Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

Equities continued their plunge this week, the weakness spreading to all markets around the globe. Stocks were able to move higher Monday following a better-than-expected quarterly report from IBM, but the gains did not last. Tuesday saw the major averages drop heavily again after Citigroup announced a $9.8 billion loss for the fourth quarter and an $18.1 billion write-down. Further compounding the negative mood, the retail sales report for December proved to be weaker than expected. After the trading session was over, Intel released its Q4 earnings report, which missed Wall Street's expectations on both profit and revenue. The company also issued a cautious outlook for 2008. The news sent the markets tumbling at the open Wednesday. Despite a mid-day rebound attempt, stocks could not avoid additional losses by day's end. The major indexes opened higher Thursday but quickly reversed course after the Philadelphia Fed issued a regional manufacturing report that was much weaker than anticipated and housing starts fell by 14% in December, fueling talks that the economy is in recession. Despite President Bush's announcement of a $145 billion stimulus package to boost the economy, stocks continued their move lower Friday, but were at least able to close off their lows.

The Nasdaq 100 , Russell 2000 and S&P 500 posted respective losses of 3.59%, 4.47% and 5.41% on the week. All three indexes remain located well below their 200-day Exponential Moving Average (EMA). While the Nasdaq 100 is sitting at its August 2007 lows, the situation is much worse for the S&P 500 and the Russell 2000 as they are respectively back to their October 2006 and July 2006 levels. Many market commentators are saying that we have now entered a new bear market. It is certainly the case for the Russell 2000, as the index has lost more than 20% from its July 2007 top.
Please note that U.S. markets will be closed Monday in observance of Martin Luther King Jr. Day.

Our World Index Ranking portfolio did worse than its U.S. counterparts this week with a loss of 5.99%. The portfolio consists of the 5 top-ranked world indexes as of January 4, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Sell signal, the World Index Ranking approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 indexes, as the strategy calls for staying invested at all times. Please go to our "Strategies" page for all the details.

Our current Sell signal remains in effect.

Trend Timing School

Mixing timing and momentum strategies

When originally introduced in 2001 the TimingCube service had a single trend following model which timed the market with Buy and Sell signals in function of the up and down trends it detects in the market. As we and a majority of our subscribers are U.S. based, the model focused on the Nasdaq Composite index as a proxy for the broad U.S. market, and we diversified our investments between three broad U.S. indexes: the Nasdaq 100 , the Russell 2000 and the S&P 500 . As U.S. markets began to weaken after 2003 and lose the lead to foreign markets, our Buy signals were also applied to stronger, mostly well correlated world markets. About 16 month ago we introduced the World Index Ranking system as a complementary trend following model which, instead of timing the market, seeks the markets which are experiencing the strongest momentum.

When the broad market trend is up, the two models work in tandem. Both are trend following strategies. One points the direction (up) and the other targets the strongest markets. Everyone is long in the best world markets. When the trend timing model detects a down turn and issues a Sell signal the models become dichotomies, with contradictory or even mutually exclusive natures. All this for a simple reason: one is long and short while the other is always long. One says short the market when the other still points to the strongest world markets to buy. The bottom line is that momentum and shorting do not mix.

So what are we trying to pull with this World Index Ranking "Long and Short" strategy? Do not worry. We do not promote schizophrenia, and we do not make models perform unnatural acts.

As a quick refresher, let's look at the "natural" World Index Ranking strategy, which is "Buy and Rebalance". Like buy and hold, this strategy remains invested (long) 100% of the time, but instead of being pegged to one market, it continuously upgrades to the Top 5 world markets on a 4-week rebalancing schedule. Looking at some statistics just might shed some light on this (or bore you to death, as the case may be ). Table 1 below compares our "Buy and Rebalance" strategy with the "always long" buy and hold benchmarks: the Nasdaq 100, Russell 200 and S&P 500.

The right-most column represents the yearly results of the "Buy and Rebalance" strategy since 1999 (backtested before September 2006 as explained in full detail in the notes at the top of the "Results" page). Some people complain that it is unfair to compare the best world markets with the U.S. indexes, and so we obliged and added an extra buy and hold benchmark column for buying and holding all 27 World Index Ranking indexes at the same time. Call it the WIR 27 index.

