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

Market Update

The major indexes rebounded sharply this week to recapture a good portion of the losses they had experienced since November 1^st. After a losing trading session Monday that saw the S&P 500 close just above its August low, stocks reversed course Tuesday as market participants were encouraged by a $7.5 billion capital infusion for Citigroup and a big decline in oil prices.
Building on their gains, the main averages surged on heavy volume Wednesday, with the Nasdaq Composite jumping 3.2% during the session. Investors welcomed comments by Federal Reserve member Donald Kohn that hinted at additional rate cuts to help the economy and the fact that oil prices dropped for the second day in a row. Stocks were able to hold onto their big gains Thursday and even managed to close higher for the third consecutive day. Friday saw several positive developments that helped the S&P 500 and Dow Jones Industrial Average close higher again to cap a very positive week for the markets: oil prices falling below $90 per barrel, a report that a bailout plan for subprime borrowers is in the works and comments from Fed Chairman Ben Bernanke that implied that additional rate cuts are on the way all combined to give the stock market a boost. There was a bit of weakness in tech stocks due to Dell's disappointing earnings report and outlook, which caused the Nasdaq 100 to post modest losses Friday. However, the index posted solid results over the course of the entire week, as it gained 2.97%. The S&P 500 and Russell 2000 posted respective weekly gains of 2.81% and 1.69%.

The Nasdaq 100 is now back above both its 50-day and 200-day exponential moving averages (EMAs) while the S&P 500 has reclaimed its 200-day EMA to close just below its 50-day EMA. Still lagging, the Russell 2000 remains located below both its EMAs.

For its part, our World Index Ranking portfolio outperformed its US counterparts by posting a 4.86% weekly gain. The portfolio consists of the 5 top-ranked world indexes as of November 9, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

The business cycle

Looking at the recent cover stories and lead articles of many financial publications, from the Economist to Fortune, all one sees is concern about America's vulnerable economy and the impending recession. The growing consensus amongst pundits appears to be that the slumping housing prices, the credit crunch, Wall Street woes and rising oil prices are not only taking a toll on consumer confidence but on their wallets. Debt-laden consumers seem all but certain to push the U.S. economy into recession. The very mention of recession reminds us that there is this thing called the economic cycle or business cycle, with its periodic but irregular up and down fluctuations in economic activity.

Chart 1 below introduces the terminology used by economists to describe the business cycle. The distinct stages of the business cycle are expansion, followed by peak, contraction and trough.

Chart 1: Anatomy of the business cycle

Investopedia places the average business cycle duration at three to five years peak to peak, with an expansion phase lasting about 45 months on average, and contractions 11 months.

Expansions are often subdivided into distinct recovery and prosperity stages. The recovery, as the name indicates is the expansion from trough up to the level of the previous peak, erasing losses experienced during the previous contraction. The prosperity stage is sometimes called the growth stage because it is where an expansion is supposed to establish a new higher peak.

The contractions come in various flavors depending on their magnitude and duration. They go from simple slowdowns, consisting of lower growth rates over a few months, to recessions, to the dreaded depressions. A recession is defined as a significant contraction of economic activity over a period of at least 6 months. A frequently used recession benchmark is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP). They can last from a few months to as long as 18 months.

Ever since the Austrian School economic theory developed it, the world has been forced to believe that the business cycle exists. A more contested part of the theory explains an economic depression as "a reaction to an intertemporal production structure fostered by monetary policy setting interest rates inconsistent with individual time preferences". In layman's terms this means depressions, and the entire business cycle they are part of, are created and amplified by the interest rate machinations of central banks. There is a lot of evidence that the Fed's very rapid contraction of the money supply in the face of the Stock Market Crash of 1929 made what would have been a recession a great depression. All governments feel a responsibility to regulate and smooth economic activity, and they use various tools such as monetary policy to achieve their goals. While not everyone agrees about the Fed's role and responsibility in past business cycles, most everyone agrees that they are not very good at predicting it and that their intervention efforts are frequently too much too late.

Which stage of the business cycle we are in matters not only to economists and politicians, but to investors as well because, inextricably linked to the business cycle, there is the corresponding stock market cycle. Chart 2 below depicts the relationship between business and equity market cycles. The Fed makes investors happy by cutting interest rates - just this week Goldman Sachs said it expects the Fed to slash the benchmark rate to 3 percent by the middle of next year to head off a recession.

Chart 2: Economic and market cycle relationship

The sad part about business cycles is that unlike implied by statistical averages and many "cycle investment theories", they are wildly irregular in frequency, amplitude and duration. What is even worse for investors hoping to predict the future of the stock market is that the business cycle only provides a lagging indicator, by an average of 4 to 6 months. Alas, all the cycle vagaries do not stop the world from trying to predict them.

Although third quarter economic growth numbers just released by the Commerce Department come in at a healthy 4.9% annual rate, the impressive performance is not expected to last. The fact that the U.S. economy is slowing is not a secret to anyone. Fed Chairman Ben Bernanke has acknowledged that the economy has slowed "noticeably" in the fourth quarter but he also said "Our assessment is for slower growth, but positive", meaning no recession. The Federal Reserve has officially cut its economic growth forecast for next year to 1.8%-2.5% from its June estimate of 2.5%-2.75%. Even the White House lowered their economic forecast for 2008, placing the GDP growth estimate at 2.7%, down from 3.1% previously.

A growing number of Americans also expect the economy to tip into recession in the next year, 40% last week, up from 31% in October, according to a Reuters/Zogby poll. With consumer spending accounting for about three-quarters of U.S. economic activity, some economists say it is inevitable that the economy will stop growing at some point in the coming year, for the first time since the mild recession of 2001.

Of course predicting the timing and the magnitude of future economic slowdown is generally a fool's errand and economists have not a better track record than the Fed as prognosticators.

Even the National Bureau of Economic Research, often viewed as the official arbiter of U.S. business cycles, does not engage in forecasts. In fact they declare the official peaks and through with quite some lag. For example, the March 2001 peak of the previous expansion was announced November 26, 2001, and the November 2001 trough was announced only in July 17, 2003. You can visit their web site for a wealth of information including the official list of U.S. Business Cycle Expansions and Contractions.

The ECRI (Economic Cycle Research Institute), a broadly followed and well respected economic think tank said last week that its U.S. leading index fell for a fifth straight week to -1.2%, the weakest since September 2006, but short of the -5% or -6% reading that would point to a recession. The index's components include housing activity, job growth, interest rates, investor confidence, money supply growth, corporate profits and productivity. The index is known for having reliably predicted previous recessions 4 to 6 months ahead of time.

We don't know how close we are to the beginning of an economic contraction, be it a slowdown a recession or a depression, but we will be able to tell when the equity market turns decidedly down. Our Model is by no means perfect, as demonstrated by the short whipsaws earlier in the year, but we look forward to making some money with the increased volatility going forward and, eventually, the major downdrafts of a bear market.

FAQ of the Week

Question: Who is Fraser Partners on my credit card statement?

As we have been communicating for a few weeks with messages on the "Current Signal" page and in "Weekly Updates", your credit card charges with us will now be listed as coming from Fraser Partners, LLC, the company under which TimingCube has operated all along. This minor change in our credit card merchant naming will remove ongoing confusion for subscribers of TimingCube's sister services (ETFTide and TradeGuru). Now the charges from all three services are listed as coming from Fraser Partners, LLC.

Warm wishes and until next week.

The TimingCube Staff