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

Market Update

After a brief period of consolidation, markets returned to their winning ways this week. The S&P 500 closed at a new all-time high while the Nasdaq Composite finished at its highest level since February 2001. Stocks started the week on a strong note, with the Dow Jones Industrial Average rallying 1.4% Monday to reach a record close above the 14,000 mark. Digesting their gains for the most part, the major indexes did not move much during the next three trading sessions. The bulls returned on Friday, with tech stocks leading the way to give the Nasdaq 100 a daily gain of more than 2%. All other major indexes also posted solid gains on Friday, after the Labor Department cooled recession fears by reporting that employers added 110,000 jobs in September. A significant revision in August payrolls also helped, as 89,000 jobs were created during the month whereas the original estimate was for a loss of 4,000. Reassured by the fact that the numbers clearly show that the job market is not collapsing and that the economy is indeed doing fine, investors bid stocks higher to cap yet another strong week.

The Nasdaq 100 and S&P 500 respectively gained 2.80% and 2.02% over the 5-day span. With small caps back in favor, the Russell 2000 did even better, posting a 4.89% return on the week. All three indexes remain above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World Index Ranking portfolio posted a 3.07% weekly gain. The portfolio consists of the 5 top-ranked world indexes as of September 14, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Getting with the trend

Our current Buy signal is 30 days old today, and those of us invested in the market since then like the way this trend is developing so far. This signal is still young by historical averages and by no means out of the woods yet, but we are hopeful it has a lot more to go both in time and gains. And we are perfectly positioned for that eventuality. Alas, this cannot be said by the many subscribers who currently sit on the sideline having somehow missed the signal. There are many reasons to be left standing at the station, you could be a new subscriber or you could have been traveling at the time. More frequently it is varying degrees of mistrust and second-guessing of the market and signal, be it for having been burned by previous ill fated trades or because you believe that the market is headed lower, not higher. Fear of losses is what commonly freezes investors into inactive and unprofitable cash positions.

Yes, you could simply wait out this signal and plan to rejoin at the next signal, but there is much circumstantial evidence saying you would be better off getting with the trend now. There are both emotional and financial benefits in synchronizing and staying with the trend, and there is a time-honored approach to reduce the risks associated with a mid-signal entry.

On the emotional front, it is unhealthy to be on the sidelines for too long as you lose touch with the strategy and the investment approach as a whole. It is hard to "believe" in a method and to do something different for a prolonged period of time. You know you should be invested, but you are not, and it becomes easy to feel bad or place blame for the missed opportunity. Much can be said of the level of commitment that comes with direct participation. The trick with mechanical investment systems is that you have to do it almost automatically, without a second thought. You must pull the trigger immediately or expose yourself to growing doubt and frustration. When not in sync with the trend, you need to put aside the excuses and rationalizations and rectify the situation fast, or risk falling off the Trend Timing wagon.

Financially, statistical evidence clearly points to following the trend as the most profitable alternative. Analyzing signals generated by our current Model backtested all the way to 1989, we find the average signal lasting 114 days, or about 4 months. What the averages do not reveal is that actual trade durations vary greatly, from a low of 2 days to a high of 531 days. Durations are also skewed by signal type, with Buys substantially longer than Sells. This is plain to see from the list of signals lasting 1 year or more in the table below. There have been 8 of them, or nearly 14% of the total. All of them Buy signals, and all of them generating double digit gains. It so happens that the largest stock market gains are achieved during the longest market trends, which occur during above-average length Buy signals. As always, we are not attempting to predict how long the current signal will last, but based on history, the chances of the current signal lasting substantially longer and gaining more are good. The key point here is that you can only profit from these market moves if you participate.

