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

Market Update

Continuing their see-saw action of the past three months, stocks retreated anew this week. After a quiet session Monday that saw the main indexes close nearly unchanged, investors sold heavily Tuesday, causing a 4.9% drop for the S&P 500. Market participants were apparently disappointed by the lack of details in Treasury Secretary Timothy Geithner's speech on the government's bank rescue plan. Not surprisingly, financial stocks took the biggest hit following Geithner's comments. The major averages found some stability Wednesday and managed to close the session with modest gains. Sellers returned Thursday morning as concerns about the economic stimulus package resurfaced. At its session low, the Nasdaq Composite had dropped 2.3% but a swift last hour rally pushed stocks back into positive territory, helping the index close with a 0.7% daily gain instead. The sudden turnaround was apparently caused by news that the Obama administration is considering a plan that would provide relief to qualified homeowners who are experiencing trouble making their mortgage payments. Stocks closed the week with an up-and-down session Friday. Despite the approval of the revised $787 billion economic stimulus plan by the House of Representatives, the main indexes finished the day with modest declines. Please note that U.S. markets will be closed Monday in observance of Presidents' Day.

The Nasdaq 100 (QQQQ) lost 3.00% on the week. The ETF rests slightly above its 50-day exponential moving average (EMA) but remains located below its 200-day EMA. As for the S&P 500 (SPY) and Russell 2000 (IWM), they posted respective weekly losses of 4.85% and 4.88%. Both ETFs remain located below their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 5.07% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of January 30, 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

Stimulus maximus

At the time of this writing the stimulus package, after days of political wrangling and negotiations, is still somewhere between the House and the Senate on its way to President Obama's desk for the final signature which now appears a virtual certainty. We hear that some of the specifics line items have been tweaked and that the total amount of the economic recovery plan was squeezed to fit below an emotional and moral upper limit of $800 billion dollars ($787 billion is the latest tally), but the actual details of the measure are not yet known. The Obama administration says the plan will create 3.5 million jobs but critics counter that the bill is packed with wasteful government spending which will not help the economy. It is not our role to explain the plan or to debate its merits, plenty is said and written about that elsewhere, but as the biggest fiscal expansion program in our country's history is about to be enacted it seems only reasonable to assess what it means to our wealth building program and our trend following investment strategy.

Many get confused and are intimidated, or outright frightened by all that is happening on the economic front and in the stock market. While in the eye of the biggest global bear market and economic meltdown in a hundred years, and faced with the prospect of unprecedented levels of government intervention, many investors conclude that it is all too much to understand. Some get scared out of investing, which might in itself be viewed as a good thing, except that it generally only kicks in after the losses have been incurred and it is likely to prevent these individuals to benefit from all the opportunities to get back on track the market is sure to deliver, both on the upside and on the downside.

So just how big is this stimulus package, what does it consist of, and how rapidly will the money be spent? There are so many question and very few of us are interested enough to read the 1000-plus pages of the bill. In the hope that one picture will give you all you need to know (wishful thinking on our part) we present Chart 1 below which plots the plan's expenditures over the years.

Chart 1: Stimulus package spending over time

Source: Congressional Budget Office and The Washington Post

We borrowed the numbers from the Congressional Budget Office for a slightly earlier version of the bill which totaled $819 billion, but the final stimulus package should look very similar. With an aggressive start with over $100 billion spent this fiscal year (fiscal 2009 started on October 1^st), the plan shows peak spending in 2010 with over $236 billion. In year 4, the election year 2012, the yearly spending dips below the $100 billion mark for the first time. The spending is intentionally front-ended with the bulk to be spent in the first 3 years, causing some observers to already have coined the phrase "tsunami economics". For those who really want to know more than our lonely chart we recommend the extremely clear and readable graphic representation of the stimulus package, including a more detailed version of our chart, courtesy of The Washington Post. Just over the last couple of days one can read vastly differing opinions about this stimulus package and what it will do or not do for the economy. Is it right or is it wrong? Does it have too much spending and not enough tax cuts? Whether it will end up being too big, too much government spending or too little too late, is really not for us debate. Looking at the numbers and how they break down, there is no doubt left that a liquidity tidal-wave of proportions never seen before is headed for the markets.

We keep hearing about the $787 billion figure because this stimulus package is the hot news of the day, but the actual size of liquidity injections is much bigger. Let us not forget the $700 billion TARP (Troubled Asset Relief Program) and the $168 billion tax cuts and rebates already enacted in 2008. We are now hearing of a plan to stem home foreclosures to be revealed next week ($50 billion maybe?). Many economists say that something has yet to be done about the toxic assets remaining on bank books (such as the "bad bank" or "aggregator bank" concepts floated recently at a price tag of maybe $1 trillion?). Enough conjectures about future programs. What about the ones already pledged? Some authoritative sources who track these things (read details here) say that in addition to the above mentioned programs, there is another $5 trillion of lending programs and guarantees, almost all under the Fed and FDIC, about which very little is known.

With so much liquidity built into the system many are scrambling to understand how to "ride the gravy train". A good example we found is the $20 billion assigned to the food stamps program which gets analysts scrambling to recommend Wal-Mart and other Family Dollar Stores stocks. We do not recommend individual stocks or industry sectors. We focus on the primary trend of the broad stock market. The one thing we can be confident about is that the next few years promise to be anything but boring. The extent of the crisis and the remedies put forward by governments around the world are sure to have many consequences, but the one we are focused on here is continued stock market volatility and strong intermediate trends.

In the midst of chaos we will stand firm in our belief that following intermediate market trends will continue to reward us as it has over the long run.

FAQ of the Week

Question: Why 0% returns during Cash signals?

We receive comments like this from subscribers who tell us that following our recommendations to park their cash in money market and bond funds they have seen substantial returns during the current Cash signal. Officially, our strategy states that during a Cash signal we keep our investing capital in cash or in a money market fund. Because some subscribers might take us literally and keep their moneys in non-interest bearing cash accounts, we take the most conservative stance in our "Results" page and assume a 0% return.

That being said, these subscribers are correct in highlighting that we have frequently made our position plain and clear about money market funds being the minimum acceptable and that we have repeatedly recommended positions in bond funds which have done quite well. Table 1 below shows the returns of three such ETFs for the current signal.

Table 1: Cash signal returns of bond funds (9/5/2008-2/13/2009)

ETF Symbol	ETF Name	Cash signal return
SHY	iShares Barclays 1-3 Year Treasury Bond Fund	2.83%
IEF	iShares Barclays 7-10 Year Treasury Bond Fund	6.81%
TLT	iShares Barclays 20+ Year Treasury Bond Fund	8.72%

We must also point out that when we recommended these funds last year they were in solid uptrends. Since the highs they established in December 2008 most bond funds appear to have started forming an intermediate down trend. We don't know if that will continue or not, but consider yourself warned.

Warm wishes and until next week.

The TimingCube Staff