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

Market Update

The major averages moved modestly higher in what has been a see-saw week. Stocks did not move much the first 2 days of the week, before retreating Wednesday on heavier trade after the release of the last Fed meeting's minutes showed that officials remain preoccupied with inflation pressures. Higher oil prices also did not help. Stocks were able to bounce back and recoup their losses Thursday, albeit on lower volume. The PPI (Producer Price Index) for March was released Friday and came in at 1%. The number seems high, but the Core PPI, which excludes food and energy prices was flat in March, therefore alleviating some of the inflation concerns that had built up following the release of the Fed minutes. The news helped stocks post moderate gains on light volume Friday.

The Nasdaq 100, S&P 500 and Russell 2000 respectively gained 0.22%, 0.74% and 0.63% on the week. All 3 indexes rest above both their 50-day exponential moving average (EMA) and 200-day EMA.

For its part, our World Index Ranking portfolio again outperformed the US averages as it posted a 1.59% gain this week. The portfolio consists of the 5 top-ranked world indexes as of March 30, 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.

Our Cash signal remains in effect.

Trend Timing School

China: opportunity or threat?

That's the trillion dollar question. And the short answer is both. The Chinese economy has been growing by leaps and bounds for years and is unlikely to slow down anytime soon. As millions of Chinese move into middle-class, their new found prosperity represents huge demand U.S. companies and others are falling over each other to serve. The Chinese companies which are fueling the economy through manufactured goods exports appear to be just the thing for investors trying to revitalize and rejuvenate their sagging investment portfolios. On the other hand, as the giant awakens it causes massive imbalances which have the potential to directly threaten the U.S. economically and geopolitically.

Economists looking for the root causes for the incredible Chinese expansion are generally pointing at two likely explanations:

2006 marked the fifth consecutive year the U.S. trade deficit set a new record, reaching a staggering $765 billion, of which $233 billion was with China, more than any other country. The bottom line is that the U.S. is now a developed and mature economy with an expected growth rate of 2-3% over the next five years, while China is in full development phase with economic growth projected at 7 to 8% over the same period.

While China's economic growth is bound to run into problems along the way and experience temporary slowdowns, the general consensus is that it is most likely to continue for decades to come. Incredible as it seems, the rise of China as an economic powerhouse has largely gone ignored by the West. China is sneaking up. In his book "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East", Clyde Prestowitz voices what more and more pundits are predicting: that powerful converging trends are shifting wealth and power to Asia. He warns of America's increasingly unsustainable trade deficits and the equally unsustainable buildup of massive dollar reserves in places like Japan and China.

The reason this is such a big deal is that the Chinese central bank is actually financing the massive U.S. trade deficit to the tune of about $1 billion a day. Without those loans, U.S. interest rates would spike upward, the dollar would plummet and the economy would go into a recession. And you know what that means for the stock market. Some go as far as characterizing the relationship as life support. If China does not finance our daily deficit, the patient dies. As a result, China is now the second largest owner of U.S. Treasuries. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).

The sadistic twist is that with close to a trillion in dollar denominated assets China is not anxious to undermine its value. China cannot stop buying its daily load of U.S. treasuries from the proceeds of the trade imbalance, and they cannot afford to dump billions of dollars on the open market for fear of providing the dollar death knell.

Still, for a very secretive country like China, there has been a lot of news coverage about their publicly stated intent to diversify its rapidly growing foreign exchange reserves. A number of Chinese officials have made speeches recently about creating a new agency to invest in non-dollar foreign currencies, as well natural resources such as gold and oil. In addition to existing currency reserves diversification, officials in Beijing have also been hinting that China will gradually decrease its purchases of dollar denominated assets.

China is facing the very real danger of inflaming protectionist sentiment and measures from its trading partners. In fact, political pressure on the Bush administration to do something about the soaring trade deficit with China is beginning to cause a sea change in U.S. trade policy. Just this week the Bush administration announced it is filing more trade cases against China with the World Trade Organization. The disputes range from lax enforcement of violations of copyrights and trademarks, to China's barriers to the sale of certain U.S. products. This follows a decision last month to impose penalty tariffs on certain Chinese paper imports, a decision which reversed a U.S. free trade policy which lasted for 23 years.

In addition to the recent tariffs and other measures the U.S. government has an open campaign to pressure China to revalue its currency (to make its exports more expensive to U.S. customers) and to clean up "unfair" trade practices. Congress, where Senators voted last month to call for a 27.5 percent tariff on all imports from China if it failed to alter its exchange rate substantially, is joining the fray. This is serious stuff. Some call it war. Be careful what you wish for. The China versus U.S. trade deficit debate is unlikely to be won by bullying tactics yet it looks exactly like the path we have embarked on.

China is clearly developing into a formidable global competitor for the U.S., and while the trade imbalance has been the obvious rub, there is a much broader conflict brewing for world dominance. As China strives to keep its economic engine growing it constantly needs to expand its supplies of raw materials, energy, as well as finding new markets for its exports. In doing so it inevitably runs into the U.S. and its global interests. As the war of words and trade barriers escalates, and the U.S. increasingly flaunting its military power in the Taiwan Strait and other disputed areas such as the Spratly Islands in the South China Sea (due to large gas and oil deposits), the two parties would be well served to open direct communication channels to insure their competitive gamesmanship does not deteriorate into an all out trade war.

In the mean time many still view China as a huge investment opportunity and we plan to expand on the topic of investing in China next week.

FAQ of the Week

Question: What is the best place for my cash?

The goal of Trend Timing is clearly to be invested in the stock market most of the time but, when we are not, we might as well seek cash equivalent investments that do better than strictly cash. This question comes up not only during Cash signals but also during Sell signals for investors implementing Long Only strategies.

By default most brokers will have you set-up with a "cash reserves" or "sweep account" which pays little or no interest and typically has expenses in the 0.5% to 0.75% range. Some rare brokers offer "sweep money market funds" as a cash reserves alternative to their clients, or to their largest clients. If you have access to such an account, take it, it is probably your best choice.

Most money market funds currently yield in the 4.5% to 5% range but are position traded, meaning that you have to buy them like any other fund and pay a commission for the transaction.

Beyond money market funds which keep your capital safe, you can find a wide range of bond and other so-called high-yield funds which can deliver substantially higher rates. While some of these can deliver annual return rates of 15% or more, in doing so they take higher risks and your base capital can fluctuate in value.

For the comparatively short periods of time we are positioned in cash, liquidity is our prime objective and we prefer the safety and expediency of money market funds.

Warm wishes and until next week.

The TimingCube Staff