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

It has been a quiet holiday-shortened week, generally marked by low trading volume. A decline in tech stocks pushed prices lower Tuesday, only to see the markets rebound Wednesday to erase their losses. With earnings season now over, investors are focusing on geopolitical and economic news. As oil prices bounced up and down all week, so did the markets. Stock prices were also affected by inflation concerns that seem to resurface every other day, even though rate-hike fears were first soothed Wednesday after the latest CPI report showed that core inflation for January was only 0.2%. The net result of all this conflicting news is that major indices did not move much this week, with the Nasdaq 100 and S&P 500 only recording fractional gains. Our best-performing index, the Russell 2000, was the exception as it gained 0.76% to close the week at a new all-time high. Of the three indices, the Nasdaq 100 is the only one which still rests below its 50-day exponential moving average (EMA), if just by a fraction. All three are still well above their respective long-term 200-day EMAs.

Our Model did not indicate any change in the broad market trend and our current Buy signal consequently remains active.

Trend Timing School

Trends within trends

One of the most abused and overused technical analysis clichés is that "the stock market moves in trends". The statement is certainly true, but there are so many different trends that the truism is meaningless. One can look at trends in individual stocks, in specific company groups or industry segments, or in the broad market indices. Even more bewildering is the endless range of possible observation periods which yields trends galore. Some traders chase trends that come and go in the space of an hour or in a single day by looking at extremely short-term minute charts. Others stretch it to hourly or to the more common daily charts. As Trend Timers we favor longer term intermediate trends with signals that last on average between 3 and 5 months. This article explains some of the reasons why we prefer the long view. When it comes to picking a trend we certainly do not mean to imply that we have the one and only answer . It is true that active traders can make money playing short moves of a few hours, days, to a few weeks. It is also true that it is a hard way to make a living, with lots of trading and narrow win/loss ratios. We much prefer our infrequent trading.

Looking at the short 2-month price evolution of the Nasdaq Composite index in Chart 1 below we clearly observe a downtrend that began mid-January. Nice declining tops and lows. Many investors get antsy holding a long position during this kind of decline (especially those that are tightly focusing on the Nasdaq) and they wish they could play the short term swings. The challenge for rapid traders is when to call the trades and still manage to make money. Despite the fact that there are always lots of top callers out there, no one can consistently and reliably do so. For momentum to reverse it takes some amount of decline and it takes at least two successive tops or bottoms to draw the simplest trend line. But even if you picked the entire move from the very top on January 11, 2006 to the bottom on February 13th, that would represent 54 points or less than 2.5%. Not much to write home about.

Chart 1: Nasdaq Composite index in 1-1/2 month downtrend



Another major drawback of short term trends, in our view, is their specificity. Observed in periods of days or even a few weeks, markets show little correlation with one another, and it takes one dedicated trend detection system/signal for each. This point is made rather clear when you contrast the Nasdaq Composite above with the Dow Jones Transportation Average in Chart 2 below. It turns out that many indices, domestic and international, look more like the Transports and have been setting new highs. As we have observed for some time, the Nasdaq has been lagging.

Chart 2: Dow Jones Transportation index in 1-1/2 month uptrend



Reverting to the Nasdaq Composite index, we now take the longer view in Chart 3 below. As if by magic the recent decline almost disappears and what becomes clear is the solid uptrend since mid-October 2005. Earlier this month the index pulled back to test and bounce off the 5 month-old trend line. Unlike the 2 month-chart, the same 6-month chart of the Composite looks very well correlated with most indices, and while all have gained following the uptrend since our October 20, 2005 signal, many have done a lot better than the Nasdaq.

Chart 3: Nasdaq Composite index in 5 month uptrend



We don’t know how long the current intermediate uptrend will last, but as long as our Model points the way up we will not worry about short term pullbacks.

FAQ of the Week

Question: Does your Model react to events such as terrorist attacks?

News events play no direct role in our Model. However, events with large enough impact and lasting consequences can have an impact on investor outlook and in turn on the stock market. Since our Model derives the predominant mid-term trend from observing the market, it could be indirectly impacted by events large enough to move the market trend.

A massive event like the September 11, 2001 terrorist attack exemplified the fact that such point events can induce short term crashes, but that markets tend to recover their losses promptly. How deep and long lasting the impact of an event on the stock market is depends primarily on its reach and how permanent the damage is. As we have seen with hurricane Katrina, large scale natural disasters have the potential to inflict such damage, and terrorist attacks such as today's foiled attack on Saudi oil facilities could as well if successful and repeated.

Warm wishes and until next week.

The TimingCube Staff