What's new this week?

In an effort to provide easier to read and interpret information we have changed the equity charts displayed on the "Home" and "Results" pages to a logarithmic scale. On a log scale chart, the vertical spacing between two points corresponds to the percentage change between those numbers. Thus, on the new log scale charts, the vertical distance between $1K and $2K for example (a 100% gain) is the same as the vertical distance between $50K and $100K.

Signal Update Current Signal Performance as of Signal Type Trade Date Return since issued World U.S. Nasdaq 100 (QQQQ) Russell 2000 (IWM) S&P 500 (SPY)  Market Update Stocks posted losses over the five-day span, retreating for the second week in a row. In the continuation of last Friday's negative action, the main averages opened the week with another decline, caused by weakness in the financial sector and a broad retreat among energy stocks, resulting in a 2.3% loss for the S&P 500 Monday. After a quiet session Tuesday that left the major averages almost unchanged, negative action returned to the markets the next day after the government announced that December retail sales contracted by 2.7%, a number that was much worse than anticipated. Deutsche Bank's announcement of a staggering $6.3 billion quarterly loss also put added pressure on an already weak financial sector. Faced with such a combination of bad news, investors simply dumped stocks, causing the Nasdaq Composite to shed 3.7% Wednesday. As the main indexes continued their plunge Thursday morning, it looked like investors were in for another day of heavy losses, but stocks suddenly turned around after the Dow Jones Industrial Average found support at the 8,000 mark and managed to finish the day in the black. Despite the announcement by Citigroup and Bank of America of respective $8.3 billion and $2.4 billion quarterly losses, the main averages were able to stay the course Friday to finish the session higher for the second day in a row. On the economic front, the Consumer Price Index (CPI) fell 0.7% in December as energy prices retreated sharply. Overall, inflation only rose by 0.1% in 2008, the smallest yearly gain in 55 years. Please note that U.S. markets will be closed on Monday, January 19 in observance of Martin Luther King Jr. Day. The Nasdaq 100 (QQQQ), Russell 2000 (IWM) and S&P 500 (SPY) respectively lost 2.16%, 3.43% and 4.52% on the week. All 3 ETFs remain located below both their 50-day and 200-day exponential moving averages (EMAs). For its part, our World portfolio posted a 4.06% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of January 2, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details. Our current Cash signal remains in effect.  Trend Timing School Managing emotions As most investment newsletters we do spend a lot of time on the markets and what affects them, on technical indicators and investment vehicles. Another topic we visit fairly frequently in this column is the emotional side of investing which we judge to be just as critical for success. A long-term wealth building program must by definition be emotionally sustainable. After a year like 2008 it is no surprise to see high levels of unease, uncertainty and doubt. The fear of more losses or, when the next signal comes, the fear of being on the wrong side of the market are all the tell tale signs of investors at risk of letting their emotions disrupt their strategy or lead to bad decisions. Most investors have trouble balancing greed and fear. We like to frequently remind ourselves that emotions are our worst enemy. A landmark 1994 study by Morningstar demonstrated that individual investors lose money on even the best mutual funds. It showed that while the average growth stock fund gained 12.5% per year over the study's 5 year period, the average investor in those same funds lost 2.2% per year. Why such a huge difference? Because of human psychology and the fact that people are highly emotional creatures, most investors cannot bring themselves to simply buy low and sell high. A more recent study on the "Impact of Emotions on Retirement Investors" confirmed earlier findings once more by observing that although three of four investors (76%) are negatively affected by their emotions, only one third (35%) believe emotions impact their investment decisions. This is a warning sign: most of us are negatively impacted yet we don't believe we are. Yes, there are many factors affecting and influencing our emotions: Our character/predisposition Our risk tolerance Our expectations Our investment time horizon Emotions can take many forms and result in unpredictable investor behavior. Some of us are so overwhelmed and scared by the extent of the economic turmoil and its effects on the stock market that we simply freeze and go into hibernation waiting for better days. While this may be the safe attitude to have while we are with an active Cash signal, it presents the distinct risk of leaving us stranded in our den long after the next signal has been issued and miss