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

Market Update

It has been a stomach-churning week on Wall Street, with volatility hitting levels we have not seen in years. The markets started the week by moving lower Monday morning, in the continuation of last Friday's sell-off. Stocks then suddenly turned around after the Nasdaq Composite found support at its 200-day exponential moving average (EMA) and closed higher on the day. This pattern is fairly common as heavy players start covering their short positions when the market hits new lows or key support levels. The Federal Reserve announced Tuesday that it was leaving interest rates unchanged as had been widely expected. The Central Bank mentioned that it was closely monitoring the deteriorating credit condition in the financial markets. The statement obviously reassured investors, who pushed the major indexes higher following the Fed's announcement. With fears of a credit crunch subsiding, a positive earnings report from Cisco helped stocks move higher for a third day in a row Wednesday. The mood changed completely Thursday, after French bank BNP Paribas said it was halting withdrawals from three of its funds due to the ongoing credit crisis, meaning that the issue was no longer just a domestic one, but had indeed spread internationally. Despite the European Central Bank and the Fed injecting $154 billion to provide banks with added liquidity and calm the market, stocks plunged on the day on massive volume, with the Dow Jones Industrial Average posting its second-worst daily loss of the year. As markets sold off around the globe, US stocks continued their descent Friday morning before stabilizing and regaining most of their losses as central bankers worldwide kept coordinating their efforts to try to prevent a global credit crisis.

For the week, the Nasdaq 100 and S&P 500 respectively gained 0.34% and 1.44%. For once, the Russell 2000 did much better: rebounding from its steep losses of the previous weeks, the index gained 4.35% over the 5-day span. Both the Nasdaq 100 and the S&P 500 are located in between their respective 50-day and 200-day EMAs. Despite its gains this week, the Russell 2000 remains below its 200-day EMA.

For its part, our World Index Ranking portfolio underperformed its US counterparts this week as it lost 1.50%. The portfolio consists of the 5 top-ranked world indexes as of July 20, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Sell signal, the World Index Ranking approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 indexes, as the strategy calls for staying invested at all times. Please go to our "Strategies" page for all the details.

Our active Sell signal remains in effect.

Trend Timing School

Split personality

We have long ago documented the strong correlation which exists between the world's major broad stock market indexes, which in turn led to the ability to successfully apply the same mid-term trend following signals to these world markets. While generally correlated, meaning that they move in the same direction over some period of time (weeks and months), the fact that the various markets exhibit different relative strength is exploited by the World Index Ranking part of our service which targets the 5 strongest indexes. During bullish market phases everything is well and synchronized, but when the Model issues a Sell signal, some subscribers get disturbed at the prospect of being simultaneously short the market with the funds assigned to Long and Short strategies and long the market if they also elect to follow the World Index Ranking Buy and Rebalance strategy. How can we reconcile these seemingly contradictory strategies?

As a refresher, the World Index Ranking Buy and Rebalance strategy ignores the Buy/Sell signals altogether and stays fully invested in the top 5 indexes at all times. We made the case for strategy diversification in "Why would I consider the World Index Ranking Buy and Rebalance strategy?".

The crux of the matter is that no investment strategy is perfect all the time, and to make matters even more challenging, there is no reliable way to predict which strategy will perform best in the coming stretch of time. As much as we hate giving credit to the Buy and Hold investment strategy there is no denying that during long sustained periods of flat or rising stock markets it will outperform trend following techniques like TimingCube. Trend following models because of their inherent lag have difficulties taking advantage of small pullbacks and corrections. Long and Short timing strategies, which by definition can outperform Buy and Hold only during downturns, will not be rewarded during market stretches as we have seen in the last few years, with hardly a 10% correction. During such flat or rising market periods a momentum based system like our World Index Ranking with Buy and Rebalance strategy will maximize returns by being constantly invested and will consistently outperform Buy and Hold by rotating and upgrading to the best performing indexes.

