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

Stocks retreated this week as fears of inflation and more interest rate hikes resurfaced yet again, driving bond yields higher. Most of the damage was inflicted on the Nasdaq 100, as investors aggressively sold former leading stocks such as Google which has now retreated almost 30% from the all-time high it hit on January 12. As money rotated into more conservative sectors, blue-chip indices such as the S&P 500 and the Dow Jones Industrial Average fared much better, with the Dow even posting a gain on the week. Bucking the negative tone of trading that prevailed the first four days of the week, stocks rebounded on Friday after the February jobs report calmed fears of an overheating economy, with the unemployment rate edging slightly higher to 4.8%.

The Nasdaq 100 and Russell 2000 respectively lost 2.14% and 1.64% on the week. The S&P 500 did better with only a 0.44 loss. The Russell 2000 and S&P 500 remain above both their 50 and 200-day exponential moving averages (EMAs) while the Nasdaq 100 now sits between its two EMAs. There is no change for us and our Buy signal remains in effect.

Trend Timing School

Leveraged bull/bear mutual funds explained

This category of mutual funds has been largely misunderstood by individual investors ever since the 1994 introduction of the first bear fund - Rydex Ursa. Through the long bull market of the nineties most investors got used to the bear funds being the perennial dogs at the bottom of the performance rankings, unaware that they were short funds lost in a sea of unrelated long funds. Not until the bubble burst in 2000 did investors begin to realize that maybe there was a valuable role for these funds after all. Since these early days the size and importance of the bull/bear index mutual funds segment has increased dramatically with addition of leverage and more index choices providing financial professionals and sophisticated investors with tools to better manage portfolios in all market environments. They are key investment vehicles for Trend Timers like us.

The fund industry has grown and evolved to the point where we now have multiple fund families, namely ProFunds and Rydex, offering full complements of bull and bear funds, unleveraged and leveraged, for all the key U.S. indices we track. The "Resources" page holds a complete list of the funds available (Investing with index mutual funds) and details on how to implement the four TimingCube strategies with them (Implementing the strategies). For example, how do you go short the Russell 2000, with leverage in one simple transaction you may ask? Easy, you buy the ProFunds UltraShort Small-Cap 100 Fund which seeks to return 200% the inverse of the Russell 2000 Index. When the Russell 2000 goes down 1%, the fund gains 2%.

Newer index ETFs are all the rage, but when it comes to practical investment choices, for many Trend Timers the bull/bear mutual funds are the only real alternatives. Specifically, restriction on qualified retirement plans such as IRAs precludes the use of short selling and trading on margin, which leaves the Long Only strategy as the only possible choice for an ETF investor. Sure, some brokerage firms allow certain types of options trading in retirement accounts, but options trading techniques can be daunting for many of us. In fact, the simplicity of investing with the mutual funds is such (after all, what could be easier than to exchange this fund for that fund, in one transaction, with no transaction fees?) that many Trend Timers favor them even for non-retirement accounts. The February 06, 2004 FAQ of the Week entitled "Am I better off using ETFs or mutual funds?" summarizes the pros and cons of these funds.

So how do they do it? Unlike index ETFs which invest precisely in the stock of companies that make up their benchmark index, bull/bear index mutual funds may actually have no exposure to these securities at all. The fund manager has vast latitude as to which securities or financial instruments are used in pursuit of the funds investment objective which, for the most part, means that they use derivatives. A derivative is simply a contract between two or more parties, and its price is determined by the fluctuations of an underlying asset (the price is said to be "derived" from that underlying asset). Assets on which contracts are written include stocks, commodities, currencies, interest rates and stock market indices. A key characteristic of derivatives is that they are heavily leveraged, which means that you can effectively control quantities of the underlying asset for a small fraction of the price of the asset itself. The types of derivatives used include future contracts, options on future contracts, options on securities and indices, forward contracts, swap agreements and other similar instruments.

As always with investments, nothing is perfect. There are clearly risks associated with such instruments, including an aggressive investment technique risk, correlation risk and others. By far the most significant one in our view is the leverage risk. Any time you invest with leverage, be it with these funds or through the use of margin or options, you multiply your potential gains as well as losses. We also pointed out in the December 10 and 17, 2004 articles "A short-term review of bull/bear mutual funds" and "More on ETFs versus bull/bear mutual funds" that under certain circumstances the leveraged funds do not accurately track their index due to the negative compounding effect. Still, all-in-all, the convenience and flexibility they offer makes them an irreplaceable tool for Trend Timers.

FAQ of the Week

Question: How can I find the performance of a particular index or fund?

Selecting which investment vehicles you use to implement the TimingCube strategies usually involves an analysis of how well correlated they are with the broad market trends and our signals. Whether you are looking at ETFs, indices, individual stocks or mutual funds, it is important to check how well they would have performed if traded with the TimingCube signal. Short of going deep into statistical analysis and calculating correlation ratios, we offer an easy tool to assess individual securities on the "Results" page.

Simply enter a ticker symbol in the "Performance by individual security or index" section and a window will open with lots of performance data. For example, you could go to the "Trades and Cumulative Returns" section to get the total return for a time period of your choice (by selecting a start date from the pull-down menu). The absolute return is important when comparing various securities, but just as important is how well correlated it is with the signal. The best way to tell good correlation is when the "Long & Short" return is substantially better than the "Buy & Hold" return. The 2005 ETF Performance rankings we published in the January 6, 2006 issue of the Trend Timing School gives you a good example of data we developed directly from the "Performance by individual security or index" tool. It also provides a broad list of ETFs you might want to look into. By running these ETFs through the ticker tool again we were able to quickly tell that so far in 2006 the Brazil fund continues to lead with a gain of over 13%, followed closely by the China fund (FXI) at around 12%.

The "Performance by Bull/Bear mutual funds" section further down on the "Results" page is dedicated to the ProFunds and Rydex mutual fund families and helps you check specific bull/bear fund pairs.

Warm wishes and until next week.

The TimingCube Staff