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

Market Update

It has been a punishing week for the markets. A drubbing in chinese stocks derailed all world bourses Tuesday. The US markets were also negatively impacted by a disappointing factory report as durable good orders fell by 7.8% in January, raising fears that the economy is slowing. By Tuesday's close, the Dow Jones Industrial Average had lost 3.3%, its worst daily loss since the 9/11 attacks. For its part, the Nasdaq Composite lost 3.9% on the day on very heavy volume. Stocks tried to rally Wednesday but the rebound lacked punch as the main averages were only able to gain back a fraction of the previous day's losses. Stocks plunged again at the open Thursday before turning around after the release of a better-than-expected ISM manufacturing index for February. Yet, the indexes were unable to finish in positive territory, as a good part of the failed rebound was due to short-covering. Sure enough, renewed selling pressure knocked stocks even lower Friday, capping a week of heavy losses, which marked the Dow's worst performance in over 4 years.

For the week, the Nasdaq 100 , Russell 2000 and S&P 500 respectively lost 6.18%, 6.19% and 4.41%. All 3 indexes have now pierced below their 50-day exponential moving average (EMA) but remain above their 200-day EMA.

For its part, our World Index Ranking portfolio posted a 7.01% loss this week. The portfolio consists of the 5 top-ranked world indexes as of February 2, 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 Cash signal, the World Index Ranking approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. You should remain invested in the top 5 indexes only if you follow the "Buy and Rebalance" strategy, which remains invested at all times. Please go to our "Strategies" page for all the details.

Because of the conflict between the bullish trend of the previous weeks and the bearish tone of Tuesday's meltdown, our Model issued a Cash signal after the close on Tuesday. We have therefore closed all long positions and will remain in cash until a new Buy or Sell signal is issued. Is the pullback going to be short-lived or is it instead the beginning of something more serious? We have no way to know for sure at this point, so we will remain on the sidelines until the dust settles.

We now have a Cash signal in effect.

Trend Timing School

The market is always right

Having just experienced a market drop of unexpected scope and another whipsaw delivered by the sudden reversal we are not happy campers. We all react somewhat differently to market declines and losses, depending on our individual expectations, experience, character or simply the thickness of our skin. Judging by the subscriber feedback we receive, anxiousness, anger, frustration, hurt, fear and even panic are not uncommon sensations. A recurrent instinctive reaction is to assign blame, and since the essence of our service is to detect market trends to keep you on the right side of the market, it is no surprise that the pent-up emotions are directed squarely at us. We do not mind to fall on our sword and admit to the imperfection and failings of our trend following model, but we also need to put the recent events in their proper perspective, review how the system is supposed to work, and learn from the experience.

Let us first take a look at the "plunge" of Tuesday February 28, 2007 which had so many in a frenzy. The media had a field day with dramatic descriptions, but chances are that a year from now the 90 point drop on the Nasdaq Composite Index will be forgotten like so many others before it. Yes, volume was very high with the 3.037 billion shares ranking third highest ever for the Nasdaq Composite. The 3.86% price drop on the other hand was actually mild by historical standards: there have been 67 larger single day drops, including the largest in recent memory at
-11.35% on October 19, 1987. If you think this is bad we remind you that the Dow Jones Industrials dropped 22.61% on that same "Black Monday".

The bottom line is that if you invest in the stock market, nothing will protect you with certainty against one day losses, not even stop orders. Our trend following system might well have you in a short position as it did during the 1997 and 2001 crashes, but there is no guarantee. For now we are content to be in Cash and have avoided further losses. Should this week be the beginning of something bigger, we will rely on our model to tell the trend.

Some point out that the Nasdaq drop was small compared to some International indexes. Many wrote to say they were invested in Chinese stocks (at least they cannot blame us for that ) and that their FXI fund dropped by 9.87%. To make matters worse some were fully leveraged on it... Still, when seen against the nearly 114% one year gain on the Shanghai Composite Index this could be termed a very mild correction, but then we would not be surprised if this is not the end of the correction yet.

Others have been lamenting the tremendous volatility seen this week, and in their defense, the CBOE Volatility Index (^VIX) jumped by over 64% on Tuesday (the largest single day advance ever) to a reading of 18.31. So is volatility high? Depends how far back you go. Maybe it is because U.S. market volatility has been close to historical lows for months with extreme levels of investor complacency that many have forgotten what volatility really is. A VIX reading of 18.31 is right below the historical average but far from high levels which have exceeded readings of 45. We also need to point out that while volatility is also a measure of risk, it is good for Trend Timers. Without substantial up and down market movement there is little opportunity for gains.

