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

Market Update

It has been a wild week for stocks that saw most major indexes retreat again. Following last Friday's plunge, equities staged a rebound Monday as investors cheered news that the ISM index of manufacturing activity hit its highest level in 5 years last month. The S&P 500 gained 1.4% during the session and was able to repeat that performance Tuesday on solid housing data and a rise in commodity prices triggered by a lower dollar. After an uneventful session Wednesday that left the major averages little changed, stocks took a beating on heavy trade Thursday following a disappointing weekly jobless claims report and concerns over the mounting level of debt several European countries, namely Portugal, Greece and Spain, are facing. Market participants did not ask any questions and simply dumped shares, yielding the S&P 500 a 3.1% daily loss and causing all major indexes to undercut last week's lows. The Labor Department released a mixed employment report before the open Friday: if the unemployment rate dropped from 10% to 9.7% in January, more jobs were lost than economists anticipated. Also facing renewed worries over debt-ridden European nations, market participants decided to focus on the negative side of the story and at first continued to sell before a late-day rebound allowed the S&P 500 to recover from a 1.8% intraday loss to finish the session with a small gain. Despite the rebound, the large-cap index still capped its fourth straight weekly drop.

The S&P 500 (SPY) and Russell 2000 (IWM) respectively lost 0.68% and 1.40% over the five-day span, while the Nasdaq 100 (QQQQ) did better as it managed to post a 0.44% gain. All three ETFs are located below their 50-day exponential moving average (EMA) but remain situated above their 200-day EMA.

For its part, our World portfolio underperformed its U.S. counterparts this week with a loss of 3.34%. The portfolio consists of the 5 top-ranked world ETFs as of January 29, 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

The liquidity factor

We have always loved the convenience, diversification, liquidity, transparency, and low cost of the ETFs which form a cornerstone of our service. In view of recent concerns and issues with the liquidity of certain exchange traded funds, maybe we should be a lot more specific and spell out more clearly that we do not mean just any ETF, but the index-based and open-ended variety of ETFs. To understand how the liquidity of such true ETFs is really the combined liquidity of the companies in their underlying stock market index, and why this is not the case for closed-end funds (CEFs) or exchange traded notes (ETNs), we need to briefly review how ETFs are created and unmade.

It is true that large U.S. index ETFs still dwarf most country ETFs. Take the SPY for example, with $72 billion in assets and an average of 200 million shares traded daily, and stack it against the average country ETF we track, at $2 billion in assets on average and a million shares traded per day. Since they are less liquid, are these investment vehicles really safe to use? The answer is yes.

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 normally 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.

Unlike most equities which are issued in fixed quantities, ETF shares are dynamically created and unwound in function of demand which makes them immune to certain aspects of illiquidity. So-called market makers, generally large brokerage houses, can create and redeem shares of the ETF by assembling them from the shares of the companies in the index it tracks. Thanks to this, the price of an ETF is primarily set by the price of the companies in the underlying index, and the liquidity of an ETF is not related to its daily trading volume but rather to the liquidity of the stocks it includes.

A key market force that keeps ETF 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. They trade ETFs and index futures for profit to exploit any value spread developing between the fund and the index, and in so doing keep the spread of ETFs very small. This fundamental market process simply does not exist for closed-end funds or ETNs and this is what causes these funds to have discounts/premiums which can grow quite large and unchecked. Their share value is influenced by the level of demand for them.

In conclusion, we believe that all the true ETFs we recommend in our service, including the country ETFs should be liquid enough to trade safely without undue premiums.

FAQ of the Week

Question: Can TimingCube impact stock prices?

To be honest, we are flattered when we hear this concern from existing or prospective subscribers, but our innate modesty compels us to admit that we are nowhere the size to cause substantive price changes in the ETFs or mutual funds impacted by our calls, be they Buy/Cash/Sell timing signals or World ETF Ranking Top 5 rebalancing.

As detailed in the Trend Timing School article above, the liquidity of an ETF is that of the liquidity of the companies underlying the index it tracks. Unlike the price of closed-end ETFs and Exchange Traded Notes (ETNs) which can be affected by the demand/supply for the fund itself, ETF prices are primarily driven by the price of the index they track. With a few thousand followers we do not represent nearly enough volume to budge broad country indexes.

Warm wishes and until next week.

The TimingCube Staff