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

As had been widely anticipated, the Fed raised the funds rate to 4.75% this week. It was the 15^th consecutive hike since June 2004. The initial market reaction was negative as the Fed's accompanying statement left the door open for one or more rate increases if future economic data warrants it. The disappointment did not last as investors acknowledged that the Fed's statement was nothing new and that we are getting closer to the end of the tightening cycle. They consequently sent the markets higher on Wednesday, the Nasdaq composite hitting a new 5 year-high in the process. The Nasdaq 100 retained most of its gains to close the week 1.42% higher. As for the Russell 2000, it gained 1.50% to finish at a new all-time high. Comparatively, large-cap stocks did not do as well as investors rotated money out of S&P 500 companies, which had outperformed of late. This resulted in a 0.62% weekly loss for the S&P 500. All three indices remain above both their respective 50-day and 200-day exponential moving averages (EMAs). There is no change as far as our Model is concerned and our active Buy signal remains in effect.

Trend Timing School

The risks of Trend Timing

We pride ourselves of the intrinsic risk management offered by the Trend Timing investment approach, the capital loss safeguards by virtue of signal changes, and demonstrate their positive effects through risk and risk-adjusted performance statistics such as standard deviations and Sharpe ratios (eager Trend Timers and other masochists can read "Risk-adjusted performance" in the April 1, 2005 issue of the Trend Timing School.) Still, regardless of how good the risk management system is, there are always risks when investing in the stock market. For once, instead of cleverly touting the merits of our method, we will bravely explore the risks of the approach.

There are many perils when following an investment strategy, such as the temptation of second-guessing the model in order to outsmart it (risky, because generally done with terrible results), but there are really two primary risks with the strategy:

Catastrophic events
Arguably, one of the potential flaws in the Trend Timing theory is that crashes triggered by external events independent of the market (i.e. not detected by our Model), such as major natural disasters or terrorist attacks, can occur at anytime. True, but history shows, as exemplified by the September 11, 2001 induced mini-crash, that markets tend to recover their losses promptly after such point events. We have written about the impact of disasters on the stock market in "Trends and catastrophic events", and the bottom line is that such episodes never have a lasting effect on the stock markets.

While we are in a Buy mode the exposure is identical to that of buy and hold investors, except that many of them are likely to get cold feet and bail out at the worst possible time, before the recovery begins. In any case, as we wrote in an earlier column "History is littered with catastrophic events, natural or man-made, but also with the failures and missed opportunities of people too frightened about the future to live their lives to the fullest". You cannot make money in the stock market if you don't participate.

If you feel you need additional protection against one-day crashes during which the market could blow by our Cash signal trigger points, setting stop orders could be a solution. On the other hand, setting your own stop orders presents some issues which could cause you to be stranded on the wrong side of the trend. Not only could the investment you hold be more volatile than the benchmark index, but your stop could also be triggered on an intra-day spike, when in fact our Model would not detect a signal. If the market then resumes in the direction of the primary trend, and our signal, you could miss out on substantial gains.

Trendless markets
Markets can be defined in terms of volatility and trendiness. A volatile market is one that moves a great deal from time period to time period. A trendy market is one that tends to move in the same direction from one period to the next. It is common knowledge that trend following systems works best in highly volatile and trending times, duh! Much has been written lately about the historically low levels of volatility and trendiness some U.S. markets are currently in. Volatility wise we are below historical averages but not at unusual levels. For trendiness however, we are at levels well below historical lows.

We certainly do not argue the volatility issue. We can only get what the market gives, and if the amplitude of its movements is small, so are our potential profits. However, we believe that for most markets the lack of trend is a short-term trader issue, and does not affect long-term trend followers like us. For example, a recent market momentum study has shown that since 1970 the length of consecutive strings of up or down days have steadily grown shorter. The study places the ratio at around 3 up days for every 2 down days. This matches well the pattern of seemingly daily reversals we have been observing lately. Many traders call this the worst period in trader memory. Many of them have been whipsawed to the point of whiplash by attempts to trade the short-term fluctuations.

While 3 steps forward, 2 steps back can be viewed as a lack of trendiness if you are a rapid trader looking at fluctuations spanning hours or days, in our book it spells an uptrend. We are not interested in how many consecutive days a rally lasts. We care about participating in all meaningful market movements. It may be boring but it is profitable. Yes, our Model issued the occasional erroneous Sell signal on October 11, 2005 but rapidly worked to correct the situation by issuing a Buy on October 19^th which has kept us on the right side of the market since then, with fine gains on most indices we might add.

Oops! Did we tout the merits again?

FAQ of the Week

Question: Have you heard of a double inverse Japan fund?

Sometimes, all you have to do is ask. In last week's Trend Timing article on "Long and Short strategies with mutual funds" we were lamenting about the dearth of inverse international investment vehicles, and this week, lo and behold, ProFunds comes through to grant our wish.

On Wednesday March 29, 2006, the UltraShort Japan ProFund (UKPIX) began trading. The mutual fund, which provides leveraged (200%) inverse exposure to the large-cap Japan-based Nikkei 225
Index, is the ideal companion for the UltraJapan ProFund and completes the first pair of international bull/bear index mutual funds.

And our inside sources whisper that there are more such leveraged bull/bear pairs coming in the next few weeks. We will make sure to keep you posted.

Warm wishes and until next week.

The TimingCube Staff