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

Market Update

This shortened Labor Day week started on good premises with the market continuing its steep progression following last week's reassuring comments and interventions from Ben Bernanke and President George W. Bush. This bullish market movement on rising volume was enough for our Model to trigger a Buy signal after the close on Tuesday. Things started to deteriorate on Wednesday as worries about the housing market and the economy in general resurfaced. This was exacerbated on Friday after the government reported that nonfarm payrolls unexpectedly fell by 4,000 in August when the consensus was expecting a 100,000 rise. Following the announcement, the market plunged with the Dow Jones losing almost 250 points.

For the week, the Nasdaq 100 lost 1.53%. The index is still slightly above its 50-day exponential moving average (EMA). As for the Russell 2000 and S&P 500 , they posted respective losses of 2.15% and 1.39% for the week. The S&P 500 is still located between its 50-day and 200-day EMAs, while the Russell 2000 remains below its 200-day EMA.

For its part, our World Index Ranking portfolio remained flat this week (+0.05%) outperforming its US counterparts one more time. 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 Buy signal, the World Index Ranking approach calls for buying back the top 5 indexes, especially if they had been sold previously during the previous Sell signal. Please go to our "Strategies" page for all the details.

We now have a Buy signal in effect.

Trend Timing School

Times of uncertainty

After another miserable week in the markets, it is clearly time for us to eat some crow and humble pie. Having just lived through yet another whipsaw, we can only recognize that the last few signals came with no market follow-through and in retrospect were losers, ergo wrong. Yes we are humbled by not achieving the returns we have come to expect, or anything approaching our historical averages. We also know that the sub-par performance in timing the U.S. indexes is not just affecting recent subscribers. Even amongst our older members, who have experienced the benefits of our Trend Timing first hand and are habitually our strongest and most loyal supporters, there is a growing number who are starting to lose faith in the approach.

Today, instead of exploring some particular aspect of Trend Timing or the stock market, we would like to acknowledge the many concerns, doubts and uncertainties shared by many subscribers, and attempt to address them honestly as best we can.

In no particular order, here are some of the hot topics.

Sub-par performance.
Arguably, depending on how strictly you count, 6 out of the last 7 signals have been losers when investing Long and Short in the U.S. Indexes. The last good signal was the Buy on August 17, 2006, and it was not a great one. The 2007 Year-To-Date performance is -12.97% investing in the three U.S. indexes (Nasdaq 100, Russell 2000, S&P 500) as compared to a gain of 5.94% with buy and hold of the same indexes. In fact, since about the beginning of 2004, the pickings have been extremely slim as the U.S. market has been in a narrow and slightly ascending channel which had little to deliver on the upside or the downside.

On the other hand, everything is relative as sub-par performance is in the eye of the beholder. Subscribers who have heeded our repeated admonitions to get diversified, both from a strategy and geography stand-point, have been reaping the benefits. As an example, the World Index Ranking buy and rebalance strategy is up 12.15% for the year, well ahead of buy and hold.

Is this signal right or wrong?
With every signal we get a plethora of dissenting opinions. Why a Buy/Sell now? We never judge a signal until it is over. Clearly, there is only about half the population which is correct at any given time. Many argue, mostly retroactively, that this signal or that signal is bad/stupid/wrong or came too soon/too late. We never said that our Model was perfect and that all signals would be winners (but we certainly expect a ratio closer to historic averages).

Subscribers have many reasons to doubt the accuracy of the signal, not the least being the 1-in 7 ratio mentioned above.

• There are many treats to the economy and the markets. Yes but news and fundamental data have never played a part in our Model. And neither have opinions and gut feeling
• Are we getting fooled by market manipulators? Very likely yes. They cannot make the markets do their bidding forever
• The market is overbought. Overbought and oversold indicators are great for short term traders, not for trend followers
• September is the worst month for the markets. Statistics do not yield good strategies. All Septembers are not bad
• The Buy was triggered on a low volume rally. Absolute volume figures are not as important as relative volume movements, from day to day, and between buying and selling volume. A good article on this subject was published lately by Mark Hulbert and the mention of the 9-to-1 up days buy signal which occurred after the up volume was at least 9 times higher than the down volume for three days (August 17, August 29, and August 31)

Has our model become broken or irrelevant?
Are 6 losing trades out of 7 not proof that the Model does not work anymore? Why did the changes made to the Model last year not eliminate false signals and whipsaws? What would have happened had we stayed with the original model? Are we going to modify the model and fix it? So many questions.

