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

Market Update

Markets continued their recovery off the lows that were hit on Wednesday, March 14 by rising sharply this week. Most of the action took place in the hour and forty-five minutes that followed Wednesday's Fed announcement. During the first two days of the week, stocks had managed to move higher on light volume. They were trading sideways Wednesday until the Fed announced that it was leaving interest rates unchanged for the sixth consecutive time. There was nothing really new in the Fed statement, but investors interpreted it as more dovish even though the Fed noted that core inflation remains "somewhat elevated." A sizable rally ensued, which propelled the Nasdaq Composite 2% higher by Wednesday's close. Digesting their gains, stocks did not move much for the rest of the week.

The Nasdaq 100 , S&P 500 and Russell 2000 respectively gained 2.97%, 3.54% and 4.01% on the week. All 3 indexes are now back above both their 50-day exponential moving average (EMA) and 200-day EMA.

For its part, our World Index Ranking portfolio outperformed the US averages as it posted a 4.51% gain this week. The portfolio consists of the 5 top-ranked world indexes as of March 2, which marked the beginning of the current 4-week holding period. 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.

Where do we stand now, following this week's sharp rise? There is no question that the price action has clearly improved. The volume picture, however, is not as clear. With the notable exception of Wednesday's trading following the Fed's announcement, volume has generally been weak during up days, signaling a lack of participation by large institutional investors. It is therefore still questionable at this point whether the current rally will last or is just a flash-in-the-pan. Our Cash signal consequently remains in effect. You can read more about how Cash signals are triggered and how at times they help us keep our powder dry for the next trend in this week's FAQ below.

Trend Timing School

Portfolio allocation

In our recent article on "The importance of money management" (weekly update sent on 3/9/2007) we enumerated the key activities involved such as setting objectives, the selection of strategies, and risk/reward management. Another critical task mentioned was portfolio allocation. Our portfolio is simply the group of all our assets, and a sad reality is that most of us never consciously think about and select the asset allocation that makes the most sense for us. As life happens we somehow end up with a collection of assets, and the mix is most likely not optimal.

For example, few people ever make the conscious decision of investing 20%, 30% or more of their assets (together with more borrowed money) in real estate. Yet that is exactly what most home owners do. Yes, we all need a place to live, but in certain areas and during certain periods, real estate can be a lousy investment. Many of us, after a heavy down payment and mortgage payments, feel that after all these years this money invested in the stock market would have grown to much more than the price of our home. On the other hand there are also many who have refinanced their homes (probably with subprime loans) and taken out their equity to spend it on SUVs and other ephemeral goods, and who will probably soon regret not having kept that "real estate allocation". But we digress.

Before getting into allocation proper it might be useful to ask why we need asset diversification in the first place. Simply put, diversification is the key ingredient in any risk management strategy, and we have been taught not to place all our eggs in one basket. The idea behind asset diversification is that non correlated asset classes do not go through market cycles together and that the losses in one class will be offset by gains in others, thus reducing overall portfolio risk.

Yes, by necessity we are all involved in asset allocation in order to best serve our specific circumstances and the need to satisfy different and sometimes conflicting objectives. For example, anyone of working age should save and set aside a safety buffer in cash or other liquid and readily accessible vehicle as contingency for a job loss. How much you set aside depends on numerous personal factors such as being single or providing for a family, years to retirement, your spending habits, how long a period of time you estimate could be required to find another job, etc. Other commonly accepted asset allocation strategies would be for someone in their younger earning years to assign a large percentage of assets to equity investments for long term growth and a small fraction to fixed income, versus a retiree who would reverse that distribution to maximize income generation and limit risk. This type of asset allocation is justified and is a must for everyone.

The amount of wealth we have can also dictate or at least curtail our allocation strategy choices. For example a retiree with just enough money to generate the income necessary for living cannot take any risks and is forced to assign everything to income generating investments. A wealthier retiree with a bigger cushion is likely to be more aggressive with his/her investments, be allocated more heavily into stocks and be willing to accept the associated risks to their capital. Wealthier investors are also more likely to allocate a portion of their portfolio to other asset classes such as collectibles (fine arts, jewelry, etc.), commodities, and precious metals, as everybody should be able to.

The aspect of asset allocation we generally take exception to is as it relates to the moneys we have left after the safety net, the income generation requirements and other necessities have been taken care of. It is how we allocate the money we are ready to put to work on our long term wealth building endeavors. For that portion of their portfolio, buy and hold investors use asset allocation as a risk management technique. Diversification has always been a vital corollary of buy and hold investment strategies. The theory is that by holding on to stocks through thick and thin you need to reduce how much of your portfolio is exposed to that downside risk. You place the balance in other assets such as income generating investments which help offset losses in equities during downturns and bear markets.

This view has permeated much of the financial industry. A good example of this is found in the numerous "asset allocation calculators" or other "portfolio management tools" available from various sources. Their questionnaires require personal information such as age, risk tolerance, investing experience, etc. The output invariably includes a pie chart with colored slices proportional to the percentage allocated to each asset class. If you use your broker's tools the asset classes are likely to be restricted to investments they offer, and typically includes:

• Large cap equities
• Small cap equities
• International equities
• Fixed income
• Cash or equivalent

The flip side of such diversification and traditional asset allocation is that while it softens the effects of losses in some asset classes, it also averages down your portfolio's return. The returns of the best performing assets are guaranteed to be watered down by the others. As Trend Timers we do not see how taking a position in bonds, for example, is proper protection against a severe correction or bear market. Yes, we always recommend against non-diversified investments, single country or currency approaches, but we first and foremost do not recommend holding a long equity position through a severe down turn.

This is why we have always preferred our asset allocation dynamic and strategic rather than static. We are invested in stocks during all meaningful up trends, and not invested in stock (or short the stock market) during the larger corrections and bear markets. In addition, the World Index Ranking pinpoints the markets with the strongest momentum and the most likely to outperform. Thanks to these directional and targeting indicators, however imperfect, we can lean towards the "concentration of force" principle instead of averaging down with fixed asset allocations.

FAQ of the Week

Question: Do you ever override the Model?

Never! And that includes the administration and issuance of Cash signals. Like Buy and Sell signals the Cash signals are an intrinsic part of the Model and get triggered automatically. During early TimingCube years the Model incorporated only "stop-loss" type of Cash signals of the 9% and 15% variety, but since last summer we have a new type of Cash signal built into the Model which detects the presence of conflicting trends, or the absence of trend, to position us on the sidelines until a clear dominant trend emerges.

Many of us harbor more or less educated opinions about where the market is headed, some even have convictions. The bearish crowd wants to see a Sell and decries our Cash signal as a band aid for our fears. In all the years of working with the Model we must confess that we have never seen it frightened. Regardless, we have not heard much from the bearish camp this week, instead it is the bulls declaring the pull-back over and done with, and arguing that the Cash signal does nothing but delay our participation in this renewed rally. One of these days one of the two factions will be right, a clear trend will emerge and our Model will trigger another signal. In the mean time we much prefer the safety of the sidelines rather than getting trashed and whipsawed trying to exploit short term swings or one's opinions about where the market is headed. These are not the trends we seek to ride.

Warm wishes and until next week.

The TimingCube Staff