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

Market Update

Earnings season kicked into full swing this week, which saw the major indexes mark a pause after two weeks of solid gains. After an uneventful Monday, the Nasdaq Composite moved higher the next day as a solid rally took place in the semiconductor arena, sending the SOX index to its highest level since March 2006. This is significant, as the SOX often leads the Nasdaq Composite and the overall market. It is interesting to note that technology stocks in general, and the Nasdaq 100 in particular have been leading the rally that started mid-March. Comparatively, the Russell 2000 has not done as well, indicating that money managers have been rotating money out of small stocks into large-cap tech shares. With both Yahoo and Intel posting disappointing quarterly results after the close Tuesday, markets moved lower Wednesday morning but showed resilience by recouping most of their losses by day's end. Positive earnings news from IBM lifted stocks on Thursday, with the Dow Jones Industrial Average closing at a new all-time high, right above the 14,000 mark. With Google reporting a rare earnings miss after the close, the negative tone was set for Friday's trading. Stocks indeed succumbed to profit taking, with small caps taking the brunt of the selling. Volume spiked on the day, as Friday marked the expiration of options for the month.

For the week, the Nasdaq 100 gained 0.18% while the S&P 500 lost 1.19%. Both indexes remain above their 50-day and 200-day exponential moving averages (EMAs). As for the Russell 2000, it trailed the other two indexes, posting a 2.26% loss. It is now resting a hair under its 50-day EMA and is still well above its 200-day EMA.

For its part, our World Index Ranking portfolio lost a modest 0.18% this week. The portfolio consists of the 5 top-ranked world indexes as of June 22, which marked the beginning of the current 4-week holding period. The World Index Ranking portfolio is being rebalanced today, as the current 4-week holding period is now over.

Our current Buy signal remains in effect.

Trend Timing School

Dollar proofing your portfolio

Following last week's article about the U.S. dollar woes, with the odds solidly pointing to further weakness in the months and years to come, as U.S. investors we have to make our peace with this sad state of affairs and learn how to deal with it. Or better, how to benefit from it.

Not so fast, you say. Why is the value of the U.S. dollar important to me? If I earn U.S. dollars, spend U.S. dollars, and I invest in U.S. stocks, why should I care about the exchange rates of foreign currencies? It is a little like sitting on the deck of a slowly sinking ship, you may not notice much happening looking at the deck chairs around you, but relative to what matters - the level of the sea - you are going down. With our already enormous and still accelerating dependency on imports for everything from oil, to food, manufactured goods and services, the value of the U.S. dollar has a huge impact in the form of monetary inflation.

Because of increasing money supply, easy credit and other drivers, there is a liquidity glut which undermines the value of the dollar. Monetary inflation is the simple erosion in purchasing power associated with a devaluating currency. We have to pay more and more dollars to purchase the same amount. The other type of inflation is "price inflation" which occurs when, because of supply and demand factors, an item becomes scarce and increases in price. Together they are the real inflation which slowly but surely eats into the value of anything you own that is denominated in dollars such as your U.S. stocks, your bonds, and your money market funds.

Since 2002 the U.S. Dollar index has lost an annualized -7.27%. That is a far cry from the annualized 2.7% Consumer Price Index (CPI) reported by the U.S. Department of Labor which is broadly positioned as the official inflation measure. A 7% annual depreciation of your dollar assets will half your capital in 10 years. While the deterioration has been orderly so far, many fear that if technical support is clearly broken, a snowball effect could ensue, sending the dollar on a much steeper decline. The likelihood and consequences of monetary and price inflation being as certain as death and taxes, it behooves us all to take the necessary steps to protect ourselves.

Of course, all of this depends greatly on perspective, and opportunity. Most investors, wherever they may be, are cognizant and feel comfortable investing primarily in their own local stock market. Few are the U.S. investors who have a substantial share of their holdings in foreign equities. The same can be said all around the world. Citizens of many countries cannot practically invest in foreign markets. From that stand point, U.S. investors are blessed with incredible freedom and in recent years, the investment vehicles allowing anyone to conveniently invest just about anywhere (hooray for ETFs). Still, we each have to overcome our prejudice about our home market being the best and the safest. More often then not, as they are right now, the facts simply do not support that presumption.

