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

Market Update

Despite a good start, stocks ended up posting more losses on the week. Renewed optimism over the fate of bond insurers sparked a rally late Monday, sending the major averages higher for the session. Despite news that core inflation for January was double the expected 0.2% increase, stocks moved higher again Tuesday after IBM announced a $15 billion stock buyback and a Fed official made dovish comments on inflation, saying that the central bank's priority is to revive the slowing economy. After a quiet session Wednesday, stocks started to retreat the next day after the release of disappointing economic data: unemployment claims rose more than expected last week and a revision of GDP growth for the fourth quarter came in at a lower-than-anticipated 0.6%, pointing to a weakening economy. Oil prices above $102 a barrel and Fed Chairman Bernanke's warning that some small banks may not survive the ongoing credit crisis also did not help matters. Stocks finished the week on a sour note with all major indexes posting losses in excess of 2.5% Friday on heavy trade and the Nasdaq Composite closing at its lowest level of the year. A $5.3 billion quarterly loss from AIG and cautious comments from Dell caused stocks to open sharply lower. The release of the Chicago Purchasing Managers Index (PMI) added to the selling pressure with a February reading of 44.5, indicative of contraction in manufacturing activity in the Chicago region.

The Nasdaq 100, Russell 2000 and S&P 500 posted respective losses of 1.59%, 1.66% and 1.33% on the week. All three indexes remain located below both their 50-day and 200-day Exponential Moving Averages (EMAs).

For its part, our World Index Ranking outperformed its U.S. counterparts this week with a gain of 0.87%. The portfolio consists of the 5 top-ranked world indexes as of February 1, which marked the beginning of the current 4-week holding period. The World Index Ranking portfolio is being rebalanced today, as the current 4-week holding period is now over. 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

Alpha and beta

Statisticians define five primary technical risk ratios: alpha, beta, R-squared, Sharpe ratio, and standard deviation. While all have to do with risk, these indicators are very different and their actual meaning is lost on most individual investors. Standard deviation (see "Risk and volatility") is the most common and widespread volatility measurement, an accepted substitute for risk. The Sharpe Ratio (see "Risk-adjusted performance") is the most widely used direct measure of reward-to-risk. Alpha and beta are risk related measures which are used extensively in the mutual fund industry and as a result have become part of the financial industry jargon.

Let's begin with beta, which we have used in these pages when discussing leveraged funds. Much like standard deviation, beta is a measure of the volatility of a security or a portfolio. Where standard deviation measures volatility by itself, beta measures volatility in comparison to that of the market as a whole, or the systematic risk. Using the example of a leveraged ETF, a fund with a beta of 1 attempts to match the daily performance of the index it tracks. A beta of 2 will attempt to double the performance of the index. An investment with a beta of 1 would be perfectly correlated with the market and have the same volatility, up or down. Some stocks or market segments such as utilities will be typically less volatile than the market as a whole and have betas of less than 1, and others like high-tech offer the opportunity of higher returns in exchange for a beta higher than the market. The key here is to select an index of reference which is comparable with the investment.

Investopedia defines alpha as "A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a "fund's alpha". So alpha, or alpha coefficient, just like the Sharpe ratio is a measure of risk-adjusted performance, but unlike the Sharpe ratio it compares returns with the market as a whole. In other words, alpha is the portion of a fund's or portfolio's return that cannot be attributed to market returns, and is thus independent from market returns. It is a measure which many say most accurately gauges the real contribution or value-added, positive or negative, of the portfolio manager or the strategy used.

Alpha was all important in the days when most mutual funds were actively managed, because it squarely placed the spotlight on the managers producing the best returns, above and beyond what the market delivered. In fact, much of the manager's compensation was based on the alpha they produced. In today's environment where index ETFs are becoming the norm, alpha is an oxymoron, because the fund manager's objective is to match the performance of the index, which is the same as eliminating alpha. Conceptually, alpha still remains attractive to measure a portfolio manager or any other investment strategy other than strictly buying and holding an index. Practically speaking there are numerous issues with alpha. A portfolio with exposure to various markets or even asset classes really should have multiple betas and alphas, or risk comparing apples and oranges. To really isolate the non-market-related part from the market-related part of the performance can be enormously difficult. The sad truth is that too often, alpha is a propaganda tool which in skilled hands can be made to produce the most flattering results.

Another important aspect of any active investment strategy is that you really make a "beta bet" as much as an "alpha bet". In fact, you could argue that a large part of our returns, in particular with the World Index Ranking strategies, come from the markets we select (the betas).

While we find many of the performance, risk, and performance/risk statistics interesting, more often than not they are used opportunistically by managers, yet largely misunderstood and nearly impossible to verify by investors. Instead of fancy statistical measures we believe there is nothing simpler and clearer than absolute returns as we report them on our "Results" page.

FAQ of the Week

Question: What is the ETF for India?

With the introduction of new index ETFs for the Indian market, this question goes from having no good answer to having two: EPI and PIN. How good they will be remains to be seen.

Our long-term subscribers know the challenge it has been to find a good investment vehicle for the Indian stock market which is best represented by the Bombay exchange index, known as the BSE Sensex. Table 1 below lists all India related funds, including the two newcomers. Until now the only choices were two closed-end ETFs (IFN, IIF) and an ETN (INP ) which have not tracked the index very well and have suffered from significant premium/discount issues. That saga can be traced in past "FAQs of the Week": "What is wrong with Indian funds?", "What is an ETN and is it as good as an ETF?", "Is it time to give up on IFN?" and "Why is INP on fire?".

Table 1: India indexes and funds

Ticker	Type	Name
^BSESN	Index	BSE Sensex Index
IFN	Closed-end ETF	India Fund, Inc.
IIF	Closed-end ETF	Morgan Stanley India Investment Fund
INP	Index ETN	iPath MSCI India Index ETN
EPI	Index ETF	WisdomTree India Earnings Fund
PIN	Index ETF	PowerShares India Portfolio

The two new funds have the distinct advantage of being true index ETFs, and their price will be driven by the underlying index and not by demand for the funds themselves. They are the WisdomTree India Earnings Fund (EPI) which started trading earlier this week, and the PowerShares India Portfolio (PIN) expected to start trading on March 1. Because of the restrictions India places on foreign investments these two funds use creative proprietary indexes to skirt the rules. The bottom line is that it is unknown how the indexes these funds track will compare with the broad Indian market represented by the BSE Sensex. Only the future will tell.

Warm wishes and until next week.

The TimingCube Staff