the corresponding profit opportunities. Others are more the impatient type and their emotions drive them to jump into action in order to make up for losses or lost time. We also want to take this opportunity to welcome our most recent subscribers and recognize them for their distinct set of experiences and emotional baggage. Contrary to our longer-term subscribers who are largely unscathed by the bear market, many of the more recent arrivals have suffered severe capital losses in the crash of 2008, and their perspective can be quite different. The emotional toll could not be worse than that inflicted on a buy and hold investor during a bear market. Except maybe for a highly leveraged buy and hold investor. On the bright side, by learning the buy and hold lesson the hard way you now truly understand why it makes perfect sense to time the market: to avoid losing your shirt during bear markets! Yet, because of the old adage "once burned, twice shy" these subscribers are amongst the most likely candidates for sudden paralysis in the event of a signal. So, now that we know what emotions can do to us we can look at what we can do to keep these emotions in check. Here are a few simple steps to manage your investor emotions. 1) Have a plan We often describe the objective of Trend Timing as participating in all significant market moves and avoiding all significant declines. We firmly believe in the merits of a mechanical system in large part for removing emotions from the investment process. Our approach is 100% mechanical, rigorously unemotional, and leaves no room for analysis or interpretation of data or news events. The system is not perfect and not all signals will be winners. It does not have to be perfect because over time the absolute protection it offers against significant losses will always keep us safe and beat the market. Rather than perceived risky tactics, market timing signals are the key ingredients in reducing real market risk, helping us keep our emotions in check, and allowing us to stick with our wealth building model for the long run. But since you are reading this, you obviously have taken the first step in having a plan. 2) Turn off the noise and the distractions Maybe most importantly, Trend Timing gives us the luxury of not suffering through the minute by minute, hour by hour agony of market days like we have experienced recently. Too many investors spend too much time glued to the financial news networks and data feeds. News, forecasts, guesses or other subjective judgments, opinions and rationalizations, however educated and inspired they may be, play no part in determining the market trend. You don't need them. Your health is negatively affected by them. And most importantly, your investment results are not improved by them. By trusting our mechanical trend following system you can achieve superior long-term results without worrying about what the market should be doing or why it is doing what it does. With practice you can achieve results and peace of mind. 3) Be prepared Last but not least, you need to pre-condition yourself to pull the trigger unconditionally when required. Being in the shelter of our Cash signal gives us an opportunity to prepare ourselves mentally to execute the plan when the time comes. We want to walk through, and write down, all the steps and rehearse exactly what we will do with a Buy signal and with a Sell signal. Make sure in advance that you will receive, and recognize, our signal change e-mail. Use the "Test E-mail Addresses" function at the top of the "My Profile" page to verify end-to-end delivery Write down your broker(s) account(s) details including Web site addresses, account numbers, user IDs and passwords (also capture the broker phone numbers, just in case their Web site is down or you run into problems) Select your strategies Select your investment vehicles Make the commitment to execute promptly Always remember that it is by participating in all the major moves and avoiding all significant downturns that Trend Timers build their wealth, and keep their sanity.  FAQ of the Week Question: Do you anticipate a rebound soon? This is but one of a series of similar questions we frequently get when volatility increases and markets are erratic. Will the market re-test the lows? How far from the next signal are we? Are the markets sufficiently oversold? All of these questions have to do with the uneasiness of not knowing what is going to happen next and the resulting desire to predict the future. The fact that there are so many experts and pundits willing to make bold market forecasts does not legitimize the practice or make them more accurate. As Trend Timers we never make predictions and instead we let the market do the talking. As the market goes through its gyrations it eventually establishes a new intermediate trend which we detect and follow with the appropriate signal. We do not know when this will happen and neither does anyone else. Don't let them fool you. Warm wishes and until next week. The TimingCube Staff