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

Market Update

This week was largely dominated by economic news. Stocks held their own the first two days of the week despite Tuesday's release of a weaker-than-expected Chicago PMI report for October. The measure on Midwest manufacturing fell to 53.5 versus the 58.0 reading economists had forecasted. The Institute for Supply Management (ISM) reported its national manufacturing index the next day: it dropped to 51.2 in October, the lowest level since mid-2003. With both the Chicago PMI and ISM index pointing to a softening economy, investors took profits and drove the markets lower Wednesday. Other disappointing economic news was released Thursday, as third-quarter productivity was unchanged versus the expected 1.1% gain, while higher unit labor costs rekindled inflation fears. Still, the major averages managed to stay flat on the day. Friday saw the release of the much-awaited employment report. Non-farm payrolls rose by 92,000 in October. While that number was below the expected 125,000 gain, both the August and September figures were revised significantly higher and the unemployment rate fell to a five-year low of 4.4%. In light of the employment data, the economy does not look so weak after all.

The Nasdaq 100 and S&P 500 respectively lost 0.79% and 0.95% on the week. Small stocks fared worse, as the Russell 2000 shed 1.71%. All three indexes are still located above both their respective 50-day and 200-day exponential moving averages (EMAs). Our current Buy signal remains in effect.

Trend Timing School

Elections and the stock market

As we approach the important U.S. midterm elections to be held on Tuesday November 7, 2006, some investors wonder what impact the results may have on the stock market. Others doubt there is any connection between the world of politics and the stock market. And we ask ourselves, even if there is a relationship, how reliable a market timing indicator could politics be?

But first, we would miss a great opportunity to do our civic duty if we did not dedicate at least one paragraph to brush up on our electoral system knowledge. Midterm elections, as the name indicates, occur in the middle of a President's four year term. They are to select one third (33) of the members of the U.S. Senate for six year terms, all seats (435) of the House of Representatives for two year terms, and many state and local officials.

Now back to the link between the election cycle and the stock market. For once, those who argue that the stock market cannot be manipulated and other government conspiracy disbelievers are clearly proven wrong by history. The fact that the stock market generally follows the four year presidential election cycle is clearly borne out by statistics. Much research has been done on the subject by many people over many years and data abounds, some of it quite compelling.

Whether we like it or not, the President, his administration and his political party all stand to benefit greatly from continuing to apply the influence that Washington has exerted on Wall Street throughout history, at critical points of the four year election cycle. The way the four year election cycle is driven is that the administration in power wants to make the economy look as good as possible during the presidential election year (year 4 in the cycle) to pacify and energize the voters. The way this generally plays out is that the first two years of a President's term is when all the bad stuff tends to happen. It is then that wars frequently get started and when recessions and bear markets occur. Somehow, the first two years in the cycle are on average the worst for the stock market, with year 2 (2006 is year 2) the worst of the two. The key word to remember is "on average", and you cannot take statistics to the bank.

Interestingly, the pre-election years or year 3 (2007 in the current cycle), is the best. This is also the most convincing statistic of the lot, with ALL third years showing the highest returns since the great depression (which by no-means guarantees it will happen this time around).

The government, at least some of the time, attempts to shape the economy for the better, not necessarily the stock market (although jawboning the markets by government and Fed officials is a long and rich tradition in this country). Still, since it is widely accepted that the economic and stock market cycles are broadly correlated (see "Dismal indicators"), it makes sense that by influencing the economy one would indirectly impact the stock market. Since the stock market generally leads the economy, it also makes sense that the stock market should do best the year prior to the economy doing best.

Not all statistics are nearly as clear cut as the pre-election year record, and some of the widely held beliefs are actually wrong. For example, popular wisdom has it that the stock market does better with a Republican President. Wrong! Over the last hundred years or so, the average yearly gain under Democrats is almost 30% higher than when the Republicans occupied the White House. Regardless, the election cycle phenomenon has been going on regardless of the party residing in the White House, so this is really not a partisan discussion.

We have mentioned election based stock market predictions before in "Seasonality investing", and this reminds us that, as we leave October for November, we are also at an annual crossroads for the markets. October is known as the "jinx month", probably because it is when many of the worst stock market crashes occurred (e.g. 1929, 1987, and 1997) and because it is also the month during which bear markets frequently end, but despite this reputation it is not the worst month on average. That distinction goes to September. In case you noticed that this year's September and October happened to be good months for the stock market you can start to grasp the poor reliability of statistics and averages as investment timing indicators.

Still, according to Nasdaq statistics we should be excited because the November through January period is the strongest of the year, with the three individual months also the leading gainers (January being the best of the best). November also marks the beginning of the best 6-months of the year, statistically speaking.

With all of this in mind, there are a couple of key points to remember:

FAQ of the Week

Question: Is there a solution if I am unable to monitor the system or trade myself?

A key success factor with any trend following investment system, even one which trades as infrequently as ours, is to be able to monitor the signals and trade in a timely fashion. There are many circumstances which might prevent you from staying on top of the signals, such as traveling or being away from the Internet and e-mail for prolonged periods of time.

You may also be in need of help if you ever get to the point where the responsibility of monitoring and trading creates too much stress in your life, or if you feel unable to unemotionally follow the signals.

But not to worry, if you find yourself in such a situation our friends at MarketTrend Advisors can help with a managed account. MarketTrend Advisors is a full service investment advisory firm serving individual investors and they specialize in implementing the TimingCube strategies, including the World Index Ranking service.

You can find all the details about MarketTrend investing and managed accounts by going directly to their Web site at www.MarketTrendAdvisors.com or by contacting them directly at:

MarketTrend Advisors, Ltd.
3720 Gattis School Road #800-214
Round Rock, TX 78664

Phone: (512) 255-8722
Fax: (512) 255-8732
E-mail: info@MarketTrendAdvisors.com

Business hours: Monday through Friday 8:00am to 5:00pm Central Standard Time

Warm wishes and until next week.

The TimingCube Staff