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

Market Update

As investors expected, the Federal Reserve decided to leave interest rates unchanged during their Wednesday meeting. In its accompanying statement, the Fed said that the economy was likely to expand "at a moderate pace" in the coming months and that "inflation pressures seem likely to moderate over time". Market participants obviously welcomed the Fed's dovish tone, as they bid stocks significantly higher Thursday, the Nasdaq Composite closing the day at a fresh 5 1/2-year high and the S&P 500 at a new 6-year high, while the Dow Jones Industrial Average finished at its highest level ever. With the S&P 500 up seven days in a row, stocks were then due for a pause. It was therefore not surprising to see profit-taking hit Friday, with the major indexes giving back some of their recent gains on reduced volume, following the release of a weaker-than-expected GDP report. GDP growth for the third quarter came in at 1.6%, less than the 2.1% economists had anticipated. The shortfall was largely due to a significant slowdown in residential construction activity. The report provided better news on the inflation front, as the chain deflator, one of the Fed's favorite inflation gauges, only rose by 1.8%. The better-than-expected number confirms the Fed's view that inflation is likely to moderate going forward.

The Nasdaq 100 and Russell 2000 respectively gained 0.47% and 0.49% on the week. For its part, The S&P 500 closed 0.65% higher. All three indexes still rest well above both their respective 50-day and 200-day exponential moving averages (EMAs). Our Buy signal remains active.

Trend Timing School

Concentration of force

A vital corollary of a buy and hold investment strategy is asset allocation as a risk management tool. Instead, as Trend Timers we advocate concentration of force with substantially all of our serious money dedicated to achieving superior long term results in the stock market.

Asset allocation is the act of distributing your portfolio between different, non-correlated asset classes like bonds, cash, real estate and stocks. Yes, we are all involved in asset allocation in order to best serve our specific circumstances and needs. For example, anyone of working age should save and set aside a safety buffer in cash or other liquid and readily accessible vehicle as contingency for a job loss. How much you set aside depends on numerous personal factors such as being single or providing for a family, years to retirement, your spending habits, how long a period of time you estimate could be required to find another job, etc. Other commonly accepted asset allocation strategies would be for someone in their younger earning years to assign a large percentage of assets to equity investments for long term growth and a small fraction to fixed income, versus a retiree who would reverse that distribution to maximize income generation and limit risk. This type of asset allocation is justified and is a must for everyone.

We are talking about the moneys we have left after the safety net, the income generation requirements and other necessities have been taken care of. It is the money we are ready to put to work on our long term wealth building endeavors. For that portion of their portfolio, buy and hold investors use asset allocation as a risk management technique. When you think of it, it makes perfect sense that, being doggedly committed to staying the course with buy and hold, one would be leery of placing all one's eggs in the stock market basket, or any other basket that is known to take major spills every now and then.

While the motto of the buy and hold crowd has always been that "It is impossible to time the market", many have noticed the hypocrisy of buy and hold money managers and advisors frequently resorting to shifting allocation between asset classes. When confident of rosy economic conditions and bullish on the stock market, they will routinely shift a greater percentage of their assets to equities in an attempt to improve performance or conversely, attempt to lower risk by reducing exposure to stocks when getting bearish. Of course we all know that this is nothing but market timing under a different name and since it is generally based on educated hunches and opinions it is entirely based on market predictions. We are normally sympathetic to attempts at timing the market, but we take exception here, because history has proven that it is impossible to consistently and reliably predict the stock market.

Diversification between non-correlated asset classes is, by definition, a drag on performance. Your returns average down because, while one asset may perform well, your portfolio always holds others that are not faring as well. Any serious wealth building system involves consistently achieving superior returns over the long term. You cannot count on achieving yearly returns of say 15% or more on average by diluting your efforts with sub par investments. Imagine a year when the stock market has a great year with 20% returns, but having only earmarked 25% of your assets to equities your actual return is likely to be closer to 5%, if you did not go too heavily to cash or, god forbid, to asset classes that are losing money. So, instead of averaging down through diversification, we like to apply concentration of force.

Militarily speaking, concentration of force has been an essential ingredient of conventional warfare ever since World War II and the advent of armored fighting vehicles. Simply put, the concentration of force doctrine of carefully selecting and exploiting a given engagement increases the chance of winning the battle. Concentrating firepower in one point generates far greater force than spreading the same along a line and fighting a broad front. This is based on the generally accepted formula that the power of a military force is the square of the number of members in that unit. Two tanks dish out four times the combat power of a single tank and can take four times the punishment. Two key aspects of executing concentration of force maneuvers properly are mobility and power, which led to the gradual shift of focus from infantry to cavalry, and then to tanks.

To extend the military analogy to the world of investments, the Trend Timing system provides the key intelligence and weapon to make a concentration of force doctrine possible and effective. Trend Timing is like your personal mechanized division. It provides mobility and lets us change direction when the broad market trend changes, but it also delivers power by helping us target the strongest markets.

Do not get us wrong, we are not suggesting you put all your moneys in any one investment or any one system, including ours, and we are very much in favor of diversification as a risk management tool. The broad market indexes we track and their related investment vehicles offer the protection of broad baskets of stocks. We further recommend diversifying among several geographic regions with the strongest momentum.

We all need to have our cash reserves, a roof over our heads, enough current income, and it might even be wise to allot some of our money to hard assets such as gold for rainy days, but when it comes to our wealth building program we want to maximize our returns by concentrating all remaining assets to the asset class with the highest historical returns: stocks. Instead of diluting our equity exposure for fear of a major market downturn, we use our trend following technique to keep us on the right side of the market most of the time, and to participate in any meaningful move up or down.

FAQ of the Week

Question: Please explain why Results page signals do not match my recollection?

The discrepancy is due to a revision to our Model that drastically improved the performance.

We have been operating under a revised Model since July 14, 2006. The "Results" page is based on backtesting until July 14 and live history since then. We clearly state at the top of the "Results" page that all returns are based on the current Model, which went into effect on July 14; and that earlier returns are backtested hypothetical results. The primary difference in the revised Model is the ability to detect the existence of conflicting simultaneous bullish and bearish patterns. This condition was present during the whipsaws which occurred this summer. For more details about the differences and detailed backtesting of the original and revised Models you can read the Weekly Updates of August 11 and August 18, 2006.

In order to be as transparent as possible and provide the accountability you are looking for, we also keep a separate "Trades History" page with returns for all "live" TimingCube signals since June 18, 2001. We had to find the right balance between the need expressed by many subscribers to have the "Results" page show returns with the revised Model and the necessity to keep reporting actual live results. That is why we decided to implement two different pages.

Warm wishes and until next week.

The TimingCube Staff