Signals of 1 year duration or more

Signal	From	To	Duration (Days)	Nasdaq 100 Return (%)	Russell 2000 Return (%)	S&P 500 Return (%)
Buy	10/16/1998	03/30/2000	531	236.73	62.18	44.01
Buy	05/25/1994	09/26/1995	489	55.95	24.88	27.92
Buy	10/22/1990	02/19/1992	485	93.88	72.03	30.37
Buy	08/05/1996	10/17/1997	438	64.62	40.92	44.19
Buy	03/14/2003	04/30/2004	413	38.74	59.59	33.90
Buy	01/03/1989	01/31/1990	393	11.42	3.56	16.30
Buy	03/04/1993	03/25/1994	386	12.21	18.32	3.36
Buy	05/12/2005	05/12/2006	365	13.07	27.18	11.51

Regarding current market conditions, with so many market pundits in the bearish camp, it is not surprising that many individual investors are scared of a big market drop. When our Model triggered the Buy signal in early September, many were predicting that the pullback was in fact the beginning of a major bear market and the general tone was very gloomy. The reversal of the strong July/August slide and the subsequent setting of new bull market highs are technically very bullish, yet investor sentiment remains largely negative. Banking on a market sell off, bears have brought the short-interest ratio to an all-time high this week, which has historically been bullish for the markets.

Similarly, Mark Hulbert of "The Hulbert Financial Digest" fame, has just recently reported that his contrarian analysis of stock market timing newsletters and a low reading in his Hulbert Stock Newsletter Sentiment Index, in which the average stock market exposure recommendation is only 40.2%, suggest that the market is headed higher (read the article).

We seem to be in a period in which the investing public is confident that the Fed will intervene whenever necessary, which favors the bulls and creates the "buy the pullbacks" mentality which has been apparent over the last few weeks. We are also fast approaching the best stock market investing season which typically lasts from fall to spring, November through April, the best 6 months of the year. We do not favor any predictions based on seasonal market history, however compelling, but we take any information supporting the current uptrend as positive confirmation.

Finally, in case our lecture has convinced you of the wisdom of getting in sync with the predominant market trend, we can now review how to best achieve this. Entering a new position always seems the riskiest time, and this increases with the amount of time elapsed since the signal was issued. To compensate for the entry risk, a trading technique called "dollar cost averaging" offers a good solution. With dollar cost averaging, instead of investing the entire amount up front, you invest it in 5 equal size weekly installments. The number of slices and the frequency can be varied, but 5 weekly increments have worked well for us. The theory is that over the course of the 5 weeks, if the market drops instead of rallying, your fixed 1/5^th dollar amount will buy more stock (because the price dropped). If the market rally eventually resumes, your average purchase price will be better than if you had bought with the lump sum. Should the market instead turn down for good, a Sell signal is likely to be issued before you are fully invested. Again, in this case your loss will be less than if you had invested everything up front. The only scenario in which dollar cost averaging is less than optimal is if the market goes up for the next 5 weeks. For full details on the technique, read "Dollar cost averaging explained".

FAQ of the Week

Question: Why the discrepancies between World Index Ranking and ETFTide systems?

Inquiring minds who subscribe to both the TimingCube and ETFTide services have been assiduously comparing the respective rankings and, at times, have become puzzled by the discrepancies they found.

The absolute rank numbers are meaningless for comparison purposes because of the difference in the number of indexes/funds included in the two services, 27 currently for TimingCube's World Index Ranking versus 78 for ETFTide. While the World Index concentrates on broad and correlated world equity indexes, ETFTide encompasses all major markets, asset classes, industry sectors, types, and geographies. Still, even when focusing only on the same subset of indexes and looking at their relative positions, some of the markets seem to be stronger in one service than in the other.

There are two principal contributors to the discrepancies and the most obvious one is the fact that while the momentum algorithms used by the two systems have similarities, they are not identical. The other important source of disparities between the two services is that TimingCube strictly ranks market indexes and ETFTide uses the ETFs themselves. While minor on the surface, this distinction causes the TimingCube World Index Ranking to be a pure reflection of the local stock market strength, but the ETFTide ranking reflects not only the market strength but also the relative strength of currency exchange rates not factored in the indexes. The good news is that since we invest in the ETFs and not the indexes, as long as the U.S. dollar continues its downward trend against most foreign currencies, our international ETF positions should do even better than the index-based results posted on this Web site.

For a good explanation of the cause and effects, read "Are international ETFs affected by currency movements?".

For more details about the ETFTide service, please visit www.etftide.com.

Warm wishes and until next week.

The TimingCube Staff