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

Market Update

The major averages posted solid gains this week. The Nasdaq Composite managed to clear the 2,500 level Monday, buoyed by positive earnings news and a bullish retail sales report. The move higher occurred on lower volume, though, and the index proceeded to relinquish some of its gains over the next 3 days on increasing volume, showing a lack of commitment on the part of institutional investors. The same type of action was observed on the Russell 2000. On the economic front, consumer prices increased by 0.6% in March, the sharpest rise in almost a year. However, the Core CPI, which excludes food and energy prices, only rose a modest 0.1%. Stocks finished the week with a broad rally as investors embraced positive earnings reports from companies such as Google, American Express and Caterpillar, sending the Dow Jones Industrial Average to a new all-time high. Volume on the Nasdaq proved to be disappointing as it was similar to Thursday's trade, despite the fact that Friday was an options expiration day, which typically sees significantly increased trading volume.

The Nasdaq 100, S&P 500 and Russell 2000 respectively gained 1.6%, 2.17% and 1.16% 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 underperformed the US averages as it posted a 0.92% 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.

Despite the week's positive action, our Cash signal remains in effect.

Trend Timing School

Investing in China

We are not economists and we do not specialize in Chinese stock markets, but we read the many reports and analysis by the experts on the China phenomenon, and the conclusion we derive is that the vast majority of them point to continued growth for many years to come, with intermittent hiccups. The fact that China is simultaneously threatening the U.S. hegemony on world financial markets is beside the point for most investors.

It has been almost two months since our Model triggered the current Cash signal, and we have mostly forgotten that what set off the decline was a drubbing in Chinese stocks. As a perfect follow-up to last week's "China: opportunity or threat?" Trend Timing School article, China announces sizzling economic growth data of 11.1% for the first quarter. The flip side of this positive news is that the Chinese Cabinet also declared this week that it will take steps to keep the economy from overheating. Which in turn caused the Chinese markets to take another one day tumble of nearly 5% from investor fears that the Chinese Government would hike interest rates to cool the economic expansion. It comes as a timely reminder for anyone intent on exploiting the China bull market that the higher the profit potential, the larger the volatility and risk.

Yet, despite the compelling reasons to do so, investing in the Chinese economic juggernaut is not an easy proposition for U.S. investors. In fact, our own World Index Ranking service is currently unable to include China for a couple of key reasons. For starters, the correlation between Chinese and U.S. stock markets has been poor. Our last review of the correlation of world markets (see "The correlation coefficient") China finished dead last with a negative coefficient which indicates inverse correlation. Other reasons which prevent us from including China have to do with the absence of market indexes with sufficient published history and the lack of index ETFs that track the broad Chinese stock market (read "Why are Chinese and Russian markets not in the World Index Ranking?" for more details).
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At first glance, there are plenty of Chinese investment vehicles to choose from. The table below presents available China related funds. We say "China related" because in fact, only the very young CAF closed-end fund directly invests in mainland China. Of the index funds in existence, the iShares FTSE/Xinhua China 25 Index Fund is the only practical choice as PGJ and GXC are too small, illiquid and unproven to be considered. Also, we do not view the closed-end fund choices (CHN , GCH , TFC , JFC and CAF ) as serious contenders because of the numerous deficiencies of such funds (lack of transparency, whim of the manager, discount/premium and higher costs). While some of them have had superior returns of late, they can be highly unpredictable.

China related funds

Index ETFs
Ticker	Fund Name	Inception	Assets	Return*
FXI	iShares FTSE/Xinhua China 25 Index Fund	October 2004	$5.3B	63%
PGJ	PowerShares Golden Dragon Halter USX China Portfolio	December 2004	$253M	64%
GXC	SPDR S&P China ETF	March 2007	NA	NA
Close-End Funds
Ticker	Fund Name	Inception	Assets	Return*
CHN	China Fund	July 1992	$455M	95%
GCH	Greater China Fund, Inc.	July 1992	$411M	122%
TFC	Taiwan Greater China Fund	May 1989	$113M	68%
JFC	JF China Region Fund	August 1992	$104M	101%
CAF	Morgan Stanley China A Share Fund	September 2006	NA	NA
* Since 1/3/2006 using a Long and Short strategy

