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

Market Update

Even though they managed to remain little changed over the five-day span, stocks finished the week on an ugly note. Intel announced Monday that it is increasing its buyback program. The news boosted the tech sector and helped the major averages recapture last Friday's losses, with the Nasdaq Composite posting a 1% daily gain. Stocks then traded in negative territory during most of Tuesday's session before a late rebound allowed them to close little changed. Better-than-expected data on new-home sales helped push the market modestly higher Wednesday, yielding the S&P 500 a 0.4% gain. The Fed said in the afternoon that it is leaving interest rates unchanged and that it would pursue its bond-buying program. The news was largely expected and had therefore little impact on stock prices. Despite weekly jobless claims data that came in higher than expected, the main indexes managed to notch additional gains Thursday as strength among chipmakers spilled over to the rest of the market, resulting in a 0.6% advance for the Nasdaq Composite. The market tone changed radically the next day however, as stocks suffered a broad-based sell-off on heavy trade. The increased volume clearly indicates that institutional investors participated actively in the selling, yielding the market its worst one-day loss in almost six months, as illustrated by the 2.5% drop suffered by the Nasdaq Composite. The sell-off was attributed to news of mass protests and rioting in Egypt and to disappointment over the latest GDP reading. The economy grew at a respectable 3.2% annualized rate during the last quarter, but economists were expecting a 3.7% increase.

The Russell 2000 (IWM) and Nasdaq 100 (QQQQ) respectively gained 0.29% and 0.09% over the five-day span while the S&P 500 (SPY) lost 0.51%. 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 1.42% 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. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. 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

How far until the rubber band breaks?

As we write this the Dow Jones and S&P 500 are wrestling with round numbers 12,000 and 1,300, respectively. Since the Fed's QE2 rally kicked off in late August, markets have marched higher with only a pause for reflection in November. Higher-risk small and midcaps led the way early on, but this month it has been the "Bigs" that have taken up the baton. Market heavyweights such as GE and IBM have been the stars of the show in January, propelling the Dow Jones to an unusual spot of leadership among the indexes in recent days. Commodity-driven stocks, the typical force behind the market's moves over the past decade, have split leaving emerging markets lower despite a significant decline in the U.S. dollar while sectors such as energy have marched higher without resting for months. All this upward bias leads one to wonder how far stocks can go before gravity (and mathematical necessity) pulls them back home to visit their longer-term moving averages.

Chart 1 below draws bands out from the 50-week moving average to show how an index will normally extend only so far before being drawn back into the normal range. This is shown very well through the late 1990s and then again in the bear market of 2001-2002.

Chart 1: An index can only stray so far from 'home'



We know that bullish markets can remain "overbought" for quite awhile before that investor enthusiasm parties itself out. As the stock index shoots higher, the moving average follows suit, accelerating its ascent in the wake of the index's move. We see this action above as the midcap index tracks the upper bound of the moving average band through the first half of 2000 and again for an extended boundary-hugging ride in late 2003.

Chart 2 brings us current.

Chart 2: Midcap index is livin' on the edge



We have the boundary-hugging 2003 ride on the left of this chart. The boundary-crashing shock of 2008-2009. And the subsequent recovery leading to the recent near-vertical charge of the midcaps. As we saw in late 2003, hitting this boundary does not always portend a pullback. The index can remain on the edge for several weeks as buyers pile in.

Which brings us to our philosophy on stock market investing. Using any sort of indicator - fundamental, economic, or technical - to try and foretell which way the market will go has broken the hearts (and wallets) of many investors. It's always best to not fight the market, instead following in its path. Sometimes that journey might be short; sometimes filled with switchbacks. But our history shows that following the market's path, rather than trying to predict its course, leads to the most rewarding results.

FAQ of the Week

Question: I know that ETFs are becoming more "actively managed". Any that you all find particularly interesting?

Perhaps not actively-managed in the sense of someone making day-to-day decisions, we do know of one new ETF that speaks directly to our worldview. Trend-following, our preferred method for investing, has really caught hold over the past few years as investors got whipped around by the financial crisis only a few years after weathering the tech-induced market bust. Finally, the ETF world has fully embraced trend-following with an ETF (and ETN) built on a very simple trend-following methodology. RBS (Royal Bank of Scotland) has recently unveiled the ETF symbol TRND that buys and holds the S&P 500 as long as stocks remain above their 200-day moving average, moving to T-bills when stocks fall below that average for more than a week.

Naturally, we applaud RBS for joining the trend-following ranks and offering investors a simple way to access a basic form of this wealth-preserving strategy, noting that using a simple 200-day moving average as the reference point still would have delivered 20%+ drops over the past decade. 20% is far better than 50%, of course, and, as such, this type of thinking among ETF issuers is a great step forward for investors.

Warm wishes and until next week.

The TimingCube Staff