Signal Type	Trade Date	Return since issued
		World	U.S.
			Nasdaq 100 (QQQQ) Russell 2000 (IWM) S&P 500 (SPY)

Market Update

Stocks lost ground on light trade during the last week of the year. With many investors remaining on the sidelines to enjoy the holiday season, it came at no surprise that trading activity remained subdued all week. The major averages hardly budged at all during the week's first three sessions, despite positive news showing that the economy is getting stronger: consumer confidence is improving, home prices are stabilizing, retail sales ahead of Christmas rose vs last year's numbers and the Chicago Purchasing Managers Index (PMI) for December came in better than expected. Stocks looked ready for a repeat Thursday ahead of the New Year holiday as they remained little changed for most of the session, but sellers stepped in during the last half-hour to yield the S&P 500 a 1% daily loss as some investors apparently decided to lock in 2009 profits.

The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively lost 0.50%, 0.92% and 1.45% over the four-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio again outperformed its U.S. counterparts this week with a 0.51% gain. The portfolio consists of the 5 top-ranked world ETFs as of December 4, which marked the beginning of the current 4-week holding period. Please note that the World portfolio is being rebalanced today, as the current 4-week holding period is now over.

Our current Buy signal remains in effect.

Trend Timing School

A "lost" decade in stocks?

Many market commentators are talking about the "lost decade" in stocks. The S&P 500 looks to end the year 20-25% below its starting value of ten years ago. Factoring in dividends received helps a little, but only a little in this era of stock buybacks rather than higher dividend payments. The Nasdaq Composite index, which entered this decade at a moonshot trajectory, will likely end up having lost a bit less than half its value - back about where it began 1999 and before the true moonshot that kicked off later that year.

Looking back we know all too well the excesses that led to this "lost" decade in stocks. There was the dot-com bubble, which rolled into a real estate bubble, with perhaps a mini-bubble in oil prices thrown in for good measure. All those bubbles have been popped with perhaps others being formed as we speak.

But to look at the decade in stocks as having been a bust is to grossly miss the opportunities and tremendous gains that have been available to investors. The bust was really contained to large-cap stocks and financials. For example, Intel and Microsoft are down 35-40% for the decade. Pfizer lost almost 30%. Walmart dropped 15%. The financial ETF (XLF) is down 30% for the ten years. But small cap stocks were fantastic - no "lost" decade there!

Chart 1 below shows the performance of the 100 largest S&P stocks compared to equally weighted versions of some of the weakest sectors of the decade - tech, financials, and healthcare. The small cap stocks within even these laggard sectors performed quite well lifting the equal weight version to solid returns.

Chart 1: 100 largest S&P stocks versus weakest sectors



Chart 2 expands on this theme by comparing a stronger sector - energy. With oil prices soaring in early 2008 energy stocks of all stripes took flight. However, once again, the performance of the small caps dwarfed that of the giants of the industry. And despite the absolute crash in real estate, stocks of real estate investment trusts - those owners of now-empty strip shopping centers, but also of office buildings, hospitals, etc - have had a reasonable decade.

Chart 2: S&P 500 versus sectors



The real story of the decade has, of course, been the emergence of China and its BRIC cohort as a powerful economic force. Fueled in part by China's building boom in preparation to host the Olympic games, natural resources soared throughout much of the decade delivering massive gains to investors in China and other emerging markets. The explosive growth in exchange-traded funds (ETFs) allowed investors easy access to this enormous opportunity. Our World ETF Ranking approach took advantage of this trend and helped guide you to the best opportunities. The results of that guidance, and our other model returns, are as follows:

Chart 3: World ETF Ranking as of 12/31/2009



You know well our belief that buy and hold can be substantially improved upon, especially in secular bear markets such as this decade has delivered. While many investors have spent the past ten years struggling to find, and hold onto, market gains, we hope we have helped make that goal a much greater reality. We never know what turns the market brings next. But we remain adamently committed to following our Models to the types of gains shown above. We look forward to continuing to have you along for the ride in the next decade.

FAQ of the Week

Question: What is this 2010 Roth IRA conversion all about?

Traditional IRA accounts receive a tax deduction when the money is put into the account. When the money is withdrawn, the owner of the account pays taxes usually at their ordinary income tax rate. Roth IRA accounts do not receive the upfront tax deduction but instead get favorable tax treatment on the distributions from the account - no taxes on most distributions. In short, traditional IRAs are taxed on the way out, Roth IRAs are taxed on the way in. The benefit of the Roth IRA, then, is that all the gains that build up in the account are tax free, which is a huge benefit over decades of returns.

Investors can generally convert from one type of IRA to the other. But doing so carries tax implications. For example, converting from a traditional IRA to a Roth IRA causes you to pay taxes on those "distributions" from the account, and pay them at an ordinary income tax rate. Conversions might also be restricted based on income and other factors. Beginning in 2010, Roth IRAs will waive the income restrictions, meaning that higher income account owners can now convert their accounts to Roth IRAs. To make the conversion more enticing, the federal government is allowing account owners who convert to spread their tax burden over a two year period.

We are certainly not tax or investment advisors nor financial planners. If you are interested in converting to a Roth IRA and taking advantage of this unique opportunity, we would recommend you consult with your tax and/or financial professional.

Warm wishes and until next week.

The TimingCube Staff