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

Market Update

After an uninterrupted rise since early December, increased selling pressure forced stocks to retreat this holiday-shortened week, with small caps suffering the most severe setback. With markets closed Monday in observance of Martin Luther King Jr. Day, trading resumed on a weak note Tuesday after investors learned that Apple CEO Steve Jobs is again taking a medical leave from the company. Yet, stocks managed to reverse course to finish the session with minor gains. After the close, both Apple and IBM reported better-than-expected quarterly results, but the news failed to entice buyers Wednesday, as all major indexes instead sold off to finish with their largest losses in almost two months, after several banks reported disappointing results. By day's end, the Nasdaq Composite had shed 1.5% on increased trade. The selling continued Thursday despite better-than-expected weekly jobless claims and existing-home sales data, causing the Nasdaq Composite to relinquish another 0.8% as trading volume expanded again, clearly showing that institutional investors were actively participating in the selling. Despite a stellar quarterly report from Google, the Nasdaq Composite dropped 0.6% further Friday. The S&P 500 did better as it managed to hold onto a 0.2% gain following solid results from General Electric.

The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively lost 0.72%, 2.32% and 4.16% over the five-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 posted a 3.27% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of December 31, 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

Equal weighted index ETF anyone?

In the late 1990s, when mega-large companies were all the rage, everyone loved the S&P 500 performance and its high concentration of super large growth stocks; but in recent years, performance has been lagging. Some say they have found the cause of the problem as being "capitalization-weighted indices", and the cure, in what they call "equal-weighted indices" and ETFs.

But, first things first. Most popular indices, like the S&P 500, Nasdaq 100 and Russell 2000, are so-called capitalization-weighted, which means that the companies constituting the index are represented as a function of their respective size, the largest weighing the most. To illustrate how top-heavy these indices really are, the top 10 companies in the S&P 500 now represent over 26.25% of the index. Another way to emphasise it is to look at the weight of the largest company in the index (Exxon-Mobil) which currently has a market-cap of $394 billions, therefore more than 300 times the size of the smallest company in the index.

It turns out that the top-heavy nature of most indices, and in turn of the ETFs that track them, can become a liability during periods when investors are more enthusiastic about the growth prospects of smaller companies. Some time back, Rydex recognized that fact and, in cooperation with Standard and Poor's, they have developed an equal-weighted index and related ETF.

The little known index is called the S&P Equal Weight Index and the mirroring Rydex ETF is called S&P Equal Weight ETF (RSP). The underlying stocks are identical to those in the traditional S&P 500 index. Instead of the cap-weighted approach, these allocate 0.2% of their assets to each of the index's 500 stocks, which automatically gives more weight to smaller companies, because there are more of them. The smallest company in the 500 has a weight equal to that of the largest. In contrast to the S&P 500's highly concentrated portfolio, the equal-weighted index's top 10 holdings account for just 2% of the portfolio.

So, what would be the advantage of such a fund, you may ask? First, it is more diversified, giving more importance to smaller companies, which has been great because most of them have outperformed the larger ones lately.

As can be seen in Chart 1 below, over the last two years, RSP has outperformed its cap-weighted counterpart, the S&P 500 index itself, or SPY , the oldest ETF, and largest one tracking the S&P 500. Coming out of most recessions it is the smaller companies that exhibit the best stock performance. Indeed small cap stocks are historically the best performing group of stocks, period. It pays to invest in smaller companies as they possess the fastest earnings growth rates which often fuels faster stock price appreciation, at least on the long term. However, as you can see on the chart, there are periods where large caps resist better than the smaller ones, like during the 2008 crash where we can see that the RSP had a slightly bigger drop than the SPY.

Chart 1: RSP versus SPY



So, Equal weight ETFs offer investors a chance to benefit from smaller companies while not abandoning the benefits of the larger companies. As always when dealing with the stock market, there is more than one side to every story. Table 1 below also sheds some light on the actual differences between the two types of funds. RSP being "younger" than SPY by just about 10 years, its liquidity may sometimes be an issue, especially when trying to sell short. Also, some feel that the RSP expense ratio is excessive, four times higher than that of its counterparts.

Table 1: S&P 500 tracking funds, cap-weighted versus equal-weight

ETF ticker	SPY	IVV	RSP
ETF name	S&P Depositary Receipts (SPDRs)	Trust iShares S&P 500 Index Fund	Rydex S&P Equal Weight Index Fund
Style	Cap-weighted	Cap-weighted	Equal-weighted
Total expense ratio	0.09%	0.09%	0.40%
Net assets	$78B	$23B	$3.3B
Volume, daily	154M	2.85M	957K
Began trading	Jan 93	May 00	Apr 03

With the proliferation of ETF instruments of late, lots of new equal-weighted funds have emerged lately (see FAQ below). So the equal-weighted strategy can be played through many different angles.

All this being said, thoses interested in the higher performance of smaller stocks may simply look at the Russell 2000 index, and its tradable shadow, the IWM ETF, this of course while the small-caps stay ahead of the game which might not be the case for ever.

FAQ of the Week

Question: Are there any other equal-weighted index ETFs?

For those of you interested by the prospects of equal-weighted index ETFs, here is a tentative list. Far from being exhaustive, it focuses on the major ones, excluding those that are tracking any particular sector. For more detailed information, please follow the link to the fund owner.

Ticker	Name	Fund Family	Net Assets	Expense Ratio	Inception
QQEW	NASDAQ-100 Equal Weighted Index	First Trust	$77M	0.6%	Apr 2006
EWRI	Rydex Russell 1000® Equal Weight	Rydex	$8M	0.4%	Dec 2010
EWRS	Rydex Russell 2000® Equal Weight	Rydex	$6.5M	0.4%	Dec 2010
EWRM	Rydex Russell MidCap® Equal Weight	Rydex	$6.4M	0.4%	Dec 2010
EWEF	Rydex MSCI EAFE Equal Weight	Rydex	$17.2M	0.55%	Dec 2010
EWEM	Rydex MSCI Emerging Markets Equal Weight	Rydex	$12.3M	0.7%	Dec 2010
EWEF	Rydex MSCI All Country World (ACWI) Equal Weight	Rydex	$4.1M	0.6%	Jan 2011

Warm wishes and until next week.

The TimingCube Staff