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

Market Update

Stocks tacked on more losses over the 5-day span, with all major indexes closing the week at their lowest level of the year. The market remained fairly flat Monday despite climbing oil prices and a weaker-than-expected reading on manufacturing activity: the ISM index came in at 48.3 for February, showing that the sector is contracting and that we may be on the verge of a recession. Market action was similar the next two days, as stocks moved back and forth to finish almost unchanged by session's end. Unfortunately for the bulls, the respite proved to be only temporary, as selling resumed in earnest Thursday after the release of negative financial news: the delinquency rate on mortgages and the number of foreclosures are at record highs and the Federal Reserve announced that for the first time since 1945, Americans carry more debt on their homes than they have equity. The Nasdaq Composite finished 2.3% lower on the day. Stocks tried to post a rebound Friday but ended up with more losses instead, as a poor employment report for February proved too tough to overcome. The Labor Department announced that 63,000 jobs were lost last month, the most since March 2003, instead of the 25,000 gain that economists had expected. The disappointing number once again raises fears that the U.S. economy may be contracting.

The Nasdaq 100 , S&P 500 and Russell 2000 posted respective losses of 2.16%, 2.80% and 3.80% on the week. All three indexes remain located well below both their 50-day and 200-day Exponential Moving Averages (EMAs).

For its part, our World Index Ranking underperformed its U.S. counterparts this week with a loss of 5.30%. The portfolio consists of the 5 top-ranked world indexes as of February 29, 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.

With all major indexes closing at new 2008 lows, our current Sell signal remains in effect.

Trend Timing School

Investing in the seventies

As perfectly summarized in the Market Update above, this week brought its additional share of evidence pointing to the advent of stagflation. The Commerce Department reported that during the 4^th quarter of 2007, GDP growth came to a screeching halt... 0.6%! The previous quarter was still at 4.6%. The U.S. dollar reached new all-time lows against the Euro and just about anything else. U.S. jobless claims data showed a sharp rise. Crude oil prices surged to a new record over $106 per barrel while the CCI index which tracks various commodities broke its all-time high as well. We will let the economists and market pundits make the final call when history is written, but all of this sure looks like oncoming (like a freight train) stagflation to us.

The geo-political context may be somewhat different, but the seventies are replaying themselves in front of our eyes, notwithstanding Fed Chairman Bernanke protestations to the contrary. Maybe wages have not yet joined the parade of increases, but they already have in China and this will trickle through the supply chain sooner or later. Even without wage hikes, the spiraling costs of food and energy will eventually force workers to seek higher compensation.

To gage the effect of inflation over time we use the Consumer Price Index (CPI). Yes, we recognize that many argue that the government has over time distorted the measurement and is actively massaging the numbers to understate inflation; nevertheless it is an official reference point, and the Bureau of Labor Statistics (BLS), a branch of the U.S. Department of Labor, is its official tracker (find all CPI data here).

The latest inflation numbers show the CPI rising at an annual rate of 4.4%, much higher than where the Fed and investors would like to see it. Yet the real inflation rate, the one we all live and feel every day, is better estimated from the following BLS figures: food rising at a 5.7% annual rate, flying is up 8.9%, hospital services up 8.5% and gasoline up 34%!

So, how were the seventies? The main reason they are remembered on Wall Street as the "sour seventies" is that despite great expectations for the decade, the stock market returned nothing. The S&P 500 ended barely 16% higher than where it started, resulting in dismal annualized returns. The decade started with a boom and a strong cyclical bull market which led to a major top in January 1973. This top was followed by a devastating bear market which lasted for 21 months and cut the S&P 500 price in half. To make matters worse, the bear market was followed not by a strong bull market, but by years of stagflation induced trendless markets. In fact, the highs achieved in early 1973 would not be seen again until July of 1980.

The yearly CPI averaged 7.7% between 1970 and 1980, the year it reached a high of 13.5%. Reality for most people, as measured by how much your dollars really bought, was much worse. Energy prices shot through the roof and 30-year mortgages were at 18% or more.