Table 1: Comparing pure buy and hold with Buy and Rebalance strategies

	Buy and Hold Benchmarks				Buy and Rebalance
Year	Nasdaq 100	Russell 2000	S&P 500	World Index Ranking (All 27 indexes)	World Index Ranking (Top 5)
1999	104.56%	19.62%	20.23%	45.12%	66.26%
2000	-37.66%	-4.20%	-10.66%	-16.18%	-15.39%
2001	-32.06%	1.02%	-12.97%	-8.85%	-12.05%
2002	-37.41%	-21.58%	-23.26%	-20.27%	12.05%
2003	48.06%	45.37%	26.19%	32.83%	45.98%
2004	10.49%	17.00%	8.93%	15.59%	23.03%
2005	1.57%	3.32%	3.00%	19.46%	32.93%
2006	6.94%	17.10%	13.60%	20.31%	24.34%
2007	17.88%	-2.84%	3.52%	11.11%	24.56%
Annualized	1.42%	6.84%	1.99%	8.97%	19.90%
Bear market

It is interesting to note that every year except 1999 and 2003, the years right before and after the tech bubble burst (during which the Nasdaq 100 outperformed), the average of all world markets beat the U.S. markets. In fact, 1999 was an incredible year for world equity markets as the AVERAGE of all 27 world markets we track gained over 45%. The Top 5 rebalancing strategy beat that average handily at 66%, but nothing could compare with that year's winner, the Nasdaq 100 which more than doubled in value.

The 9 year period also includes the 3 year, 2000 to 2002, bear market which brought all markets back to reality. On an annualized basis, the U.S. indexes barely produced single digit return for the entire period, while the average world markets approached 9%. Only the "Buy and Rebalance" strategy managed to pare losses sufficiently that annualized returns over the entire period more than doubled other buy and hold strategies to almost 20%.

Still, it is the bear market set-backs which keep buy and hold strategies back, and why Trend Timing was invented. In theory, a "Long and Short" strategy should be able to side-step the downturns and profit from them. This is what Table 2 below shows.. This brings us back to the initial thought which was to combine the best of both trend following methods: the World Index Ranking "Long and Short" strategy.

Table 2: Mixing timing ("Long and Short") and momentum strategies

	Long and Short Benchmarks			Long and Short
Year	Nasdaq 100	Russell 2000	S&P 500	World Index Ranking Long: Top 5 Short: Nasdaq 100
1999	104.56%	19.62%	20.23%	66.26%
2000	104.78%	32.57%	15.34%	63.70%
2001	110.69%	77.44%	45.76%	102.26%
2002	57.28%	24.55%	20.18%	34.84%
2003	50.07%	77.63%	51.28%	61.59%
2004	23.47%	31.16%	13.28%	34.59%
2005	22.76%	18.89%	8.45%	50.62%
2006	24.44%	37.00%	20.10%	50.95%
2007	-4.02%	-22.53%	-11.75%	6.22%
Annualized	49.64%	29.56%	18.99%	50.20%
Bear market

During up trends and Buy signals the strategy focuses on the momentum model to invest in the world's top performing markets, and during down trends and Sell signals it reverts to shorting the reference index: the Nasdaq 100. This strategy has historically produced the best results with the least exposure to any single market or strategy. Any attempts to outsmart the "always long" momentum model by trying to short the bottom 5 during Sell signals, or the top 5 for that matter, resulted in inferior returns in our testing.

FAQ of the Week

Question: What are 130/30 ETFs and are they applicable to our strategies?

According to Morgan Stanley, funds following the so-called 130/30 strategy have been the hot thing in the world of hedge funds lately, with more than $100 billion invested in them worldwide. While hedge funds are the exclusive playing ground of financial institutions and high-net-worth investors, ProShares has recently filed papers with the SEC for just such an ETF which, if and when it is approved and introduced, would open the door for all investors.

We believe that this ETF will fall in the general category of "quantitative strategy ETF" which use pre-determined investment selection rules which could consist of fundamental and/or technical criteria. The fund will use an as-yet undefined "130/30 index" implementing a proprietary, quantitative analytical system with the goal of achieving better returns than the market while maintaining a 100% market exposure. According to their prospectus, the index selection methodology seeks to rank and weight U.S. large-cap companies by applying various factors to make a comprehensive determination of a company's overall investment potential. The index then establishes a 130% long position in the higher ranked index components and a 30% short position in the lower ranked components resulting in a net 100% long position.

For anyone interested in more details, here is a lik to the ProShares 130/30 Fund prospectus filed with the SEC.

There are as yet many questions which remain unanswered such as what this index exactly is, the expense ratio, and a date of availability, but we can still safely say that this fund is not likely to get recommendations from us. Our entire service is focused on broad market indexes. Historic and daily data for all our indexes must be publicly available, which is highly unlikely to happen here. More importantly, there is a fundamental philosophical difference between a 130/30 strategy which permanently maintains both the 130% long and 30% short hedge positions, and our trend following system which is based on being either long or short at any given point.

Warm wishes and until next week.

The TimingCube Staff