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

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500

Market Update

Ben Bernanke succeeded Alan Greenspan this week as the Federal Reserve chairman. On the last day of Greenspan's tenure, the Fed raised the funds rate by 25 basis points for the 14th consecutive time, bringing its yield to 4.5%. The Fed issued an ambiguous accompanying statement that read "Some further policy firming may be needed". The markets did not react at that point, but growing nervousness among investors became apparent on Friday as markets tumbled following the release of the January employment report. An unexpected drop of the unemployment rate to 4.7% combined with higher than expected hourly earnings to reignite fears that inflationary pressures will force the Fed to keep raising interest rates. Rising oil prices and a disappointing earnings report from Amazon.com did not help. Technology stocks took the biggest hit as Google's earnings had already come short of expectations on Tuesday evening. As a result, the Nasdaq 100 lost 2.72% on the week and now rests below its 50-day exponential moving average. Our leading index, the Russell 2000, fared much better as it only shed 1.09% and remains well above its 50-day EMA. As for the S&P 500, it closed the week 1.53% lower and has settled right at its 50-day EMA. All three indices remain above their respective long-term 200-day EMAs.

There is no change as far as our Model is concerned and our active Buy signal remains in effect.

Trend Timing School

ETF liquidity

One of the attractions inherent of the index investing method put into practice by Trend Timing is that the investment vehicles are as diversified and liquid as the companies that make up the index. After we published the first two issues of the Trend Timing School in 2006 ("2005 year in review" and "Diversification revisited") which highlighted the potential benefits of diversifying internationally, many subscribers have started looking at ways to participate in various foreign markets. The most obvious investment vehicles happen to be the rapidly growing number of country and regional ETFs. Yet, a closer look reveals that many of them have relatively small assets and are very thinly traded.

For investors used to investing with the large U.S. index ETFs, the contrast can be shocking. Take the QQQQ for example, with $21 billion in assets and an average of 80 million shares traded daily, and stack it against the average country ETF at $200 million in assets on average and a few hundred thousand shares traded per day. With such low liquidity, are these investment vehicles really safe to use? The answer is, for most of them a qualified yes. Before assessing and qualifying how safe they are we need to understand what liquidity is and why the lack of it is generally viewed as a bad thing. An investment that is liquid can be traded easily and rapidly near its fair market value. Our buying or selling of such an asset does not affect its price. Liquidity is measured by the daily trade volume expressed generally as the number of shares per day. Thinly traded equities on the other hand are called illiquid and have high spreads and volatility. The spread is the difference between a security's bid and ask prices. When there is little interest and low trading the spread increases causing the buyer to pay a price premium, and the seller to be forced into a price discount in order to get it sold. This is how liquidity works for most things, but not ETFs.

The way ETFs work makes them immune to certain aspects of illiquidity. The trick is that the so-called market makers, generally large brokerage houses, can create and redeem shares of the ETF in function of market demand. They assemble ETF shares from the shares of the companies in the index it tracks. Contrary to popular belief, the liquidity of an ETF is not related to its daily trading volume but rather to the liquidity of the stocks comprised in the index. Coming back to our QQQQ example, we now have to look at the market capitalization and liquidity of all the companies in the Nasdaq 100 index. Microsoft alone is worth $300 billion and trades an average of 66 million shares per day. No liquidity headaches there. Of course, at the other extreme, you could look at the entire stock market of Mozambique which has four companies listed and a total market cap of $120M (but don't hold your breadth for an ETF for that market!).

Another aspect of ETFs that keeps spreads small (generally less than 1%) is that the market makers, specialists, and arbitrageurs all interact and compete to effectively flatten the premiums and discounts to fair market value.

Still, despite these advantages, we cannot state that illiquidity causes no problems for ETFs. A real drawback of low liquidity of an ETF, regardless of how liquid the underlying companies are, is that it makes it nearly impossible to short because your broker will not have any shares to loan you. The only way to implement a Long and Short strategy is to go short with another, more liquid ETF like QQQQ or SPY.

In conclusion, we believe that most country ETFs, with the exception of those focusing on very low capitalization countries, should be liquid enough to trade safely without undue premiums. One still has to remember that individual countries are a lot more susceptible to local events than broader regional funds. They are more prone to temporarily fall out of correlation with the rest of the world markets.

FAQ of the Week

Question: How can I get the signal when away from e-mail and Internet?

Many of us spend at least some time during the year traveling or otherwise away from reliable e-mail or Internet service, yet needing to stay in touch with the signal without interruption. Some of our newest subscribers may not have discovered the various methods of accessing the signals via phone, and we will remedy this perilous situation right now.

Depending on the type of phone you have access to, there are three methods to get the signals:

Warm wishes and until next week.

The TimingCube Staff