So, attempting to learn from the experience accumulated during the seventies, what should we invest in during stagflation? The answer to that question is at least in part dependent on how you invest. For example, if you are a buy and hold type of investor, we would highly recommend you simply avoid the stock market all together for the next few years.

Trend Timers use their trend following approach to tame the stock market. The directional signals keep us out of harm's way, or add to our winnings, during the most severe declines. During rallies, our world market momentum model points us to the strongest geographies to be in. While this combination of strategies is proven to drastically outperform buy and hold over the long run, the largest gains are achieved when the markets show trending patterns and volatility, the more the better. However, during periods of stagflation, the stock markets can be in a funk and remain trendless for years, making trend following profits harder to come by. The best places to look for returns during stagflation are not in equity markets but in totally other asset classes.

In times of high inflation you want to have as little debt as possible and as many hard assets as possible. Stuff is king. Ironic that the Federal Reserve just reported that Americans' home debt exceeded their equity (52.1% versus 47.9%) for the first time since they began tracking the figures in 1945. The general rule is that you do not want to hold anything which devalues with inflation. Cash, when held in U.S. dollars, will devalue at least at the published inflation rates.

Most debt instruments like treasuries, while normally benefitting from their safe-haven image, will not prove enough to overcome the erosion in purchasing value experienced by the dollar. Just this week, the yield on five-year Treasury-Inflation Protected Securities, also known as TIPS, fell below zero for the first time since 1997 because desperate investors have bid them up to unprecedented levels. A yield below zero means that you would pay the interest for the pleasure of owning this fascinating instrument (we doubt there will be many takers from here on out).

We are also observing a steeper Treasury yield curve caused by the shortest term rates falling much faster than the long rates. At some point the long rates will start heading up with a vengeance, making these instruments bad investments.

Real estate, land, commodities, collectibles and precious metals are all areas which will hold their value best in the face of stiff inflation. Gold and silver for example have been signaling inflationary times for years and have been some of the best investments over the last 12 months. Some noticed that gold for one has just surpassed its all-time high and wonder if it is not too late? In inflation-adjusted terms, gold would actually have to reach some $2,177 to reach the $850 peak of 1980, or some 2.2 times higher than today. And the inflation-adjusted high for silver is at about $126, or some 6 times today's price. This secular commodity bull market seems to have a long way to go.

While our TimingCube service will continue to keep track of the general direction and relative strength of world stock markets, it does not assist outside of equities. For this, our sister service ETFTide can provide a complementary solution. By encompassing ETFs which represent diverse asset classes, ETFTide's momentum ranking model will propel defensive securities such as commodities to the front when equities falter, as they have recently.

FAQ of the Week

Question: Do retirement accounts incur trading delays?

The questions we receive tell us that many subscribers with retirement accounts are confused about the settlement period and whether it affects their trading.

As a refresher, the settlement period is the time it takes your broker to finalize your orders. The trade date is when your broker executes the trade and the settlement date is when ownership of the shares actually transfers from the seller to the buyer, and when money and shares officially change hands. The settlement period varies between investment types but it is typically three business days for listed equities, such as most ETFs, and one day for mutual funds.

With the exception of a Cash signal, all of the transactions with the TimingCube system involve two trades, selling an existing position and buying a new one. The confusion comes from the fact that during the settlement period you are not free to dispose of the shares you bought or redeem the money from sold shares. Many falsely interpret this to mean that you cannot buy the new ETF until the shares of the ETF you are selling have settled three days later, unless you have the cash available in your account. In fact, your broker will generally let you place both the sell and the buy order on the same day, as long as the securities have compatible settlement periods. Selling an ETF and buying another is fine, even in a retirement account because there is no margin or loan involved. Your broker knows that in three days he will have the proceeds of the first trade to pay for the second trade. One case which would not be allowed is selling an ETF and buying a mutual fund, because it would require the money to be there in one day to settle.

Warm wishes and until next week.

The TimingCube Staff