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Turbo Model

Current Signal Performance

Turbo Signal
Trade Date
Turbo Model Returns (Long & Short Strategy)
Nasdaq 100
Russell 2000
S&P 500
  Classic Signal  
Trade Date
Classic Model Returns (Long & Short Strategy)
Nasdaq 100
Russell 2000
S&P 500

Market Update
Stocks rebounded strongly over the five-day span to recapture a good chunk of the ground they had lost during the previous two weeks. News that AT&T is planning to acquire T-Mobile combined with hopes that the nuclear accident in Japan would soon get under control to give equities a boost Monday, allowing the S&P 500 to gain 1.5%. After posting marginal losses during a quiet session the next day, stocks gapped lower at the open Wednesday on fears over Portugal's debt situation and weaker-than-expected February new-home sales, which hit their lowest levels of the past fifty years. Yet, the main indexes managed to turn around and finish the session in the green, with the S&P 500 gaining 0.3%. Stocks were able to build onto their gains Thursday as a strong showing by the tech sector helped lift the entire market and propel the S&P 500 0.9% higher. The government said Friday that the economy grew at a better-than-expected 3.1% annual rate during the fourth quarter of last year. With investors also encouraged by a strong earnings report from Oracle, the positive news helped push stocks solidly higher early on, but the main indexes gave up most of their gains by day's end to finish modestly in the green, still capping a strong week for equities. It should be noted, however, that this week's rally occurred for the most part on below average volume, showing a lack of conviction among institutional investors.

For the week, the S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQ) respectively gained 2.77%, 3.70% and 4.39%. All three ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 3.13% gain over the five-day span. The portfolio consists of the 5 top-ranked world ETFs as of February 25, which marked the beginning of the current 4-week holding period. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. Please note that since we have an active Classic Model Cash signal, the World 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 ETFs, as the strategy calls for staying invested at all times. Please go to the Classic Model "Description" page for all the details.

Our current Classic Model Cash signal and Turbo Model Sell signal remain in effect.

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Trend Timing School
Forget gas prices, what really drives Inflation?

We thought it might be interesting to take a step away from our usual market-related comments and spend a few words on a subject that comes up so very often in the financial and investment press. Today, we will talk a bit about the boogey-man that is inflation. Based on emails we receive, newsletters we read, etc. you would think that inflation is roaring at unprecedented levels. Or at least on the verge of such a high level as to cripple our very way of being. As always, we are dismayed that, in this day of 24-hour media, those who peddle fear seem to get so much airplay and generate so much noise. Those preaching a more moderate and optimistic (and boring?) view tend to get drowned out. When it comes to understanding inflation, one must realize that it's a somewhat shared, but also a largely personal experience.

What that means is that inflation affects different people and different households in different ways. How can that be? Well, take energy prices for a very visible example. If gasoline prices rise by 10%, someone who commutes to work every day over long distances will feel much more impact than a person who works from home and does relatively little driving. People tend to react to energy prices in part because we see those prices posted every day as we drive to and fro. We can SEE the energy price inflation happen before our very eyes. Seeing it tends to overstate its importance in our mind perhaps. However, since the gas lines and high inflation of the late 1970s a lot has changed. Cars get 50-100% better gas mileage than they did in those days. Businesses have significantly reduced their energy inputs over the subsequent decades as well. Thus, when oil prices surged to over $140 per barrel in 2007, it was painful, but not the profit-destroying squeeze seen in earlier decades. Thus, today's step up in gasoline prices has far less impact than it once did.

The inflation that gets reported is the Consumer Price Index (CPI), which is what is often called "headline" inflation. That is to distinguish it from "core" inflation which subtracts out energy and food costs. Why remove these seemingly critical components? For one, they are very volatile, rising sharply one month, falling sharply the next. For another, they are not the main drivers of the type of inflation that causes major systemic problems. For many, if not most, businesses, food and energy costs are a minor cost of operation. They are factors, to be sure. But labor cost is by far a more important driver of cost for most businesses. Thus, it's wage inflation that becomes more critical for businesses to keep an eye on. With unemployment still hovering around 9%, there is little likelihood of pervasive wage inflation on the horizon.

The real problem with inflation comes when it becomes an expectation built into prices and behavior. When we start to expect that prices can ONLY go higher, never lower. When that expectation takes hold, there is substantial incentive to spend today rather than wait until tomorrow when prices will be even higher. This behavior is akin to housing boom periods where a house seller has potential buyers bidding against each other and throwing all caution out the window in order to get the deal closed. This type of behavior is at the heart of the inflation spiral that is truly damaging and hard to contain. We are nowhere near that sort of mindset these days.

To better understand inflation, let's take a quick look at the components of the reported CPI:

Chart 1: Consumer Price Index Components

You can see that housing is by far the largest piece, and indeed is by far the greatest expense most of us face. With housing prices falling substantially over the past few years, this has been a DE-flationary period for many housing costs, though again, it depends on your personal situation and locale. Some renters have certainly faced increasing rents, for example. The other factor which can lead to de-flation in housing cost is an ability to refinance to lower rates. When it happens, the refinance usually results in hundreds of dollars of savings each and every month. That savings typically dwarfs any inflation from food, energy, et al.

Though we give increases in price lots of lip service, for many people it's just not as big a deal as we make it out to be. For example, let's look at energy costs. A full $1.00 increase in gas prices probably adds $10-15 per week in cost for many folks. That's a monster inflationary 25-35% hike in gas prices! However, that increase in costs is easily covered by one less meal at a local restaurant, for one example; hardly a huge impact in the overall scheme of things.

Granted, there are households where the impact is greater, far greater. Those living on fixed incomes have few alternatives if prices rise sharply. Certainly, there are many who live paycheck-to-paycheck without that extra $10-15 per week for added fuel costs. It is those households for whom inflation is truly a significant concern. An economy-wide view, however, still shows the two main drivers of cost - wages and housing - as being far away from the worrisome price increases that would spark true, broad-based inflation concerns. Indeed, increasing housing prices (and wages) would be a welcome change for most.

The intent of this information and commentary is not to set aside the potential for very damaging inflation. That always exists and becomes more possible as the Federal Reserve holds interest rates down to try and stimulate further economic growth. Instead, the intent is to encourage a broader view of inflation and move beyond the typical one-liners about gas prices or the ever-increasing cost of a latte.

For more detail on inflation and a next level of detail, we suggest the following link and give thanks to Doug Short for his excellent work.
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FAQ of the Week
Question: Where did the Quad-Q go?

Wednesday marked a sudden change in a close friend. The Nasdaq-100 ETF, widely known as the Quad-Q for its ticker symbol QQQQ, dropped a 'Q' becoming the QQQ, ("Tri-Q"?). To be fair, QQQ used to be the symbol for this favorite ETF when it once traded on the American Stock Exchange ("Amex"). When the ETF moved over to the Nasdaq exchange, it adopted the four-letter nomenclature required by Nasdaq. As time has passed, those requirements have been relaxed. Invesco, the large investment house now responsible for the ETF, has decided to return to the original 3-letter name, consistent with most stocks, which are also 3-letter tickers. QQQ is the fourth largest ETF trading these days with over 60 million shares changing hands each day. For us, with many data feeds built to find the quad-letter version, we had a very busy week adjusting to the new name. Don't worry Q, despite all that painful rearranging, we're still friends.

Warm wishes and until next week.

The TimingCube Staff
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