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

Market Update

Despite a solid start Tuesday, stocks suffered a sharp retreat this holiday-shortened week. Positive earnings news from Citigroup helped the main indexes post gains in excess of 1% Tuesday, allowing both the S&P 500 and Nasdaq Composite to close at their highest level since September 2008. The market tone changed Wednesday as stocks relinquished the previous day's gains on news that China ordered banks to tighten their lending, raising fears that the measure would negatively impact the global economy. Just as the market was attempting to recover early Thursday on the back of great earnings results from Goldman Sachs, news broke that the Obama administration plans to impose new regulations on the banking sector. It was enough to cause investors to dump shares, sending the S&P 500 1.9% lower on heavy trade. The selling intensified Friday despite upbeat earnings reports from General Electric and McDonald's, as market participants expressed their disappointment over Google's results and their rejection of President Obama's banking plans. The S&P 500 sank another 2.2%, capping a negative week for stocks.

The Russell 2000 (IWM), S&P 500 (SPY) and Nasdaq 100 (QQQQ) respectively lost 3.06%, 3.69% and 3.90% over the four-day span. All three ETFs have now crossed back below their 50-day exponential moving average (EMA) but remain located above their 200-day EMA.

For its part, our World portfolio underperformed its U.S. counterparts with a 6.26% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of January 1, which marked the beginning of the current 4-week holding period.

Please note that the VIX volatility index experienced a sharp spike as a result of this week's sell-off, indicating that the market is now oversold. Will the pullback turn into something more serious or will it instead provide for a great buying opportunity? We have no way to know for sure, but what we do know is that our Model has not budged so far and that our current Buy signal consequently remains in effect.

Trend Timing School

What about fundamentals?

We briefly talked about fundamental analysis in our March 6, 2009 article entitled "Fundamental and technical analysis". We have also written about the relationship between the economic and market cycles in the August 7, 2009 Trend Timing School editorial, but we have not recently looked at fundamental analysis as it applies to broad markets.

Fundamental analysts generally study countless details of a company's finances, management and operations in order to ultimately establish its intrinsic value. Cash flow, cost of goods, sales growth, and inventories are but a few of the variables that go into assessing whether a company is undervalued and by how much. While some fundamental analysts have a great track record of identifying good long-term value, they all suffer from two main issues: 1) there is no timing indicator and a stock can remain undervalued for a long time, and 2) during bear markets, 80% of stocks decline with the broad market, even undervalued ones. For this and a few other reasons Trend Timers focus on broad market indices instead of individual stocks.

Which brings us to another class of fundamental analysts, frequently economists, who look at endless economic indicators such as interest rates, employment, gross domestic product (GDP), the balance of trades, and the federal deficit to mention just a few, in order to establish the direction of the economy and of the stock market. We espouse the belief commonly held in financial circles that somehow the economy and stock markets are linked. Where we differ is that we do not believe that analysis of such economic fundamentals can reliably predict the market direction. Again, there is the total absence of timing cues, for example, the markets can be in a clearly excessive overvaluation situation for years. The second and most important argument against this type of fundamental analysis as a prediction tool is that everything is relative. The same exact fact or statistic can be a net positive for the stock market one day and a short-time later be clearly bearish. There are endless examples.

We know that higher interest rates are bad for stocks, we know that a declining stock market is ultimately followed by a slowing economy. Yet the public is constantly puzzled by the contradicting messages. While we are still recovering from one of the biggest financial crisis of all times, we are torn between the risk of inflation that will result from the large amount of stimulus money the Government has poured on the market, and the necessity to keep interest rates low not to derail the economy recovery effort.

The increasing globalisation of the world economy brings a new level of complexity in the already very convoluted space of fundamental economics. In the past Washington had better control over its economic destiny since the US market was more predominent and less impacted by what happened overseas. Nowadays, countries like China have a very influential role over the recovery of the global economy, not to also mention the stake they have in the enormous U.S. federal deficit.

So frequently are long-term trends and short-term reactions caught at cross-currents. Economic news are not only extremely depressing, more importantly, they are almost guaranteed to confuse you. Sometimes the evidence and urgency can seem overwhelming and doubts are hard to put to rest. As Trend Timers we always prefer to ignore much of the never-ending flow of economic information and most importantly squash any analytical temptation. Remember that the markets very seldom do what they are logically expected to do.

FAQ of the Week

Question: Do you offer Managed Accounts?

Yes, indirectly. Our sister company, MARKETTREND Advisors, is a full-service Registered Investment Advisory firm and offers managed account strategies that leverage the TimingCube Trend Timing model and our World ETF Ranking. MARKETTREND Advisors combines our market-beating TimingCube model with additional proprietary tools exclusively for their clients.

For more information and historical performance please see MARKETTREND Advisors’ most recent Quarterly Client Letter or see our Managed Accounts page.

Warm wishes and until next week.

The TimingCube Staff