TimingCube - The two schools of investing - Technical analysis, fundamental analysis, tradeguru, Folio A, Folio B

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

It has been a volatile week for the markets, with the major indexes moving up one day only to relinquish their gains the next. Wednesday saw the Dow Jones Industrial Average hit a new all-time high while the S&P 500 closed at its highest level in over 6 years. The gains did not last however, as markets retreated in earnest Thursday. The drop was attributed to a surge in bond yields. Investors had been hoping that the Fed will soon be cutting interest rates, which would be beneficial for stocks. Several strong recent economic reports dashed these hopes. The Commerce Department said Friday that December new home sales rose 4.8%, a much higher number than had been expected. This might indicate that the housing sector has finally bottomed out. Durable good orders also jumped in December, posting their biggest gains in three months. Add to the mix oil prices that are on the rise again, and you get the picture of an economy that may soon justify a rate hike, not a rate cut.

For the week, the Nasdaq 100 and S&P 500 respectively lost 1.33% and 0.58%. The Russell 2000 did better, posting a gain of 0.38%. Both the S&P 500 and the Russell 2000 remain above their respective 50-day and 200-day exponential moving averages (EMAs). As for the Nasdaq 100, it has now crossed below its 50-day EMA, but remains above its 200-day EMA.

For its part, our World Index Ranking portfolio outperformed the US averages again as it posted a 0.85% gain this week. The portfolio consists of the 5 top-ranked world indexes as of January 5, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Sell signal, the World Index Ranking approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. You should remain invested in the top 5 indexes only if you follow the "Buy and Rebalance" strategy, which remains invested at all times. Please go to our Our Service page for all the details.

Our active Sell signal remains in effect.

Trend Timing School

The two schools of investing

As we mentioned last week, the TimingCube Model does not use any fundamental or economic data to determine the underlying market trend. Instead it relies exclusively on technical analysis and several proprietary indicators using the Nasdaq Composite as the data source. To further illustrate the point, we want to review the two main schools of thought when it comes to investing: fundamental analysis and technical analysis.

Analyzing company fundamentals has been the bread and butter for generations of Buy and Hold stock pickers selecting the companies that represent the best value and probability of increasing shareholder equity. Reams of company data such as earnings per share (EPS) and price/earning ratios (P/E) are compared with that of peers, competitors and industry averages to identify the best stocks to buy. We are big believers of this approach when it comes to choosing individual stocks. Great investors such as Warren Buffett or Peter Lynch have proven time and again that a lot of money can be made if you are able to pick the right stocks based on their fundamental strength. However, our view is that the approach is flawed when applied to the market as a whole and cannot effectively help determine the underlying trend. One issue is that when the market suffers a significant drop, the stock of over 2/3^rd of all companies goes down, regardless of their fundamentals. The other problem is that economists and market strategists apply fundamental analysis on a macro scale to determine the future direction of the market or that of specific sub-segments. Broad measures such as employment levels, inventories, the money supply, interest rates and currency fluctuations can all be indicators or even catalysts for stock market movements. All this data is of course widely subject to interpretation: ask 10 economists where they think the market is headed next and you will get 10 different answers! The stated intent of such flawed trend forecasting activity is to shift portfolio weighing from one industry group to another or to re-allocate assets among equities, bonds and cash. This is nothing more than a form of market timing! The main issue with applying fundamental analysis to the market as a whole is that what you get is no more than the opinion of some so-called expert. It is almost certain that unexpected factors such as news and investor psychology will ultimately move the markets in such a way that the prediction will turn out to be plain wrong.

Over the past several years technical analysis has become a popular method of evaluating securities and markets. Instead of attempting to measure a market or a security's intrinsic value, technical analysis strictly looks at past and present market data, such as price and volume, and attempts to identify patterns that suggest future activity. The primary tools of the trade are various types of charts, moving averages, relative strength indexes and support/resistance zones. While many favor complex statistical analysis tools and the recognition of patterns such as head and shoulder, cup and handle or double bottom formations, we try to keep it simple. As trend timers we are strong believers in listening to what the market is telling us, recognize the predominant trend, and following it. While our Model does look at various indicators such as moving averages it leans most heavily on the relationship between price and volume action.

