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 staged a solid rally this week. Both the Russell 2000 and S&P 500 recorded five consecutive daily gains, sending the Russell 2000 to a new all-time high and the S&P 500, along with the Dow Jones Industrial Average, to fresh multi-year highs. Inflation fears eased after the release of a weak February retail sales report, triggering a bond market rally. The resulting lower yields in turn helped the stock market move higher. The labor department reported Thursday that the Consumer Price Index only rose 0.1% in February, following a 0.7% jump the month before. The tame reading was in large part the result of moderating food and energy prices.

For the week, the Russell 2000 was the best performer with a gain of 2.72%. Despite weakness in the semiconductor sector, the Nasdaq 100 posted a solid 2.27% gain. As for the S&P 500, it finished the week 2.01% higher. All three indices now rest above both their respective 50-day and 200-day exponential moving averages (EMAs). Our Buy signal remains active.

Trend Timing School

U.S. versus international stock markets

One of the mystifying aspects of world stock markets is that while they are generally well correlated over extended observation periods, it does not mean that they all perform at the same levels. Correlation between markets means that they move in unison, i.e. they rise and fall at more or less the same time, but it does not speak to the relative amplitude of their movements. In fact, as many U.S. investors are painfully aware, domestic stock markets have been lagging severely for well over a year now. As Chart 1 below shows quite clearly, the Nasdaq Composite index is up a measly 5% since the beginning of 2005 while the equity markets of Europe and Japan have been delivering impressive returns well in excess of 30% and substantially more if traded with the TimingCube signals.

Chart 1: U.S. versus international stock markets



One starts to wonder what causes such diverging relative strength and if there is an end in sight to the disparity. Are foreign companies simply healthier, or are overseas economies in better shape than ours? No, the one big difference between the U.S. and many of the other industrialized nations has been interest rates. While most countries have been stuck for years with little or no economic growth, or even contraction in the case of Japan, the U.S. has enjoyed a solid expansion for over four years now. As a result, the U.S. Federal Reserve Board, Fed for short, has been raising interest rates since June of 2004 in an attempt to keep growth under control and combat inflation. From a low of 1%, 14 consecutive hikes have brought the key Fed funds rate to 4.5%, and counting.

While the short-term Fed funds rate does not directly control longer term interest rates, U.S. long rates have recently started moving higher as well, as exemplified by the 10-year bond yield now at a two year high near 4.7% and 30-year mortgage rates well over 6%. Bond analysts point to various technical indicators signaling long-term rates are going higher, and therefore bond prices are going lower. Another even more serious effect of rising rates is the cooling of the real estate market. Long-term rates which dictate mortgage rates move in opposite direction to housing prices. The reason this is so important is that much of the economy is driven by consumer spending, and most of the American consumer spending has been directly tied to gains in real estate valuations and related financing through home equity loans. Many economists feel that a deflating real estate market could put the economy in a tail spin, or even lead to a serious recession. The reason higher interest rates also have an indirect impact on the stock market is because the cost companies incur to finance their operations and expansions increases and, as that eats into profit margins, their stock valuations decrease.

The Fed has actually been acting in a schizophrenic manner by, on one hand stepping on the brakes with interest rate hikes, and on the other keeping their foot firmly planted on the gas with massive liquidity injections. The huge U.S. deficit spending and money supply has been fueling inflation for months, and it jumped early this year to a menacing 8.4% annual rate with a January Consumer Price Index (CPI) reading of 0.7%. Yesterday's announcement by the Labor Department of a much tamer CPI reading of 0.1% for February was seen by most analysts as only a temporary reprieve primarily associated with a sharp but probably short-lived drop in energy prices. Few expect these latest figures to stop the Federal Open Market Committee (FOMC) from continuing their rate hikes when they meet next on March 27 and 28. This will be the first meeting presided over by new Fed Chairman Ben Bernanke who many expect to continue Alan Greenspan's "tough on inflation" stance.

Nevertheless, there is growing evidence that rising interest rates have already begun to slow economic growth, and while there may still be a couple of rate increases in the pipeline, the Fed is widely expected to be nearing the end. Housing starts fell 8% in February, mortgage applications are down 20% year-over-year, weekly jobless claims rose to the highest level of the year, and manufacturing activity in the benchmark Philadelphia region shows a slower pace of growth in March. Throughout history, the Fed and the politicians that pull the strings have always sided with inflation instead of risking severe economic slowdown or recession. So we can expect an end to the rate hikes and a continuation of loose money supply in the U.S.

In stark contrast, interest rates in Japan - the second largest economy in the world - have been near zero for five years in an effort by their Central Bank to fight deflation and stimulate economic growth. Similarly, interest rates in Europe have been low, near 2%. However, recent news clearly point to a new cycle of global liquidity tightening. Countries around the world have seen signs of higher economic growth and rising inflation and, as they forecast more of the same, their policy makers are taking action to restrain expansion. Earlier this month the ECB (European Central Bank) raised rates by a quarter of a percent to 2.5%, the second such rise in less than three months, and suggested further increases were coming. At the same time the Bank of Japan announced that it is abandoning their long standing super-easy monetary policy, indicating that it will gradually decrease liquidity in the system and start inching up interest rates.

So, just as the U.S. is nearing the end of an interest rate increase cycle, other economic powers are at the beginning of one. While over time this is likely to reverse the fortunes of the respective stock markets, it is not going to happen overnight and, as we have been saying for well over a year, the wisest thing to do for Trend Timers is still to diversify into the higher yielding international stock markets.

FAQ of the Week

Question: Can your Model trigger wash sales?

As is the case every year as we approach the April 15th IRS deadline for submitting tax returns, many subscribers wonder about various tax aspects of the Trend Timing system. This time around we received a number of questions regarding the little known wash sale rule.

Normally, you can offset capital gains from security trades with losses realized in the same tax year, except if they were from a so-called wash sale. In short, the IRS considers that a wash sale occurs when you sell a stock or security at a loss and, within 30 days before or after the sale or disposition, you buy substantially identical stock or securities. For more details on wash sales read the April 15, 2005 Trend Timing School article on the subject.

It turns out that for the 2005 tax year we actually incurred such a wash sale and a somewhat unusual one at that because it occurred with a short sale. If you implemented a Long and Short strategy, you incurred a loss from the Sell signal issued on October 11 because we got whipsawed and a Buy signal was issued on October 19^th. Although short selling reverses the normal buy/sell sequence, i.e. you sell the security first and then buy it back to cover; buying the same security back on the October 20 trade date still caused a wash sale. If you are in this situation don't despair, all is not lost. The IRS lets you add the disallowed loss to the cost of the new stock or securities.

We are not Certified Public Accountants and to be on the safe side you should get your individual tax related issues reviewed by a professional tax advisor.

Warm wishes and until next week.

The TimingCube Staff