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

Market Update

Stocks could not confirm their gains of the previous week after the Fed's decision to leave interest rates unchanged and instead moved lower over the 5-day span. The losses occurred mostly on Tuesday and Wednesday amid renewed geopolitical concerns over Iran that caused a significant spike in oil prices. Investors were faced with a sharply lower consumer confidence number Tuesday and responded by reducing their holdings. Worries about inflation also resurfaced Wednesday after Fed Chairman Ben Bernanke stated that core inflation levels remain "uncomfortably high", somewhat reversing the dovish tone that investors had interpreted from last week's Fed statement. The Commerce Department said Thursday that the US economy grew by 2.5% in the fourth quarter of 2006 versus the previous estimate of 2.2%. The news initially boosted stocks but escalating tensions with Iran took the wind out of the market's sails. On Friday, the February core PCE (Personal Consumption Expenditures) came in at 0.3%, above economists' median forecast for a 0.2% rise. The core PCE is supposedly the Fed's favorite inflation gauge. Its annual rate now stands at 2.4%, above the Fed's target range of between 1.0% and 2.0%. The implication is that the Fed is unlikely to cut rates anytime soon. Stocks finished the week and the quarter with two up-and-down sessions that basically left them unchanged from Wednesday's closing prices.

For the week, the Nasdaq 100 , Russell 2000 and S&P 500 respectively lost 1.21%, 1.09% and 1.06%. Both the S&P 500 and the Russell 2000 remain above their respective 50-day and 200-day exponential moving averages (EMAs). As for the Nasdaq 100, it has now crossed below its 50-day EMA, but remains above its 200-day EMA.

For its part, our World Index Ranking portfolio again outperformed the US averages as it posted a 0.76% gain this week. The portfolio consists of the 5 top-ranked world indexes as of March 2, which marked the beginning of the current 4-week holding period. The World Index Ranking portfolio is being rebalanced today, as the current 4-week holding period is now over. Please note that since we now have an active Cash signal, the World Index Ranking approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. You should remain invested in the top 5 indexes only if you follow the "Buy and Rebalance" strategy, which remains invested at all times. Please go to our "Our Service" page for all the details.

The week's action did not warrant any changes for us and our current Cash signal consequently remains in effect.

Trend Timing School

The rise of emerging markets

Emerging markets are the stealth investment story of the last few decades. We all sort of know that many of these countries have experienced tremendous growth, but few are those who have benefited from the associated stock market bonanza. With the likelihood of continued superior growth in the years to come, emerging markets are well worth serious consideration despite the special risks they entail.

The definitions of what emerging markets are vary widely, but most, in the developed nations especially, agree that they are composed of developing countries. The developed market economies are commonly defined as:

• Western Europe
• Canada and the United States of America
• Japan, Australia and New Zealand

Arguably, the East Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) should also be counted as developed countries, but they are generally not.

So, if you remove the developed countries you are left with all the others in the emerging basket, right? Not so fast. Some, like the IMF (International Money Fund), have tighter restrictions on who qualifies as emerging market: "The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors" which, for the rest of us, means something like "only the countries with a stock market we can invest in". Oops, we just dropped most of Africa and South America from the list.

Then there are those who define emerging markets as the "BRICs". The BRICs thesis, published in 2003 by Goldman Sachs, postulated that the BRIC economies (Brazil, Russia, India, and China) are developing rapidly and that by 2050 they will eclipse what are currently known as the developed economies. This notion grew in popularity and began to mushroom into BRICM (with Mexico added), or BRICET (with Eastern Europe and Turkey included) and many other creative permutations. The critical aspect here is not so much which countries are or are not included in the definition, but rather the fact that these emerging markets have been on a tear for years.

Following the time honored tradition making a picture worth a hundred words, Chart 1 below provides an eye opening historical perspective of the evolution of emerging and developed economies. It plots the share of the global GDP (gross domestic product) of emerging and developed economies over the last 1000 years, give or take a few.

Economics jargon interlude: GDP is a broad measure of a region's economic activity and represents the total value of the goods and services produced in a given period. Interlude over.

