TimingCube - The power of diversification - diversification,positive correlation,higher volatility,market rotation,small cap

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Signal Update

Current Signal Performance as of

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

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
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

Markets bounced back and forth within a narrow range all week to finish in the vicinity of where they were last Thursday after the terrorist attacks in Madrid. Uncertainty about the geopolitical situation has prevented any significant bounce so far, as investors remain hesitant to commit additional funds to the markets. It should be noted that selling volume has dropped significantly, indicating a lack of conviction among sellers too. The Nasdaq 100 finished the week 2.29% lower, while the Russell 2000 lost 2.08%. The S&P 500 did better, losing only 0.96%.

This week's market action did not affect our model and our Buy signal remains active.

Trend Timing School

The power of diversification

Every once in a while, a little perspective is good for the eyes, and good for the soul. So for this week's perspective we offer the graph below which depicts the nearly one and a half year old bull market we are currently in.
For subscribers who watch the markets daily, the last couple of months can seem like the markets have just been falling continuously. Even when looking at the Nasdaq 100 which has pulled back the most, some 9.98% since its most recent closing high on January 26, 2004, placed in the perspective of an almost uninterrupted 74% run since the bull market officially began on October 7, 2002, the recent decline looks rather trivial. No market goes straight up, and long time students of the markets will tell you that pullbacks and corrections are actually healthy and help keep a bull market alive and well. The graph also provides other interesting clues to market behavior, and in turn, highlights the importance of diversification in the Trend Timing philosophy.

Hourly and daily movements of the different market indices mostly appear erratic and non-correlated. Trend Timing's, and the graph's longer term orientation clearly bring out the very tight positive correlation that exists between the different facets of the market. Positive correlation means that the indices tend to move up and down at the same times. Negative correlation would exist if one moved up when the other moved down, and non-correlation would describe the absence of any visible relationship between them.

A high degree of positive correlation does not imply that indices gain or lose the same amounts. Typically they don't, and they are said to exhibit different relative strengths. This is somewhat related to the concept of volatility which causes indices with higher volatility - such as the Nasdaq - to move up and down faster and by larger percentage amounts than lower volatility indices - such as the S&P 500. But in addition to varying degrees of volatility, there is the concept of market rotation which regularly causes the relative strength of one market segment to change as compared to others.
One such example in the chart below is that during the last couple of months we have seen a rotation out of technology stocks. While the technology heavy Nasdaq 100 has been correcting since January, the broad market represented here by the Wilshire 5000, and the other indices we track - the Russell 2000 and the S&P 500 - have been holding up well. We don't know when the current Buy will come to an end, but the broad market action we are seeing suggests consolidation within the bull market and not the formation of a major top.

A yet more telling example of market rotation is provided by the relative out-performance of the Russell 2000 since the last Buy signal in April 2003. The chart confirms what the weekly Signal Updates have been telling us for the best part of a year, namely that the small cap heavy Russell 2000 has gained substantially more than the other indices. Since we cannot predict how long smaller companies will retain their relative strength, or which market segment will then take over, Trend Timing advocates diversification. We have discussed the safety rationale for diversification in the past, we now see the performance argument. Having our investments spread between multiple market segments insures that we are always invested in the best performer with at least part of our portfolio. It also reduces our exposure to the worst performer. Overall, our performance benefits from diversification.

Diversification possibilities and permutations are virtually endless when considering the number of investment vehicles available to us, including the numerous geographic index ETFs and mutual funds (countries or regions). Add to this one's personal style and risk tolerance to influence portfolio allocation between more or less conservative choices. A solid "middle of the road" diversification plan we recommend as a good starting point is to allocate one third to each of the primary indices we track, the Nasdaq 100, the Russell 2000, and the S&P 500. From there, feel free to experiment according to your own taste and preferences. And always resist the temptation to outsmart diversification principles by heavily chasing last year's superstar. They are unlikely to crank out the hits year after year.

FAQ of the Week

Question: Being a Financial Advisor, can I use the service for my clients?

As the name indicates, TimingCube's individual subscription plans are intended to help direct some of your personal investments but if, as a Financial Advisor, you need to use the service to help direct some of your clients' portfolios, as many advisors do, we would be glad to propose a Professional Subscription Plan. The service and content are identical for both types of plans, but the "Disclaimer/Terms of Use" and pricing differ between individual and professional subscriptions. To obtain an immediate estimate for the professional subscription that fits your circumstances please

Warm wishes and until next week.

The TimingCube Staff