Since there is no fundamental analysis involved in the TimingCube Model, do we use it elsewhere? The answer is yes. The TradeGuru Folio approach is based exclusively on fundamental analysis. The idea is to select a basket of stocks that is likely to outperform over the coming months. Whereas TimingCube relies on technical analysis to time the broad market using index-based ETFs and mutual funds, TradeGuru Folios are invested at all times and are made of individual stocks selected with fundamental analysis. The two systems both outperform over the long-term, but because of their different characteristics, they complement each other very nicely and we therefore believe that they belong to any portfolio. Under the TradeGuru service, we currently offer two Folios, Folio A and Folio B, consisting of ten positions each. To determine which stocks go into each Folio, we screen the universe of all US equities, using fundamental analysis to find stocks with the best value characteristics. The stocks must also meet specific liquidity requirements. For instance, we only recommend stocks of companies with at least $200M in market cap. Whereas Folio B is strictly value-based, the stocks in Folio A must meet specific value and growth criteria simultaneously. We want to buy stocks that have good growth potential but are still reasonably priced. If you are familiar with the concept of "Growth At Reasonable Price" or GARP, it is basically what Folio A is all about.

The TradeGuru Folio service is an easy-to-use and low maintenance system. It was started in 2006 and backtested to 2002. What about performance? Both Folios sport an annualized return of over 50% since January 2002. They both performed very well during the year 2002 (Folio B returned a whopping 58.7%), even though the general markets suffered heavy losses that year. This illustrates the fact that the TradeGuru Folio approach is a long-term all-weather investing strategy which can outperform in any kind of market environment. It therefore complements the TimingCube service very well. For 2006, Folio B matched the performance of the S&P 500 while Folio A almost doubled it with a gain of 29.9%. Please refer to the table below for additional performance figures. It will hopefully convince you that there is also room for strategies based on fundamental analysis in anyone's portfolio.

	2006 Return	Cumulative Return from 1/4/02 to 12/29/06	Annualized Return from 1/4/02 to 12/29/06
Folio A	29.9%	560.8%	51.4%
Folio B	15.3%	626.4%	53.7%
S&P 500	15.7%	45.9%	6.7%

FAQ of the Week

Question: How can I access the signal when I am away?

Various methods of accessing the current signal can be used whenever you are away from your regular computer.

If you have access to a computer with an internet connection that is not yours or is shared you can simply access our Web site as usual. A TimingCube login session will automatically log out if there is no interaction on the Web site for more than 20 minutes. However, we strongly recommend that you log out once you are done so that the member-only information is not accessible to non-TimingCube subscribers.

If you are away from reliable e-mail or Internet service, yet need to stay in touch with TimingCube without interruption, you have three options to get the current signal:

Call our "Signal by Phone" service from any phone anywhere. The message is updated daily, at the same time as the Web site after the market close by 7:00 pm ET. The access phone number is a regular toll number (703 area code) because toll-free numbers (800) cannot be accessed internationally. For security reasons, each subscriber is issued their own unique access code which you can enter or speak when prompted. You can find the access number and your individual access code on the "My Profile" page after you log in. Make sure to carry these number with you when you anticipate being unable to go online.
If your cell phone can receive e-mails, set its e-mail address as your alternate e-mail address on the "My Profile" page after you log in to receive our notifications wherever you are.
If you own a SmartPhone (a mobile device combining the capabilities of a wireless phone with PDA-type functionality), you can use it to browse a special secure "Current Signal" page (https://www.timingcube.com/app/html?page=pda_login). Find all the details on SmartPhone access in the July 9, 2004 FAQ of the Week.

Warm wishes and until next week.

The TimingCube Staff