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

Market Update

It has been a mixed week for the markets. After moving slightly lower on Monday, stocks plunged Tuesday on higher volume, with the Dow Jones Industrial Average losing 280 points during the trading session to close at its lows of the day. The negative mood was attributed to weak consumer confidence data and the release of the latest Fed minutes as the Central Bank noted that "a further deterioration in financial conditions could not be ruled out." Led by tech stocks, markets turned around Wednesday to recover most of the previous day's losses. After a quiet Thursday, stocks finished the week by posting more gains ahead of the Labor Day week-end. Investors were encouraged by Fed Chairman Bernanke, who confirmed that the Fed is ready to provide more liquidity to the financial markets if required. President Bush also provided a psychological boost by outlining a plan designed to help distressed subprime borrowers.

For the week, the Nasdaq 100 gained 1.39%. The index remains above its 50-day exponential moving average (EMA). As for the S&P 500 and Russell 2000 , they posted respective losses of 0.36% and 0.76% on the week. The S&P 500 is located in-between its 50-day and 200-day EMAs while the Russell 2000 has crossed back below its 200-day EMA.

For its part, our World Index Ranking portfolio outperformed its US counterparts again this week as it gained 2.25%. The portfolio consists of the 5 top-ranked world indexes as of August 17, 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

Market safety valves

People in fear of a crash while long the market, or desperate for one when short, all are interested to know what other measures, besides the Government interventions we described in last week's article about "The Plunge Protection Team", could help prevent or at least reduce the magnitude of such a crash. Equity, futures and foreign exchange markets have collars and curbs, circuit breakers, delays, halts and other trading restrictions in their arsenal.

Delays and halts

The U.S. Securities and Exchange Commission (SEC) gives securities exchanges such as the New York Stock Exchange (NYSE), American Stock Exchange (Amex), as well as the Nasdaq Stock Market the authority to halt and delay trading in a security. To quote from the SEC "A trading halt - which typically lasts less than an hour but can be longer - is called during the trading day to allow a company to announce important news or where there is a significant order imbalance between buyers and sellers in a security. A trading delay (or 'delayed opening') is called if either of these situations occurs at the beginning of the trading day."

Delays and halts being applied to individual securities have not worked very well to control broad market movements, as demonstrated during the 1987 crash. In order to slow or stop a runaway market stock exchanges have other tools at their disposal. The most obvious example of broad trading restrictions is the fact that U.S. stock exchanges have the ability (as does the President of the United States) to close the markets. The last time this happened was on September 11, 2001 when none of the major U.S. exchanges opened and remained closed until September 17. Clearly, the complete closure of a market is an extreme measure and there are other mechanisms stock exchanges can use to combat disorderly trading.

Program trading curbs (NYSE Rule 80A)

Program trading has come to represent an ever growing and now dominant percentage of the transactions on U.S. stock exchanges as it is now averaging above 60% of the total. Most program trading is done by institutional investors such as pension funds and mutual funds as well as hedge funds. Program trading, sometimes referred to as algorithmic trading, designates the use of computer programs to decide when, at what price, and in what quantity an order should be placed, and to place such orders automatically without human intervention. The algorithms used follow many strategies such as market making, index arbitrage and even trend timing. Market making is an automated trading technique aimed at benefiting from the bid-ask spread. With index arbitrage, the program strives to profit from small price differences between a stock market index and its constituent stocks. As the difference grows large enough to profit the software automatically places orders to buy/sell index futures or options and simultaneously sell/buy a portfolio of matched stocks.

It is such program trading that was blamed for much of the stock market crash of October 19, 1987, when the Dow Jones Industrials lost 22.6% in one day, as the computer models began feeding on themselves into a runaway downward market spiral. Most trading restrictions were introduced in 1989 as a direct result of the crash.

On the NYSE, a so-called program trading curb, or trading collar, aimed squarely at index arbitrage is implemented whenever the NYSE Composite Index moves 2% (defined as 190 points for Q3 of 2007) or more, up or down, from its previous close. When the "curb is in", program trades can only be executed on an uptick for sales or a downtick for buys, which is thought to limit volatility and prevent the program trades from providing positive feedback and amplifying the price movement. For this rule NYSE defines program trades as an order that includes a basket of at least 15 stocks from the S&P 500 or of a value of at least $1 million.

Circuit breakers (NYSE Rule 80B)

Contrary to the trading curbs which directly affect only program trades and the institutions that use them, this trading restrictions impacts all investors. Nasdaq and Over The Counter Bulletin Board (OTCBB) markets have joined the NYSE in implementing the so-called "circuit breakers" which halt trading on the exchange in the event of specified decline levels on the Dow Jones Industrial Average index . The NYSE publishes the numbers for the circuit breaker levels quarterly(see NYSE Circuit Breakers), which are as follows for Q3 of 2007:

DJIA decline of 10% (1350 points)	Before 2 pm	2-2:30 pm	After 2:30 pm
	1 Hour Halt	30 Minutes Halt	No Halt
DJIA decline of 20% (2700 points)	Before 1 pm	1-2 pm	After 2 pm
	2 Hours Halt	1 Hour Halt	Market Closes
DJIA decline of 30% (4050 points)	Any Time
	Market Closes for the day

Note that the Chicago Mercantile Exchange (CME) where futures contracts are traded also implements trading restrictions when the S&P 500 futures contract moves 2.5%, 5% and 10%.

As far as we can tell, the circuit breakers have only been implemented once, during the 1997 mini-crash, but the trading curbs are implemented fairly often, as they have been this month, repeatedly. The key lesson to learn from history is that the market cannot be forced into doing something it does not want to do for any length of time. If the market wants to go down, it will go down despite all the circuit breakers. A good example of this is what happened when markets re-opened on September 17, 2001, after the longest closure since 1929. Despite all the curbs and circuit breakers, the Dow Jones Industrial lost 7.1% on Monday and a total of 14.3% on the week. Severe declines will happen when the market decides it is time, and all trading restrictions can do is slow down the fall. While Trend Timing is no guarantee against sudden event-induced market crashes, it certainly is the best protection from severe downturns we know.

FAQ of the Week

Question: What is the "Alternate E-mail address" for?

In case you did not notice it, the "My Profile" page on the Web site provides for both a "Primary" and an "Alternate E-mail" address. While only the "Primary" is mandatory when you register, we highly recommend you use both. The two addresses were intended to give you more flexible and reliable access to the signals. Many of us have both a home and a work e-mail address which we could use, not just for convenience but to increase the chances of receiving a signal when it comes.

Alas, in this day of raging spam, many e-mails do not reach their destinations due to various overzealous countermeasures along the way. For details on how to increase your chances of receiving our e-mails, and to find out how to perform an end-to-end delivery test, read "Why am I not receiving your e-mails?". Sometimes, despite all the precautions, e-mails will be filtered by your e-mail service provider and you may have no control over it. The best way to protect against such occurrences is to set-up an "Alternate E-mail" address with another provider. It is highly unlikely that two service providers start blocking the same type of e-mail at the same time, the redundancy greatly increases the likelihood of proper signal reception on your end.

Warm wishes and until next week.

The TimingCube Staff