The fact is that the market has been on a continuous uptrend since the fall of 2002 and major indexes such as the Dow Jones Industrials and S&P 500 have not seen a correction (defined as a decline of between 10% to 20% from intermediate top) since then, nearly 5 years. Normally bull markets have a few. The more volatile indexes such as the Russell 2000 and Nasdaq Composite have experienced a couple of mild corrections over that time frame, but none since the first half of 2006. Still, it is a truism that during a sustained, uninterrupted bull market, no attempt at timing will beat the buy and hold investor (assuming the buy and hold investor was fully invested at the bottom of the last bear market and managed to hold ever since). The only strategy which consistently beats buy and hold in such times is buying and rebalancing the strongest world markets. In our backtesting since the beginning of 2003, the World Index Ranking buy and rebalance strategy has returned 233% versus 100.74% for buying and holding the Nasdaq 100.

The recent tumultuous times reinforce us in the conviction that it is impossible to predict what the market is going to do and that the only sane strategy is to follow what the market is actually doing.

Do you say that your car insurance does not work because you keep paying and receive nothing in return? We believe in Trend Following because we know there will be more market corrections and bear markets down the road. Just because the current bull market has gone without a correction and that we are overdue for a bear market does not mean they have been abolished.

What can we do about it?
Yes, we are continuously humbled by the market's mysterious ways but we are not embarrassed or defeated, and because we do not believe that Trend Timing has outlived its usefulness, we are not apologizing.

The main variable in trend following is the length of the trends one focuses on. There are long term systems which seek to identify the broadest bull and bear market cycles. Our form of Trend Timing is about mid-term trends lasting a few months on average, leading to our historical signal frequency of about 3 per year. There are of course many much shorter term trends tracked by more active traders. One of the common traits is that none of them are perfect all the time and all have their strengths and weaknesses. The long term trend following methods provide for very little trading and holding periods like buy and hold strategies, very few losing signals, but they can suffer significant drawdowns before signaling a change in trend. Short term trading techniques are much more active with win/loss ratios much closer to 50% and narrower profit margins.

The last thing we want to do is tweak our Model to fit a specific time frame, and we will not do that. We are firm supporters of continuous improvement but any enhancement we make has to improve the entire testing period since 1989, not just the last 2 years.

We know that market corrections and bear markets will still occur and that our long term wealth building program depends on avoiding the accompanying losses. Just for this reason will we continue to listen to our Trend Timing Model, however imperfect, as our insurance policy. And in the mean time, our diversification into the world's strongest markets is bearing fruits. Find out why, even with a Long and Short strategy, it is better to invest in the top 5 world indexes than in the U.S. markets by reading the FAQ of the Week below.

FAQ of the Week

Question: Should I invest in the 3 U.S. indexes AND the top 5 world indexes?

The question stems in large part from our pre-World Index Ranking history and the legacy which can be found throughout the TimingCube Web site. Before the introduction of the World Index Ranking in 2006 our system was largely U.S. focused and, because we had no way to pick the strongest index, we broadly recommended investing in a diversified portfolio consisting of the Nasdaq 100, the Russell 2000 and the S&P 500 , in equal parts. After the introduction of the World Index Ranking we kept reporting the results for the three U.S. indexes for continuity, and added new information for the Top 5 portfolio. Some of our long term subscribers have kept a U.S. only focus, but many more naturally evolved to allocating their funds between the U.S. indexes and the International ones.

The question should really be "Which markets offer the best opportunity for profits right now?" and, according to our backtesting going back to 2001, the correct answer is: the top 5 world indexes. The Long and Short strategy applied to the strongest word markets (which at times can include U.S. indexes) has consistently outperformed investing in a blend of the three U.S. indexes. We understand the risks of ETFs concentrated in foreign markets (see "What are the risks of international investing?") but over time these same risks are all present when investing in the U.S. stock market. Taking the latest World Index Ranking we can see that the Nasdaq 100 has crept into the top 10 for the first time in years but that the Russell 2000 and S&P 500 are languishing in positions 21 and 20 out of 27. Looking at the relative momentum currently in place, the outlook for the blend of 3 U.S. indexes is to continue lagging stronger world markets.

Warm wishes and until next week.

The TimingCube Staff