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

Market Update

In recent weeks a new pattern seems to have emerged which sees Mondays being mild continuations of the previous week's mood followed by Tuesdays delivering strong moves in the opposite direction. This week was no exception with Monday delivering small gains on anemic volume, followed by a drubbing of 2% or more on most indexes on Tuesday. Once again the housing industry played a central role in spreading a negative tone with a report that foreclosures reached record numbers during the fourth quarter of last year. The combination of this news with renewed concerns about the subprime lenders sent markets into a one day plunge. Despite a nice reversal on Wednesday which saw sharp early losses erased for gains on higher volume, by week's end markets could not completely undo the damage done on Tuesday. Note that the significant volume increase which accompanied Friday's mild losses was at least in part amplified by the quarterly options expirations (quadruple witching Friday).

For the week, the Nasdaq 100, Russell 2000 and S&P 500 respectively lost 0.14%, 0.81% and 1.13%. All 3 indexes continue meandering between their 50-day and their 200-day exponential moving averages (EMA). Our Cash signal remains in effect.

With a "Buy and Rebalance" strategy the World Index Ranking portfolio posted a 1.33% drop this week and retains a meager gain of 0.25% at the mid-point of our 4-week rebalancing period. Please note that unlike the "Buy and Rebalance" strategy which remains invested at all times, 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" strategies. Please go to our "Strategies" page for all the details.

Trend Timing School

Baby Boomers and the stock market

The term Baby Boomer is well known and used almost globally, even in countries which did not really experience a demographic surge, and is generally defined as the people born after World War II, between 1946 and 1964, or thereabout. Much has been written about the possible causes of Baby Booms and history shows that they frequently follow positive events such as good crops or a victory in a war, and they generally coincide with periods of political stability and solid economic growth.
It is not so much why the Baby Boom occurred in the first place as its future impact on the stock market and the economy that matters. Many studies have established a direct link between the growing Baby Boomer driven money influx into equity markets and the long bull markets of the eighties and nineties. As the first of that generation are now beginning to retire we need to seriously ponder what the impact on our investments might be.

There is not much debate about when the post World War II baby boom began and that is 1946. As to when it ends is subject to much debate and argument by demographers and historians who place it variously from 1957, which is when birthrates started declining again, to 1960, 1964 or even 1968. Regardless, it is not really when it ends that matters but when it starts. What everyone wants to know is when the wave of change arrives and how big it is going to be. Well, it starts now and last about 20 years.

75 to 80 million Americans, depending on who is counting, represent a huge population wave, called by some a "demographic tsunami", which has dramatically affected all sections of life as the boomers come through them, from overwhelming hospital nurseries, multiplying the number of schools for two decades, to being a constantly aging but prized consumer target group. They represent just shy of one third of the U.S. population and, now aged in their mid-forties to early sixties, they have become the wealthy generation which commands the lion's share of the population income and which is also targeted by marketers as the segment purchasing the majority of high ticket items.

The fact that the populations of most industrialized nations are showing similar current and projected future aging is directly linked to the aging of their Baby Boom generation. The direct consequence of aging populations is that the ratio of working wage earners (read taxpayers) to retirees (read Social Security and Medicare recipients) is projected to worsen for the next two decades. Some even describe the Baby Boomers as the sucker generation. During their productive years they have and are still laboring to fund the retirements of the previous "golden generation", and when their turn comes, the sheer demographic realities will be that there are too few people in the younger working force to keep financing the retirement and other social benefits of the larger Baby Boom generation.

Returning to the potential impact of the coming Baby Boomer retirement wave, it is plain to see that it is bound to continue causing intractable changes whether we like them or not, and since the effect of the "incoming" wave was wildly beneficial for the stock market it stands to reason that the "outgoing" phase could be bad. The dark side of the boomer tsunami for the stock market can generally be described in two separate but compounding scenarios:

For sure these are generational events of such a complexity and scale that we highly doubt anyone can accurately model or otherwise project what the real impact will be. What we know is that the future is likely to be interesting and loaded with drama, and that crisis brings opportunity to Trend Timers.

FAQ of the Week

Question: What is short covering?

We mentioned short sellers covering their positions as a likely cause of the market advance in last week's "Market Update" and soon realized that many subscribers may not fully understand shorting transactions, what short covering means or why at times it triggers market rallies.

The simple definition of short covering is the action of closing out a short position by buying back the shares which were sold when the short position was taken. Note that usually your broker loans you these shares from his inventory, with interest, and you restitute them when you close the position.

We need to stress that the scenario and strategy we describe in the following example relates to short term traders and not us Trend Timers. Having speculated on a correction, they had established short positions and benefited from the drop since the highs of late February. At this stage traders look for an exit point, an opportunity to cash in the profits. In last week's example - refer to the Nasdaq Composite chart below - technical traders looked at a possible support area around 2340 using Fibonacci retracements and other indicators. If the support had broken down, they would have kept holding their short positions, but as the line held, it signaled the possible end of the downward correction. This was taken by a sufficient number of short sellers as a cue to cover their positions that they actually caused markets to rally.

Nasdaq Composite index chart

Traders beware; the market may not be done testing the support line.

Warm wishes and until next week.

The TimingCube Staff