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

Market Update

It has been another volatile week for the market, but the major averages did not move much overall. Fueled by technology and energy stocks, markets were able to erase early losses Monday to finish solidly in the black. Opposite action could be observed Tuesday: stocks started strongly on news that Warren Buffett's Berkshire Hathaway company was offering to insure up to $800 billion in municipal bonds. The major indexes could not sustain their gains, however, and the Nasdaq Composite reversed to close the session with a modest loss. Stocks did much better Wednesday, posting strong gains after the latest retail sales report showed a 0.3% increase versus the 0.3% decline that had been anticipated. The markets were unable to build onto their momentum Thursday and instead declined sharply to relinquish all of the previous session's gains. The negative tone was attributed to comments Ben Bernanke made to the Senate Banking Committee. The Fed chairman warned of a worsening economy and more write-downs to come from major financial institutions. Investors did not like what they heard and decided to sell. Disappointing economic news was released Friday morning: regional manufacturing contracted in the New York area and the University of Michigan survey on consumer sentiment fell to its lowest reading since 1992. Stocks fell on the news but a late-day surge helped cut losses and even allowed the S&P 500 to finish the session with a fractional gain.
Please note that US markets will be closed Monday in observance of Presidents' Day.

The Nasdaq 100 and Russell 2000 posted an identical 0.37% gain on the week. The S&P 500 did better, with a 1.40% increase. All three indexes remain located below both their 50-day and 200-day Exponential Moving Averages (EMAs).

For its part, our World Index Ranking outperformed its U.S. counterparts this week with a gain of 2.16%. The portfolio consists of the 5 top-ranked world indexes as of February 1, 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. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 indexes, as the strategy calls for staying invested at all times. Please go to our "Our Service" page for all the details.

Our current Sell signal remains in effect.

Trend Timing School

The ins and outs of shorting

For a publication that pioneered Trend Timing and advanced the art of "Long and Short" investing (we say art because if it was a science our trading win/loss ratio would be 100%! ), we admittedly spend very little time discussing the short side of the equation in these pages. One of the founding principles of Trend Timing is that faithfully following the trend will enable us to profit in both up and down markets. For us, going short when markets act like they are headed for a serious decline, or at least cashing out until the uptrend resumes, comes naturally. While this notion is deeply ingrained with long term subscribers of our service, it goes against everything most financial media, money managers and financial advisors preach. Despite the classic Wall Street cliché about buying low and selling high, we easily forget that timing the markets is not a mainstream approach. As most things do in the stock market, the popularity of timing evolves in cycles. In the absence of any bear market or even severe correction since 2002, buy and hold proponents, and followers, have been reaching cyclical highs. Even the very rationale for shorting the markets is obscured by time, and by a chronically long-biased financial media. Today we will attempt to rectify this situation.
All of this is predicated on two investment truisms

Instinctively we all believe that shorting the market is more risky than being long the market. As it is often the case, when looking at historical facts and figures to assess the relative risk of being long and short the stock market, it turns out that popular wisdom has it backwards. History clearly shows that downward action tends to be much more swift and explosive than upward movements. Markets drop further and faster than they rise. It is as if the laws of gravity worked to accelerate and amplify downward spurts. Maybe this is why there is no bullish equivalent to the word "crash".

Looking at the 13 bear markets between 1929 and 1999, the buy and hold investor would have lost an average of 39% and waited an average of 5.2 years to recoup her/his money. That's the average. The worst of them was the 1929 crash with an 87% loss and over 25 years to breakeven. During the most recent bear market, a buy and hold investor in the Nasdaq Composite Index would have lost 74% from the September 2000 peak to the October 2002 bottom. And today, that same investor would still be down 55% from that peak. And we should never forget that it takes double the work to recoup losses (a 100% gain is needed to recapture a 50% loss), and instead of wasting time just getting back to the starting point, the 100% gain should have doubled your money.

One may argue this particular bear market was different because of the tech bubble, or that it could not happen today, but in the end the evidence indicates that we are due for another bear, probably sooner than later.

We know that during bear markets the majority of stocks and stock funds go down, worldwide. Even by seeking the best of the best as you would with the World Index Ranking "Buy and Rebalance" strategy, you may still be holding the markets which lose the least.

For us, the data is overwhelming, and the only conclusion we can reach is that we do not have enough time in our wealth building plan to risk a setback of such a magnitude. The only obvious solution (besides giving up stock market investing) is to avoid significant declines at the very least, and profit from them if possible. The way to profit during market declines brings us back to shorting.

Shorting is betting that the market is going to go down, and this is what we do with the "Long and Short" strategy during a Sell signal. In this day and age we have the luxury of being able to buy an inverse ETF (read and bypassing all the nasty details related to the mechanics of shorting). For an example of how to short the market the easy way, with inverse and double inverse ETFs, read the February 1, 2008 FAQ of the Week. For those of you who care about the nasty details of short selling, we have included the following paragraph.

Put simply, short selling is the opposite of "going long" or buying a stock. An investor borrows shares of stock from a broker and sells them. He is said to have a short position in that stock. The shares come from the broker's own inventory or from another customer. When the stock is sold the proceeds are credited to the investor's account. In order to make a profit the short seller hopes the price of that stock will go down so that the shares owed the broker can be replaced at a lower cost. The open position is closed at some point in the future by purchasing shares and returning them to the broker. This is called short covering. The profit on the transaction is the price at which the stock was initially sold minus the price paid for the replacement shares, minus any fees, interest and dividends. Of course, if the price of the stock went up between short and cover, you'll have a net loss.

We don't know how long and how far down the current decline will go or if it will develop into a full fledged bear. As Trend Timers we can look at the concepts of timing and shorting the market under a very different light. Rather than perceived risky tactics, they are the key ingredients in reducing real market risk, helping us keep our emotions in check, and allowing us to stick with our wealth building model for the long run.

FAQ of the Week

Question: How is momentum trend following?

Many of our long term subscribers are well versed in the trend following nature of TimingCube's directional model which seeks to identify the predominant up or down trend of the broad stock market. Frequently, when we present the momentum model embodied in the World Index Ranking, the fact that it too is fundamentally trend following comes as a surprise. By measuring the relative strength of various market indexes over various periods, up to many months, TimingCube's momentum model identifies the markets with the strongest up trends.

By itself, the World Index Ranking model is an always long proposition and the Top 5 always represent the markets with the strongest up trends, regardless of the general direction of the broad market. The "pure" "Buy and Rebalance" strategy, by upgrading every 4 weeks to the latest Top 5, seeks to always follow the strongest trends.

Of course, for the portion of your investments which you invest using the strategies relying on the directional model, such as "Long Only" and "Long and Short", the current Sell signal has you in cash or short the Nasdaq 100 .

Warm wishes and until next week.

The TimingCube Staff