While attractive, the chart below demonstrates that the FXI fund is far from the perfect investment vehicle to tap into mainland China. The reason is simple: there is a huge disconnect between the real Chinese stock market and the Chinese stocks International investors can invest in. The "real" stock markets in China are the Shanghai and Shenzhen exchanges. Yet, because China still is a very secretive and closed country, International investors can only invest in a select few large cap companies traded on the Hong Kong stock exchange . The FTSE/Xinhua 25 Index is also overly concentrated as more than 40% of its weighting is in the Financials sector. The best way to contrast the two worlds is to show the real China index, the Shanghai-Shenzhen 300 Index which represents 300 of the largest companies in mainland China (about 60 percent of the market value in the Shanghai and Shenzhen markets) against the FTSE/Xinhua 25 Index which consists of the 25 largest companies in the Chinese equity market that are available to International investors through the Hong Kong stock exchange. Alas, this is the index which is tracked by the FXI fund. While FXI's one year return of over 40% is nothing to sneeze at considering meager U.S. stock market returns, it comes far short of the nearly 200% gains experienced by real China stocks.

FXI returns compared to Chinese indexes


A more tractable alternative is to capitalize on growth in China by investing in companies and countries which derive or are expected to derive a substantial portion of their revenues from exports to or operations in mainland China. Over the last 20 years, a regional pan-Asian production system has come to be with China as its focal point. China imports intermediate products, parts and components such as electronics, from the more advanced Asian economies (mainly Japan, Malaysia, Singapore, South Korea, and Taiwan) and assembles them predominantly for export to non-Asian markets. For our part, until there are some more legitimate means to invest in mainland China we will favor the indirect approach through the "feeder countries". As fate would have it, the main ones are listed and prioritized in our World Index Rankings.

FAQ of the Week

Question: How does trend following compare with stock picking?

It is nearly impossible to generalize because there are so many possible variations between strategies. For example, trend following can be applied to broad market indexes or to individual stocks, and can be targeted at very short trends or very long ones. Conversely, stock picking comes in an infinite number of flavors. To make comparisons meaningful we will use the specific systems offered in our family of services.

Much could be said to compare the different investment systems, such as the fact that long and short trend following approaches distinguish themselves when markets are exhibiting strong trends, up and down, but stock picking systems which are invested 100% of the time shine in bullish times. The simple truth is that different investment systems work best under specific market conditions and at different times.

To provide a comparative glimpse of their respective performance in the recent past, the table below ranks the different systems according to their return since the beginning of 2006. Also listed is the most recent period of 2007 Year-To-Date (YTD). The conclusion is that over the past 15 months stock picking with a growth slant (TradeGuru Folio A) has outpaced other systems with an impressive return of 55.36%. Folio A's 2007 YTD return of almost 20% is not bad either. Second and third places go to the World Index Ranking strategies. The pure value orientation of Folio B joined the TimingCube Long and Short strategy came in the same performance ballpark as a simple buy and hold strategy, not surprising during a period mostly devoid of downturns.

More information about the TradeGuru stock picking service can be found at www.tradeguru.com.

Relative returns of investment strategies (ranked by returns since 2006)

	Returns (1)
	Since 2006	2007 YTD
TradeGuru Folio A	55.36%	19.59%
World Index Ranking Long and Short strategy (2)	42.17%	-5.82%
World Index Ranking Buy and Rebalance strategy	32.84%	6.83%
TradeGuru Folio B	20.30%	4.37%
Nasdaq 100 Long and Short (2)	18.13%	-5.07%
S&P 500 buy and hold	17.81%	3.69%
(1) Returns as of April 19, 2007, since 12/30/2005 and 12/29/2006 respectively
(2) Using the current Model which went live on July 14, 2006

Warm wishes and until next week.

The TimingCube Staff