In addition to the CTI, the model includes a Sentiment Index and a Momentum Index which are used to confirm the buy/sell signals generated by the CTI. Based on the status of the indices, a Market Posture is formulated which is either Bullish, Bearish or Neutral. The model is updated on a weekly basis. Typically, the model will reverse its posture 2-3 times per year. By staying on the right side of the market, you will be long stocks when conditions are favorable and out of the market or ‘short’ during times of uncertainty.

Using this approach over the last four years (2000 – 2003) produced very rewarding results and should be of particular interest to those who suffered major losses during the bear market period. While the DJIA was down three of the four years (2000, 2001 and 2002), timing the market with the Market Edge long/short approach would have produced a gain in each year! For 2000, the DJIA lost 710.27 points (-6.18%) while timing the DJIA would have produced a 1573.06-point (+13.7%) gain. For 2001, the DJIA was down 765 points (-7.8%) while timing the DJIA in the same manner would have resulted in a 658-point gain (+6.1%). The DJIA lost 1679.87 points (-16.76%) in 2002 but once again timing the DJIA would have produced a 1476.75 point gain (+14.74%). Finally, the DJIA gained 2120.15 points (+25.4%) in 2003 while the Market Edge approach produced a 1361.97-point (+16.3%) gain. Over the four year period, a buy and hold strategy would have produced a loss of 9.1% while the Market Edge long/short approach would have generated a non-compounded, 44.1% total return. To see the CTI's track record since 1974, click on Market Letter Track Record located on the left side bar on the Market Edge home page.

Exchange Traded Funds

The best way to trade the market using the above approach is to trade Exchange Traded Funds (ETFs). ETFs, which are also referred to as i-shares, are trusts, which contain a basket of stocks that mirror the performance of recognized stock and bond indexes. As of 12/31/02 there are more than 113 ETFs which are traded in the U.S. Unlike mutual funds, ETFs can be bought and sold at any point during the trading day providing liquidity not found in open-end mutual funds. They can also be bought on margin and shorted, just like a regular stock. With ETFs the investor can gain broad market exposure without costing an arm and a leg.

Advantages Of Exchange Traded Funds

In addition to liquidity and tracking ability, ETFs also posses the following advantageous characteristics:

Putting The Strategy to Work

There are two ETFs which are excellent vehicles when using the Market Edge Long/Short approach. The first, called the Diamonds (DIA), tracks the movement of the Dow Jones Industrial Average (DJIA). Their value is 1/100th that of the Dow. The second ETF, Spiders (SPY), tracks the movement of the S&P 500. Its value is 1/10th that of the S&P 500. Both DIA and SPY trade on the AMEX.

There are a couple of ways to trade these ETFs using the Market Posture signals. The simplest approach is to initiate long (buy) positions in either the Diamonds (DIA) or Spiders (SPY) whenever the Market Posture is upgraded to bullish. These positions should be held until the Market Posture reverses to bearish at which time a short position could be initiated or simply move to cash. A more aggressive approach would be to initiate either long or short positions in conjunction with the Market posture and use the Market Edge, Second Opinion buy/sell stops as an exit point