Coming back to the investment system and the recent losing trades, the reaction of many is to say that the model is broken and that the enhancements we made last summer do not work. Before going any further we want to stress that we are firm believers in continuous improvement and that we are relentless about researching opportunities for enhancing the model. Our learning about the market and its behavior will never be completed and neither will our model. We cannot expect an investment system to ever be perfect because the stock market it seeks to decipher is itself less than perfect, constantly changing, and of course always right.

So is the model broken or has it stopped working? This may come as a shock to some but actually, the model is working the way it is supposed to. The goal of the system is not to have big gains on every signal. We believe that the conditions which existed when the most recent Sell and Buy signals were issued justified the signals, even if in hindsight we can tell that those trends did not develop as anticipated. The fundamental objective of Trend Timing is to participate in all meaningful market advances and to avoid, or benefit from, the larger corrections and bear declines. It is not possible to know in advance how meaningful an advance or decline is going to be, and waiting to know would cause the bulk of them to be missed. What is important is to keep individual signal losses small but to participate in order to profit from the large moves when they come. Just because we have losing trades does not mean we will necessarily run out and create a patch to eliminate this specific occurrence.

Our long term track record speaks for itself (not backtesting but our live signals since June 18, 2001 as listed on the "Trades History" page) with a cumulative return of 251.75% (a $1,000 investment grew to $3,518) versus 2.50% for buy and hold. Yes, we fully realize that most of these gains were achieved during the early years and that since 2004 winnings have been harder to come by, but this is exactly the point of sticking with an investment system for the long term. The stock market will simply not oblige by constantly delivering nice trends and high volatility. Trendless, low volatility periods during which no stock market investor makes money, regardless of strategy, are not uncommon but they do not last forever. Throwing in the towel during such a phase will insure that you will not participate when strong trends resume.

You cannot let short term losses destroy your long term investment strategies.

While, for some, blaming and cursing the market or TimingCube or the Trend Timing approach for your investment woes can feel good and provides temporary relief, it is wholly inadequate when it comes to learning to become a better investor and managing your wealth building program.

Those of us getting overly flustered by one day losses or successive losing trades have clearly not done their homework in setting proper expectations and understanding what is involved in achieving large long term gains in the stock market. Being aware of potential equity drawdowns, for example, is part of having realistic expectations. Looking at our live track record since 2001, our largest drawdown using a Long and Short strategy applied to the Nasdaq 100 as a measure was 24.22%, without leverage. Recent drawdowns, even when factoring in last summer's whipsaws, pale in comparison with history. Before you lose faith because of the potential drawdowns of Trend Timing, you need to remember that limiting drawdowns is actually why you need Trend Timing, because during the same period a buy and hold investor on the Nasdaq 100 experienced an 82.98% maximum drawdown!

As individual investors we have a lot of on-going responsibilities. Beyond selecting and following a market timing strategy there are many other elements such as strategy and investment diversification, goal and expectation setting, risk and money management, which are all specific to our personal situation and critical to our ability to stick to our wealth building program for the long term.

FAQ of the Week

Question: Is it time to give up on IFN?

The short answer is yes!

The fact that IFN , a closed-end ETF focusing on India, stopped following the broad Indian market as measured by the India BSE 30 index was already clear late last year (see "What is wrong with Indian funds?". The only other ETF (IIF ) has not done much better.

We announced the availability of the iPath MSCI India ETN (INP ) in the December 22, 2006 FAQ of the Week entitled "What is an ETN and is it as good as an ETF?" INP is not an ETF but an ETN (Exchange Traded Note). ETNs are unsecured debt instruments and carry the credit risk of the issuer, Barclays Bank PLC in this case. While a little over two months of history is not much to go by, it is nevertheless a good early indicator that INP tracks the index well and that IFN continues to dramatically under perform as seen on the chart below. For anyone intent on participating in the Indian market, INP seems to be a lower risk alternative to the badly lagging IFN.

IFN and INP versus the India BSE 30 index

Warm wishes and until next week.

The TimingCube Staff