• Diversification options, January 23, 2004
• The power of diversification, March 19, 2004
• The Trend is contagious, June 11, 2004
• Index blends, October 22, 2004
• International diversification, November 12, 2004
• Currency hedging, September 9, 2005

The initial reaction of many subscribers following last year's results was to toss their QQQQ shares out the window. That is called a tantrum, not diversification. Looking at the early 2006 evidence, there were more than enough buyers ready to scoop up those shares at what they believe are attractive prices, lending credence to experts predicting that the long-dormant groups of technology, finance, and healthcare may rise to the fore again. Chasing performance by going after last year's winners is often a bad strategy because of never ending leadership rotation.

Similarly, should you give up on the U.S. stock market altogether because it was thoroughly outpaced by international markets over the last couple of years? Absolutely not. Despite the serious challenges faced by the U.S. (ballooning national debt, escalating budget and trade deficits, and two ongoing wars to name a few) we do not believe you should write off the U.S. stock market. The answer might be different if we promoted buy and hold investing, but with our all-weather trend following method, we really don't care which way the market goes. What we need to be successful Trend Timers is to have volatility and trends, up or down, rather than the stagnant, range-bound U.S. markets of the last couple of years. It is starting to look like we may be getting our wish soon.

The reason for diversification is that no one can consistently and accurately predict which market index, region or sector will do best in the future. By owning varied positions at all times we lessen the impact of the weaker ones and benefit from the stronger ones, regardless of which they are.

Another point of confusion regarding international investment options was whether to just buy and hold, or trade according to the signals. We would never advocate buying and holding, and because of the tight correlation between world markets we have often written about, the smart way to invest in them is definitely by following our signals. This means you should get rid of them whenever we issue a Sell signal. For Trend Timers implementing Long and Short strategies, shorting most of the international ETFs can be a problem. Because of low liquidity, most of these ETFs cannot practically be shorted (your broker will not have any to loan you). A few, like the Japan fund are optionable, which means that they can effectively be shorted by buying puts. Otherwise, the simplest technique is to use them to go long, and to revert to U.S. based vehicles for shorting during Sell signals (like the QQQQ you threw out the window).

As far as which international funds to select, the only guideline we can provide is that single-country and emerging-markets funds are notoriously volatile. Individual countries are more susceptible to falling out of sync with world markets than regional funds, even emerging market funds. Unless you have some insight into which country's stock market should do well, you would probably be better off sticking with broader regional plays such as a Europe, Pacific, or Latin America fund.

One last note of caution is that the industry sectors we listed in last week's issue tend to be non-correlated with the broad markets, and thus with our signal. At times, when they do well, funds like the energy sector fund (XLE) seem to greatly benefit from timing with our signal as shown in recent results, but this is pure coincidence. You may well want to invest in some of these funds to diversify your portfolio (for example, owning some gold through GLD is probably a good idea in any portfolio), but don't expect the TimingCube signal to assist you with timing them.

Warm wishes and until next week.

The TimingCube Staff