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

Market Update

It has been another wild week for the markets. After a failed rally attempt Monday, stocks plunged the next three days on spreading fears of a global credit crisis.
Despite central banks continuing to inject billions of dollars to provide banks with adequate liquidity, panic selling sent the S&P 500 tumbling all the way back down to its March lows by Thursday morning before markets turned around one hour before the close of trading following a massive short-covering rally in the battered Financial sector, to finish almost unchanged on the day. With Japan's Nikkei index dropping almost 6% overnight, markets were bracing for yet another major drop Friday morning when the Federal Reserve came to the rescue. Noting that "downside risks have increased appreciably" since its last meeting on August 7, the Fed announced that it was cutting the discount rate by 50 basis points, from 6.25% to 5.75%. The move is designed to alleviate liquidity problems in the banking system and, of course, to calm a very nervous market. Not surprisingly, investors cheered the news and sent all major indexes higher Friday, albeit on much reduced volume from Thursday's levels.

For the week, the Nasdaq 100 lost 1.89%. The index remains located in between its 50-day and 200-day exponential moving averages (EMAs). The S&P 500 and Russell 2000 experienced more modest losses of 0.53% and 0.35%, respectively, but both indexes are located below their long-term 200-day EMA.

For its part, our World Index Ranking portfolio underperformed its US counterparts this week again as it lost 7.50%. 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. The World Index Ranking portfolio is being rebalanced today, as the current 4-week holding period is now over. 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

Market corrections

At least by some measures, the stock market retreat has reached correction level this week for most indexes; something we had not seen since 2002. A common definition for market corrections is a decline of 10 to 20% from an intermediate peak. Anything less is called a pullback and above that roam bear markets. As the major indexes have turned negative for the year, many investors are left to wonder how earlier solid gains vanished so quickly, and how much further markets could go on the downside. The stakes for the buy and hold investors have suddenly increased. Of course this could be the end of it, investors worldwide could become convinced that the Fed's dramatic rate cut has effectively snuffed-out the credit crunch and removed the market risk, and stocks could rebound and be on their way to new exhilarating highs. If so, then this will have been a measly correction.

For all that, technical damage has clearly been done, with longer 200-day moving averages and major support areas getting breached on most major indexes. We suspect this will take more time and confidence building to repair. Stocks will need to build a new base in order to climb back up the hill. If markets now proceed to decline further and clearly stay below the 10% loss mark, an official correction will be in the books. And frankly, like most trend timers we suspect, having been starved of serious corrections for nearly 5 years, we are just a tiny bit anxious for more substantial downward movement to be in position to pocket some profits instead of the single digit gains/losses delivered by Sell signals of recent memory.

From an investment Model standpoint, we do not care one bit what market phase (pullback, correction, or bear) we are in. Since our signals are generated purely mechanically based exclusively on technical analysis, with no rule about 10% drops, the reasons for what the markets are doing and the finer points of human emotions and psychology at work during the various market phases have no bearing on the trend. As investors however, a better understanding of what is happening and what to expect can be the key between being blind sided by huge intraday swings or anticipating them, getting rattled and tricked by bear market rallies or recognizing them for what they are. The last thing we want at this juncture is to be frightened into second guessing the strategy and making a potentially devastating gut call. We always remind ourselves that Sell signals are there first and foremost to protect us from the larger and steepest market declines.

History shows that the longer a correction lasts the more likely it is to get deeper and develop into a full fledged bear market. The main differences between market corrections and bears is that they are much shorter lived and of lesser magnitude. Every bear market begins as a correction, but every correction does not evolve into a bear.

Technical analysts actually like market corrections which they view as healthy, or even prerequisites, for the continuation of a bull market. If markets were left to go higher and higher unchecked, the risks of a catastrophic crash would increase greatly. The role of corrections is to let out some steam by adjusting equity prices back to their actual value or "support levels".

In many respects, corrections are more similar to bear markets than pullbacks. Instead of holding at or near new lows, corrections tend to set successively lower lows. During pullbacks not all markets fully participate in the decline as leaders frequently go unscathed. With corrections the breadth of the fall off widens, hitting markets across the board. At such times, investors sell indiscriminately in a mad scramble to raise cash, be it to pay for margin calls or simply to be safe. The flight to safety seems to benefit very few areas except bonds and money market funds.

As volumes and volatility explode, down days are becoming more vicious. Unlike during pullbacks when the level of investor anxiety remains fairly subdued, with corrections the extent of inflicted damage raises and the fear factor enters into play. Caution, which had become grossly neglected in the more upbeat market phases, suddenly makes a comeback. The "buy the dips" mentality which is favored during on-going bull markets and pullbacks suddenly changes to "sell the rallies". Ironically, so-called bear market rallies can occur during corrections as well. They are often called "suckers rallies" because their suddenness and strength fool many unsuspecting investors back into the market just in time for the next steeper leg down.

The real upside of market corrections, for trend timers anyway, is that as a minimum with "Long Only" strategies we keep our powder dry, and with any assets following a "Long and Short" strategy we stand to profit from a bigger correction or the bear market which could ensue. The second part of the benefits is that when the correction/bear market finally has run its course and the broad trend reverses up, we get back in the market with more money at a better price.

FAQ of the Week

Question: Why not short indexes in the World Index Ranking?

During Sell signals this is a very natural question for someone following the World Index Ranking "Long and Short" strategy. The overarching reason to not recommend shorting the indexes in the rankings is that the relative strength World Index Ranking system is designed exclusively to identify forward momentum, and not which markets are likely to go down the most. Some assume that, having risen the most, the strongest markets during an upswing should also be the ones to drop fastest and furthest during downturns. More often than not they are mistaken. The strongest economies are frequently the ones that weather storms best or even prosper.

Neither is the system symmetrical. You cannot assume that shorting the weakest markets during Sell signals will produce superior results, because it would not. The markets already at the bottom of the rankings do not have much downside left in them, and are quite often screaming buy opportunities for the speculator rather than good shorting picks. In Trend Timing, short profits are achieved by riding markets to the bottom, not through bottom feeding.

During up legs and Buy signals, perfect correlation between the signal and the respective world markets is not so critical, as any fund ranked in the Top 5 is showing the strongest momentum anyway. For down market legs it only makes sense, and has proven most effective, to short the instrument most closely correlated to the Nasdaq Composite index which drives the TimingCube Model. The fact that the QQQQ fund is one of the most liquid ETFs around means that, unlike many of its peers, it can actually be shorted. Having inverse and double inverse ETFs (PSQ and QID, respectively) for convenience makes our selection even easier.

Warm wishes and until next week.

The TimingCube Staff