Looking at the World's major currencies in U.S. dollar terms, we see multi-decade highs interspersed with all-time highs and a low (see the charts below). After a short pause during 2005, when it rallied, the dollar has since resumed its long term slide to new lows, causing most currencies to surge. One of the very few exceptions we could find of a currency falling faster than the U.S. dollar (short of digging up the Zimbabwean dollar ), is the Japanese yen, which continues setting new all-time lows against most currencies, including the dollar.

World currencies in U.S. Dollar



What to do about the chronically ill dollar varies for different types of assets and objectives. For example, there is not much you can do about your house being priced in dollars, short of selling it and moving abroad. For our liquid, "safety net" assets (the money we should all keep to provide emergency funds in case of loss of income, illness, etc.) which we keep in cash, savings accounts and money market funds, we should explore better alternatives. Just within the convenience and liquidity of ETFs the dollar hedge choices abound, with many currency ETFs (e.g. FXA - Australian $, FXB - British Pound, FXC - Canadian $, FXE - Euro, FXF - Swiss Franc) as well as commodities (DBC ) and precious metals (GLD and SLV ). Precious metals and gold in particular, as the only reliable stores of value over the recorded millennia, always regain their luster during the inflationary times which invariably accompany monetary standards crisis, but this is another story.

For the portion of assets we invest as part of our life long wealth building program, we have the ideal combination of strategies: the trend following signals which allow us to step aside or exploit any U.S. stock market declines, and the World Index Ranking which keeps us invested in the strongest geographies and the stronger currencies. Relative strength and thus the rank of countries in the World Index Ranking is based on the corresponding index which measures the momentum of the stock market, not the currency. However, by investing in foreign ETFs we can get the benefit of the stock market gains AND the appreciation of the foreign currency. For a detailed explanation of how they compound, see "How do foreign ETFs benefit from a weak dollar?" in the FAQ below. The best way to spot the best combination of stock market performance and strong currency is to look for the countries at the top of the rankings for which the ETF substantially outperforms the corresponding index (a sure sign of a strong currency).

FAQ of the Week

Question: How do foreign ETFs benefit from a weak dollar?

By foreign ETFs we mean the ones traded on U.S. stock exchanges but which invest in foreign companies which compose the market indexes they track. Though you trade the ETF shares in U.S. dollars, the ETF in turn invests in foreign companies which are traded on their local stock exchanges and are priced in the local currency. If, between the time you buy this ETF and the time you sell it, the local currency appreciates against the dollar, this gain will compound your benefits. The overall return of a foreign ETF can be expressed by the formula (which intentionally omits the fund's expenses and a few other minor details):

Foreign ETF Return = Return of foreign stocks X Return of local currency

For example, if the aggregate price of the foreign stocks held in your ETF goes up 10% and that during the same period the foreign currency appreciates 10% against to U.S. dollar; your gain is a compounded return of 21%. Had the currency lost 10%, your ETF would be down 1% overall, despite the equity gains.

Looking at two specific countries, Brazil and Japan, we can illustrate both sides of the performance impact of exchange rates. In the chart below we see that since 2005 the Brazilian stock market advanced an impressive 120% as measured by the Bovespa index , but because the Brazilian Real also appreciated significantly against the U.S. dollar during the same period, the actual return for the EWZ Brazil fund is close to 220% compared to a relatively paltry 25% for the S&P 500!

The other side of the coin is illustrated by Japan and the yen, one of the few currencies which has managed to be weaker than the U.S. dollar. While the Nikkei 225 index advanced by a very respectable 55% since 2005, because of the steady yen valuation decline, the overall performance of the EWJ Japan fund was knocked down to about 35%.

Effect of exchange rates on ETF performance

Brazilian Real stronger than U.S. Dollar	Japanese Yen weaker than U.S. Dollar

Warm wishes and until next week.

The TimingCube Staff