Just looking at the period since the World Index Ranking system has been live (from September 15, 2006 to August 9, 2007), the World Index Ranking with Buy and Rebalance strategy clearly leads the pack with a 30.32% gain, followed by the Long and Short at 15.50%, while the S&P 500 with Buy and Hold only achieves 10.11%.

When it comes to severe corrections, bear markets and the high volatility and strong trending moves which accompany them, history shows that the undisputed king of the hill is our Trend Timing Long and Short strategy, and that the worst possible strategy is Buy and Hold because of the staggering losses it has been known to inflict. Interestingly, and to the point of this article, the World Index Ranking's Buy and Rebalance strategy manages to limit the downside risk during turbulent times by rebalancing into the top 5 world markets every 4 weeks and staying concentrated in the strongest markets, which at times are the ones that lose the least. In our backtesting, the Buy and Rebalance strategy managed to survive the most recent bear market years with relatively moderate losses and outperforming Buy and Hold:

Strategy	2001	2002
World Index Ranking, Buy and Rebalance	-1.29%	-12.05%
S&P 500, Buy and Hold	-12.97%	-23.26%

At TimingCube we have always urged against placing all your wealth building eggs into one basket, be it by investing in broad market indexes instead of individual stocks, multiple indexes instead of a single one, multiple geographies, as well as using multiple strategies. In conclusion, while split personality, or dissociative identity disorder (DID), is a serious mental disturbance, investment strategy diversification (ISD) is a highly respected risk management and performance optimization technique we recommend to all investors.

FAQ of the Week

Question: How can leveraged ETFs reduce my costs?

With an active Sell signal it is a good time to think of the most efficient ways to implement the short leg of our long/short strategies, and this week our good friends at MARKETTREND Advisors* share with us one of the tricks of the trade (sorry for the pun) which they routinely rely on to manage their clients' money.

We have written much about leveraged ETFs (see "What are short and leveraged ETFs?" for the basics) but they were primarily discussed for their leverage characteristics, which we generally do not recommend for any significant portion of your portfolio. This time, the idea is to use leveraged ETFs instead of unleveraged, but to use only half the cash so that the total trade provides the same exposure as if the entire amount was invested in the unleveraged funds. It's the same concept as mixing a concentrated drink solution with water. The leveraged ETFs are concentrated. The cash is like the water. By combining them, we get the proper mix.

But why use the leveraged ETFs in the first place? Volume!
The leveraged ETFs trade in millions or tens of millions of shares each day whereas the unleveraged ETFs only trade tens of thousands. That lack of volume costs you money both when you buy and when you sell because of higher spreads. Let's use the short Nasdaq 100 index ProShare ETFs for illustration (PSQ versus QID). The spread, which is the difference between the bid and ask prices, for the short unleveraged fund (PSQ) is routinely in the 5-10 cents range whereas its leveraged counterpart (QID) seldom exceeds 1 cent. This may not seem like much but for someone trading a $100,000 position the cost differential can amount to well over $100. And you can park the 50% cash remaining in an interest bearing money market fund.
In addition, anyone trading large quantities can temporarily affect the price of the low volume shares, creating an additional disadvantage for themselves.

This same relationship between the volume and spread of the unleveraged/leveraged funds applies to the other indexes such as the Russell 2000 (RWM/TWM) and S&P 500(SH/SDS). To find all unleveraged/leveraged ETF pairs available go to http://www.proshares.com/.

* Our sister company MARKETTREND Advisors is an SEC registered full service investment advisory firm which specializes in the management of their clients' assets following the TimingCube strategies, amongst others.
You can find information about MarketTrend Advisors at

http://www.markettrendadvisors.com/

MARKETTREND Advisors, Ltd.
3720 Gattis School Road #800
Round Rock, TX 78664

Phone: (512) 255-8722
Fax: (512) 255-8732
E-mail: info@MarketTrendAdvisors.com

Business hours: Monday through Friday 8:00am to 5:00pm Central Standard Time.

Warm wishes and until next week.

The TimingCube Staff