world” portfolios.

When the adjusted system goes into effect, buy and sell signals will cause the allocation to be shifted in 15 percentage point increments. The revised system was backtested with the S&P 500 to 1978 and achieved achieved an annual rate of return that was 25% higher than the S&P 500. Commissions were taken into account, but taxes were left out of the equation. The revised system generated 42 trading signals, or approximately one every five months.

Several stocks will need to be sold to achieve a newly recommended allocation of 75 percent equities and 25 percent cash for the aggressive portfolio, and 55 percent equities and 45 percent cash for the conservative portfolio. Those companies with the lowest relative strength to the market over the past 52 weeks will be sold to bring the accounts in line with the recommended allocations. Consideration will also be given to tax liabilities since some stocks in the aggressive portfolio have large capital gains. The conservative portfolio is an IRA account, so consideration to tax consequences will not effect the selection of stocks to be sold. Subscribers will receive an E-mail message when the revised system goes into effect.

Garzarelli Gets it Wrong Again

Elaine Garzarelli finally capitulated and issued a bullish call via her telephone hotline service after being bearish since July 1996. It is a little late to be proclaiming that the market is going to rise. Since her infamous prognostication back in July the market has risen, as measured by the DJIA, about 27 percent. Elaine needs to find a new line of work before she convinces more neophyte investors to leave their money at the door. Her newsletter is a detriment to her subscribers, and she should pay them to take it.

Portfolio Updates

Coachmen Industries (NYSE: COA; $20 5/8) reported earnings of 40 cents per share for the latest quarter. According to the Nightly Business Report, COAs shrinking profit margins surprised Wall Street. The market quickly reacted to the news lopping over 20 percent off the price over two days last week. The demographic spending wave I commented on in the November 17, 1996 issue has a couple of dips. It is due to the dip between the middle and the third wave that companies benefiting from baby boomers are experiencing lower than expected margin expansion. When the third spending wave begins it’s up trend, Coachmen’s earnings and margins should expand significantly. The only thing I can see really hurting the stock from here would be a large rise in oil prices, which is certainly not out of the question.

Novellus Systems (NASDAQ: NVLS; $76 1/4) reported strong sales and earnings over the last quarter which created a lot of demand for the stock. The strength canceled out the weakness in COA and has saved the aggressive portfolio from underperforming the averages. This is the purpose of diversification…to keep bad decisions, market manipulations, and panicking crowds from destroying your principal.

Thirty-three percent of the position in Bristol Myers Squibb (NYSE: BMY; $120 1/2) was sold due to it becoming more than 10 percent of the conservative portfolio. A replacement security has not been chosen due to the upcoming implementation of the revised Tactical Timing System allocation.

Recommended Allocations

The aggressive portfolio currently consists of 90% equities and 10% cash. The recommended allocation for conservative portfolios is 70% equities, 30% cash.

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