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

Market Update

It has been another record week for the markets as the S&P 500 closed at its highest level since 2000 while the Dow Jones Industrial Average finished at a new all-time high, crossing the 13,500 mark for the first time. There is no question that investors favor big companies as large caps have been the stars of this multi-week rally. By comparison, smaller companies have struggled. This is illustrated by the fact that the Dow is up 3.57% since our Buy signal was issued on April 25 while the Russell 2000 has lost 0.99% over the same period.
The latest US consumer inflation figures were released Tuesday. The Consumer Price Index (CPI) for April came in at 0.4%, under expectations of 0.5%. The core CPI, which excludes volatile food and energy costs, matched expectations at 0.2%. These readings show inflation to be under control. The market was able to digest a jump in oil prices Thursday as other economic news proved to be more positive: the weekly jobless claims report showed an unexpected drop and the Philadelphia Fed said its business activity index reached 4.2 in May vs forecasts of a 3.0 reading, showing that the region's manufacturing sector is growing. Stocks closed the week by moving sharply higher Friday, buoyed by takeover deals and a University of Michigan consumer confidence report that came in better than expected.

For the week, the S&P 500 gained 1.12% while the Nasdaq 100 was virtually unchanged. The Russell 2000 continued to underperform, as it lost 0.71%. 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 outperformed the US averages as it posted a 1.68% gain this week. The portfolio consists of the 5 top-ranked world indexes as of April 27, which marked the beginning of the current 4-week holding period.

Our current Buy signal is still in effect.

Trend Timing School

Soft landings

The news media and investors focus a lot of their energies on the negative, all the indicators and developments pointing to an economy that is headed for serious trouble, sooner rather than later. The list of possible contributors or triggers to an impending recession is long and features the usual suspects of rising inflation, exploding deficits, sub-prime lending industry collapse, investment banking derivatives induced financial crisis, worsening war or terrorist strikes, etc.

We have ourselves frequently presented potential hard landing scenarios, because being aware of the downside risk of our stock market investments makes us more likely to adopt and implement risk management tools such as Trend Timing. Sometimes however, investors become overly convinced that danger is looming ahead. Fear of market crashes and bear markets prevents them from participating in rallies. During such times it is important to stress the flip side of this argument and for once present the case for the good outcome. The government and a fair number of well respected economists argue that, on the contrary the economy is not headed for a recession but is transitioning nicely to a slower but sustainable expansion, the fabled soft landing.
A soft landing can be defined as the tight balance governments try to achieve, in which economic growth is reduced to a lower but sustainable rate while inflation is kept in check.

Why is inflation feared so much by economists and investors alike? The easiest way to describe the effect of inflation is that it erodes the value of your assets. Your dollar does not buy you as much as it used to. In an inflationary environment interest rates will rise, and when interest rates rise it costs companies more to borrow money needed to operate and expand and as a result businesses begin to scale back. As they cut projects or plants, there are many purchases from suppliers and contractors that are delayed and cancelled, and as this phenomenon spreads through markets the economy slows down and enters a recessionary phase. As companies' revenues shrink, the first thing that evaporates is profits, which in turn will reduce the government future tax receipts. As the government's income shrinks, the cost to carry debt increases with the rising rates, causing deficits to mushroom. In efforts to stimulate the economy, governments have two primary choices: to drive interest rates back down or to inject more liquidity into the system, or both. As interest rates come back down the growth circle begins anew.

How governments view inflation has a lot to do with a law of nature, little known outside the circle of economists and politicians, called the Phillips Curve which describes the inverse relationship between inflation and unemployment. Whenever unemployment is low, inflation tends to be high. Whenever unemployment is high, inflation tends to be low. This is one of the principal reasons why governments never seek to eliminate inflation, it would be bad politically. In fact, they benefit from spiking the economy as much as they can, as they achieve with liquidity injections, and the only reason they cannot let inflation rage out of control is that it would end up crippling the economy into a recession.

Here is the soft landing scenario sought by the U.S. government, and especially by new Fed Chairman Ben Bernanke who is eager to show his old master Alan Greenspan that he is a worthy successor. The Fed's two year campaign to steadily increase rates from 1% in 2004 to the current 5.25% has gradually slowed the U.S. economy. Higher rates cause the increase in private capital flows to the U.S. providing Asian central banks an opportunity to lighten their dollar accumulation while still affirming their fundamental support for it, all without causing the much dreaded dollar depreciation. Government data confirms that the economy has been cooling nicely, starting with interest rate sensitive sectors such as housing and automotive which are slowing without crashing. Growth is trimmed back to sub-par levels, but positive growth beats a recession any day. Imports get more expensive and consumers begin to turn their frenzied spending and borrowing to repayment of debt and even savings, as the Government will do. All of this helps the U.S. budget deficit improve gradually which in turn strengthens the dollar.

Many pundits argue that this is an ideal conjuncture for the U.S. stock market.

A soft landing does not mean that there will be no more pullbacks and corrections in the stock market, but that they are likely to be a lot milder and short-lived than the generational bear markets that accompany deep recessions or depressions. Conversely the rallies will be stronger during a continuing bull market, all the more motivation to participate fully.

While we are on the subject of soft landings we cannot omit the concern voiced by a growing number of experts about unabated economic growth in China. They warn that unless China embarks on an aggressive program to temper its growth it is headed straight for a crash landing of major proportions. As we witnessed earlier this year, even minor hiccups in Chinese markets can send world markets into shock. Few are those who dare imagine the potential impact of a serious Chinese correction or recession. As if on cue, today the Chinese central bank raised its interest rates for the second time in a little over two months to 6.57 percent on a commercial one-year loan. It also ordered commercial banks to increase their reserves in an effort to curb the current lending boom. As all central banks they clearly see the political dangers of rising inflation and a potential debt crisis.

We sincerely hope that our Fed and the Chinese central bank succeed in architecting their respective soft landings because it would be the best scenario for stock markets. In the mean time we will continue to track broad market trends to be sure we do not get caught by a major downdraft.

FAQ of the Week

Question: Why not apply TimingCube signals to the GuruFolios?

We are pleasantly surprised to see how widespread Trend Timing instincts are, as evidenced by this recurring question. In this instance however, applying broad market timing to the TradeGuru stocks would be like mixing apples and oranges.

The TimingCube and TradeGuru services are completely different and independent systems, and the broad market trends tracked by the TimingCube Model have no relation with the stocks in GuruFolios. While we frequently state that 80% of companies move together with the broad market trends, TradeGuru stocks can frequently be in the other 20%.

Instead of timing the market for downside protection as we do with TimingCube, the TradeGuru system is always fully invested but concentrates on finding companies which are growing and offer the best value. This stock selection process also tends to yield the best performers during bear markets, as they invariably are the beneficiaries of the general flight to safety. In their backtesting TradeGuru point to 2002 which was a disastrous year for the markets with the S&P 500 dropping 23%, yet Folios A and B returned 23.5% and 58.7% respectively that year.

Note that TradeGuru's special invitation to TimingCube subscribers (20% off the regular price) is still available at http://www.tradeguru.com/special-tc/.

Warm wishes and until next week.

The TimingCube Staff