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

Market Update

Stocks finished the week in a much better way than they started it. All major indexes fell hard Monday, continuing the slide that had started last week after the Fed's decision to cut the funds rate by 25 basis points seemed to disappoint investors. Stocks were able to stop the bleeding and find some stability over the next two days as the Nasdaq Composite found support around its long-term 200-day exponential moving average (EMA). Markets then turned higher Thursday,
with tech stocks providing leadership following a bullish earnings report from Oracle. The Nasdaq 100 gained 1.90% on the day and did even better Friday, jumping 2.03% higher. All major averages participated in Friday's surge, triggered by a better-than-expected rise in profits at Research in Motion and news that a Singapore state-owned fund would provide a capital infusion of $5 billion to Merrill Lynch to help the company cope with hefty write-downs related to its subprime mortgage business. With the Holiday season just around the corner, many investors hope that Friday's positive action marked the beginning of a so-called Santa-Claus rally and that more gains are to come. With only 5 trading days left in the year, we will know soon enough.

For the week, the Nasdaq 100 and S&P 500 respectively gained 1.91% and 1.12%. With small-caps on the rebound, the Russell 2000 did much better, as it posted a 4.20% weekly gain. Both the Nasdaq 100 and S&P 500 have crossed back above their respective 50-day EMAs while the Russell 2000 is closing in on its 200-day EMA.

For its part, our World Index Ranking portfolio underperformed its US counterparts this week with a 0.82% loss. The portfolio consists of the 5 top-ranked world indexes as of December 7, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Volume: the footprints of giants

Stock market prices are the variable that most analysts, investors, indicators and tools focus on to gauge the market and determine trends. Most technical analysis and charting techniques deal with price exclusively. In our brand of trend following there is another variable which in many respects is even more important than price, that is volume.

But before we get to volume we must step back and remember what moves the markets and how trends are made. Ultimately, what causes the stock market cycle is the economic cycle, but the direct link between the two are the institutional investors. For good or for bad, collectively they are the overwhelming force which changes the course of markets at important inflection points. If you can tell when the institutional crowd is on the move and which way it is headed, you know the market trend.

Institutional investors are financial organizations that share one common trait: they manage and invest assets on behalf of others. They include banks, insurance companies, mutual funds, pension funds and hedge funds, and are often referred to as "the big money" or "the smart money." The smart money moniker originates from the fact that big institutions have all the best data resources, analytic tools and armies of analysts at their disposal to make the right decisions. As a result, their professional money managers are more often than not the first to react to changes in the economy. Some dispute how sharp the smart money really is, but that is beside the point. They own the majority of shares of many publicly traded companies, and they account for most of the trading taking place on stock exchanges, at market turning points in particular, routinely above 70%. The stock market ups and downs being a product of supply and demand, it stands to reason that institutions and the large asset pools they command have an impact. They are the giants who form the market trends, and our Model endeavors to detect their moves.

Volume can be very accurate in showing the buying and selling activity of the big institutions that move the market. While our Model looks at a variety of indicators, it is primarily driven by the relationship between price and volume action. Major changes in market direction involve the massive shift in asset allocation by institutional investors and the resulting trading volume, while not all neatly concentrated in a few sessions, delivers identifiable patterns for the trained observer. Volume viewed over a period of time becomes an indicator of acceleration, momentum and money flow, all of which assist greatly in pinpointing trend changes.

There are numerous ways to look at volume with indicators such as the Chaikin Money Flow or the Percentage Volume Oscillator, but we particularly like using accumulations and distributions which quite frequently precede major price moves. An accumulation occurs when the price of a stock or index closes substantially higher AND with noticeably increased volume than the previous day. Conversely, a distribution takes place when the price of a stock or index closes substantially lower AND with noticeably increased volume than the previous day. We say "substantially" and "noticeably" to make sure we discard small variations as meaningless noise. Individual accumulations and distributions are not significant by themselves, but rather when they occur in succession over short periods of time. Alternating accumulations and distributions tend to cancel each other out as they signal conflicting trends.

Our Model is primarily fed with the price and volume data for the Nasdaq Composite index. Besides being a very broad and varied index it tends to have higher volatility than other indexes, another useful attribute for a trend indicator. This volatility accentuates the amplitude of both price and volume swings and in turn facilitates detecting changes in primary market trend.

Of course, just as institutional investors are not perfect and do not form a monolithic block all acting in concert, volume is not a perfect indicator either. Extracting patterns from the noise is always challenging. One factor which also mitigates the usefulness of trading volume as an indicator is that it is influenced by many things other than the moves made by the big money. For example there are seasonal patterns and holidays. As a timely reminder, today is a quadruple witching options expiration day which means that stock options, index options, index futures and single stock futures are due to expire, which will cause the trading volume to be heavier than usual.

Regardless of whether institutional investors are smart enough to anticipate changes in the economy and the stock market, at TimingCube we are firm believers in their collective sway on the markets. Further, our years of research have led us to conclude that changes in trading volume, and the direction of price movements during these changes, are the most reliable telltale sign of what institutional investors are up to. Therefore, our Model primarily relies on volume as an "institutional investor detector" to recognize changes in the broad market trend, and issues Cash, Buy and Sell signals accordingly.

FAQ of the Week

Question: Why did my ETF drop in price as its index rose?

This time of the year we hear this question frequently because it is "distribution season". All ETFs are required by the IRS to distribute substantially all of their income and capital gains to shareholders at least annually, and somehow it mostly seems to happen during the month of December.

Since the fund pays you the distribution out of their accumulated cash, the net asset value of the fund diminishes approximately by the amount paid out. This explains why the share price gaps down at the open on the ex-dividend day by about the amount of the distribution. For the shareholders who receive that amount in cash on the payable date, they see no dip in price. Yet, if they elected to re-invest the distribution they would end up with more shares than before and effectively gained a bigger share of ownership in the process.

Distributions are common across all sorts of funds, including most ETFs and mutual funds, but they are misunderstood by many investors. As always, an example will help shed some light and QLD , the Ultra QQQQ ProShares fund, will do just fine. Looking at Table 1 below we see the surprise uninformed shareholders received on Thursday morning December 20, 2007 when instead of jumping by about 2.5% as it should have (twice the gain on the Nasdaq 100 index it tracks), QLD plunged 3% at the open.

Table 1: The short term effect of a distribution

	Close on 12/19/07	Open on 12/20/07	Gain/Loss
Nasdaq 100 (^ndx)	2031.00	2056.12	1.24%
QLD	99.75	96.75	-3.01%

To diagnose the situation we revert to ProShares' announced QLD distribution details summarized in Table 2 below.

Table 2: QLD 2007 distribution

Ticker:	QLD
Fund name:	Ultra QQQQ ProShares
Dividend:	$0.07
Short-term capital gain:	$4.65
Long-term capital gain:	$0.37
Total distribution, $:	$5.09
Total distribution, %:	5.37%
Ex-date:	12/20/2007
Record date:	12/24/2007
Payable date:	12/28/2007

Now we have all the details: the key dates and most importantly the amount of the distribution, $5.09 or 5.37% of the QLD share price at the close preceding the ex-date. We use our advanced math skills to compute twice the Nasdaq 100 return, compounded by the 5.37% distribution decrease:

((1 + 1.24%) * (1 + 1.24%) * (1 - 5.37%)) - 1 = -3.01%

On December 28, 2007 when the distribution is finally paid, the shareholders will be whole again. Mystery solved!

For details about your specific ETFs, please check with your broker or the fund company. Also, you should check with your professional tax advisor to determine what specific tax implications these distributions have for you.

Warm wishes and until next week.

The TimingCube Staff