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

Market Update

This holiday-shortened week was once again marked by heightened volatility. Scared by the last-minute bargain buyout of Bear Stearns by JPMorgan with the help of the Federal Reserve, investors sent both the S&P 500 and the Nasdaq Composite to new lows for the year. Both indexes managed to recover some of the losses by session's end but still finished in the red for the day. With the Fed's surprise announcement on Sunday that it was cutting its discount rate by 25 basis points, market participants were expecting the Central Bank to act aggressively at its scheduled Tuesday meeting. The Fed did not disappoint as it cut the funds rate by three-quarters of a point to 2.25%. The news helped the major indexes leap 3.5% or more for the day. Stocks reversed course Wednesday, giving back a good chunk of the previous session's gains as worries that the Fed's actions might not be enough to shore up the economy persisted. A better-than-expected manufacturing report gave stocks a boost on Thursday. The Philly Fed survey came in at -17.4 vs the -18 reading economists had anticipated. The news combined with a strong rebound from the battered financial sector to yield a daily gain of more than 2% for the major averages. Trading volume for the session was very high, in large part due to the fact that Thursday was a so-called "quadruple-witching" day that marks the simultaneous quarterly expiration of options and futures.

The Nasdaq 100 , S&P 500 and Russell 2000 posted respective gains of 2.23%, 3.21% and 2.79% 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 portfolio underperformed its U.S. counterparts this week with a loss of 2.82%. 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.

Our current Sell signal remains in effect.

Trend Timing School

Time to protect yourself

The week on Wall Street was exciting and, thanks to two big daily gainers, stocks bucked recent trends as most indexes managed to recoup some of the earlier losses to close the week in the green. Do not for one minute get lulled into believing the perennial bullish pundits and other government mouthpieces who are calling for a market bottom. Notwithstanding the week's action, we are in the early stages of a bear market and it is imperative that you take steps to protect yourself.

Formal bear market definitions vary widely but, as we outline below, our guidelines have been met. We will not attempt to explain or justify the financial media's near silence on the matter, but we sense the spreading notion that anyone uttering the words recession or bear market is somehow unpatriotic.

The most common bear market definition is a price decline of 20% or more on major indexes. The Nasdaq Composite is down 22.7% from its high on October 30, 2007 and the S&P 500 is down 20.5%. The Dow Jones Industrials has held up somewhat better by dropping only 14.6% from its peak. We'll take two out of three and call it a bear.

Another traditional bear market indicator is the crossover of the 10-day and 200-day Exponential Moving Averages (EMAs), and all major indexes have met that test. From a charting point of view, for those who prefer the visual approach, we offer the Nasdaq Composite index in Chart 1 below which leaves little doubt as to the intermediate trend. The uptrend line which had been in place since 2002 providing support for the bull market has clearly broken down, as it has for other major indexes. What is even more worrisome is that on the very long-term charts, the uptrend line which was in place since 1982 marking one of the longest secular bull markets, is also breaking down. A lot of technical damage has been done and the long-term picture is not pretty. What this suggests is the onslaught of the first cyclical bear market of a new secular bear market. Not good.

Chart1: Bear market onslaught



Also shown in Chart 1 is the Relative Strength Index (RSI) which is approaching oversold levels. Momentum oscillators like RSI are not very good timing indicators during sustained bull or bear phases because markets can remain overbought/oversold for extended periods. Still, a bounce off the current lows would not be unexpected, and it could even be surprisingly strong.

Bear markets are famous for one day wonders, dead cat bounces and other bull traps. Most investors would not guess that the strongest one day gains all occur during bear markets. The 4% jump we saw on Tuesday was a perfect example of the upside volatility bear markets can produce. The bursts of hope and optimism which frequently accompany bear market rallies are legendary. Bear market rallies (sometimes called sucker's rallies) are to a bear market what a correction is to a bull market. Inverse to corrections, bear market rallies are most often defined as an increase of 10% to 20% from an intermediate low. They tend to be very sharp, sudden and short-lived.

A bull trap can be triggered by any number of false signals suggesting a reversal of the declining trend when, in fact, the market will resume its decline. Gullible investors are frequently hurt by savvy professional traders who are instrumental in setting the trap, and slamming it shut for profit.

Analyzing the 19 bear markets since 1914, we find that on average they lasted one and a half years and generated losses of 36.6%.

We are not making any forecasts. The current rally could well be the real deal and be strong enough to reverse the mid-term trend and trigger a new Buy signal. It could even keep going to end this bear market as the shortest and shallowest in history, and go on to set new bull market highs. But the odds do not favor such a scenario.

During bear markets investor psychology reverses. The fabled "buy the dip" attitude gives way to "sell the rallies". Contrary to what we have grown accustomed to during the bull market, in a bear market the odds are that:

• Support levels will be broken and become overhead resistance
• Rallies will fail to set new highs or change the trend
• The bear market will not end soon

During bear markets smart traders and professional money managers like our own MarketTrend Advisors apply their talents to find intermediate discretionary profit-taking opportunities and re-entry points, but most of us are best served by sticking with the program and the signals to the letter. Volatility and emotions run too high in a bear market to improvise.

If you came on-board mid-signal and/or have not yet acted on the active Sell signal, we urge you to read the FAQ of the Week below.

FAQ of the Week

Question: Is it too late to switch?

New subscribers (and some who have been asleep at the wheel since early January) are wondering if it is too late to take the plunge and follow the active Sell signal.

Looking at our Model's Sell signals backtested to 1989 we find the following statistics:

Table 1: Sell signal statistics

Average Sell duration	55 days
Shortest Sell	15 days
Longest Sell	128 days
% of time spent in Sell	21%
% of time spent in Sell (during bear markets)	63%

At 74 days of age our current Sell signal is past the average duration, but is well short of the longest which lasted 128 days. The trouble with averages is that they do not provide a good tool to forecast the next signal; their durations are simply too variable. One statistic of more interest is that while on average we only spend 21% of the time in Sell signals, during the last bear market of 2000-2002 that number shot up to 63%. This means that during bear markets, Sell signals tend to last longer and be more frequent.

Echoing the theme of the preceding Trend Timing School article, the best advice we can give you is to protect yourself. As a minimum, we urge you to exit long equity positions and move to cash. The downside risk is just too great during bear markets. If you want to join the signal and go short, we recommend doing so incrementally over the next few weeks to reduce the entry risk.

Warm wishes and until next week.

The TimingCube Staff