Chart 1: Developed economies' share of global GDP has peaked

Source: IMF, The Economist

The chart shows that for most of 1000 years, the economies now termed as emerging, with China and India in particular, dominated the world economy because of the sheer size of their populations. In the early 1800s, due at least in part to the accelerating industrial revolution, Western economies began to grow and flourish until the so-called developed economies reached a peak of about 60% of the world GDP by the 1950s. Since then however, growth in developed nations has slowed considerably and development in emerging markets has exploded. The net effect is that since 2005 emerging markets have regained the lead when it comes to share of global GDP. It is hard to grasp the combination of forces and events that combine to create such mega trends, but the evolution is clear to see in the data. Increasingly over the last half century the growth rates of emerging countries has exceeded that of the western economies.

Radical economists describe a 100 year bubble during which Western countries grew to dominate the world economy, with a few countries getting rich at the expense of the many, and they theorize that these imbalances are now beginning to be worked out of the system with a high likelihood of even greater wealth redistribution over the coming decades. In the world of economics it is extremely rare to find a topic on which everyone agrees, and the projected growth of emerging markets appears to be one of these exceptional gems. All the projections we can find, regardless of the source, have the growth of emerging markets far outpacing that of developed countries.

The effect this economic growth has been having on the respective emerging stock markets is clear as well.

Before you all rush out to put your life's savings in the most aggressive emerging market investments you can find, we have to offer our recurring warning: international markets, and emerging ones in particular, can be volatile and risky. Read "What are the risks of international investing?".

The fact that most emerging economies are very dependent on the health of the U.S. economy to sustain their growth is mentioned both as strength and as flaw. On the other hand, there is evidence that the emerging economies increasingly trade amongst themselves, reducing over time their dependence on the U.S. economy. Another criticism of emerging markets is that they are not as well correlated with the U.S. stock market as other Western bourses are.

Country funds are not diversified and tend to be highly concentrated and vulnerable to any number of local or regional economic, natural or political events. Concentration occurs both in how few companies make up the indexes as well as how dominant a particular industry sector is. For example, some economies rely greatly on the export of commodities, and the whims of the commodities markets. Always approach these markets with discretion (i.e. carefully dose your allocation), never use leverage, diversify, and do not invest if you are not fully prepared to take the volatility and the occasionally severe drawdowns.

Assuming that, after completing the prerequisite soul searching, you decide to go ahead and invest in emerging markets you will ask which emerging markets to target and which funds to use.

The World Index Ranking service can of course provide targeting help by ranking the strongest countries and indexes. In order to diversify we generally recommend no fewer than three country funds. For some not wanting to micromanage individual country funds, a better choice could be a broader fund such as the iShares MSCI Emerging Markets Index Fund, EEM for short, which follows the index of the same name. EEM spreads its investments in over 20 countries but their top 10 holdings by country are:

Chart 2: EEM holdings by country as of December 31, 2006

Note that the reason we currently do not include funds representing regions or other country groupings in the World Index Rankings is that there are no publicly available indexes to use. The popular EEM fund follows the MSCI Emerging Markets Index which is proprietary and for which historical data is not freely accessible. Nevertheless, the World Index Ranking list includes eight emerging market countries (Brazil, Hong Kong, India, Malaysia, Mexico, Singapore, South Korea, and Taiwan) which more often than not have representatives in the top 5. Other countries and regional ETFs will be added as indexes and/or corresponding ETFs become available.

FAQ of the Week

Question: How much allocation to World Indexes?

In last week's article on "Portfolio allocation" we discussed many facets of diversification but we did not provide specific guidance on how big a slice of your portfolio should be allocated to the World Index Ranking service versus simply timing U.S. indexes. As usual there is no "one size fits all" answer. Some insist on keeping 100% of their investments in U.S. markets while others seek maximum performance wherever it may be.

This week's Trend Timing School article above includes specific warnings about the risks of investing in emerging markets and internationally in general. Clearly, without technical guidance on when to go long and when to stand aside as well as assistance in identifying which markets to invest in, investing in foreign markets would be a much riskier proposition. Taking the relative risks into consideration, together with the fact that for the last several years returns in select world markets have trounced that of U.S. stocks, and a high likelihood of a continuation of this trend, we feel that they belong in most everyone's portfolio.

As far as how much to allocate, a good place to start is 50/50. Each of us can then vary from there to accommodate our individual risk/reward inclination. If you go 0% world markets you are likely to regret missed opportunities down the road, and if you go 100% you are likely to find the roller coaster ride too rough for your taste.

Warm wishes and until next week.

The TimingCube Staff