Signal Type	Trade Date	Return since issued
		World	U.S.
			Nasdaq 100 (QQQQ) Russell 2000 (IWM) S&P 500 (SPY)

Market Update

More gains over the five-day span allowed the S&P 500, Nasdaq Composite and Russell 2000 to all finish the week at new highs for the year. Since markets were closed last Friday, Monday's session gave investors their first opportunity to react to the March employment data. Market participants were obviously pleased with the numbers as a broad rally lifted stocks, yielding the Nasdaq Composite a 1.1% daily gain. The positive mood was also the result of an ISM index of service activity that hit its highest mark in almost four years, providing further evidence that the economy is on the mend. If stocks managed to pick up modest gains Tuesday, they faced selling pressure during the next session as recurring concerns over Greece's debt situation came to the forefront again. News of a drop in credit also raised fears that customer spending could slow down, yet stocks managed to hold onto their own as the S&P 500 only retreated 0.8% Wednesday. Stocks were then able to overcome early weakness Thursday to resume their march forward following solid numbers from the retail sector and carried on with more gains during the last session of the week, as the Nasdaq Composite climbed an additional 0.7% Friday on easing concerns over Greece and a resulting move lower for the dollar.

The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively gained 2.66%, 1.81% and 1.49% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 1.55% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of March 26, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Trend check

With the headlines focused on Dow Jones 11,000, we take stock of where the market trends are and how they might be changing. First, a look at where we are in the broader context. The Chart 1 below shows that stocks have largely recovered back near their Sept 2008 pre-crash levels. Small-cap stocks have pulled away from the large-cap led S&P 500 over the past few weeks. Small caps are an important barometer as they represent investor's willingness to take risk as well as a vote in favor of an improving economy (small companies being generally more sensitive to economic conditions). Emerging market stocks have caught up to high yield bonds in 3-year performance and should pull away over the course of 2010 as bond returns normalize (and assuming the global economic recovery stays on course).

Chart 1: Stocks since September 2008



Chart 2 looks only at domestic stock indexes and draws attention to the substantial outperformance of the Nasdaq 100 as tech stocks have been attracting investor interest for a variety of reasons - not the least of which is that we are now almost exactly ten years removed from the peak of the tech stock bubble. During that ten years, leading tech stocks have built up very healthy balance sheets and are poised to deliver strong profit growth on any favorable economic tailwinds. Additionally, tech stocks have been out of favor through most of the last cyclical bull market, making them relatively cheap certainly when compared to their valuations at the beginning of the decade.

Chart 2: Domestic Stocks since September 2008



Which brings us to investor psychology and the underlying caution afflicting investors. While investors are now willing to come full circle and embrace the tech stocks that so ravaged portfolios almost a decade ago, they seem reluctant to go "all in" on stocks; far from it. The pain of the 2000-2002 bear market has spread out perhaps with the losses in a specific stock or sector having given way to a more generalized angst about stocks. That broad individual investor caution about investing in stocks is a hallmark of the secular bear market we remain in the middle of. The most recent symptom of which is an enormous flow of money into bonds. The Chart 3 and Chart 4 below show from a couple of perspectives this steady and phenomenal shift of assets.

Chart 3: Rolling Six-Month Net Inflows to Bond and Income Mutual Funds ($Bn)


Data as of 12/10/09. Source: ICI, MSIM.

Chart 4: Monthly Flow of Mutual Funds


Source: Investment Company Institute.

In addition to the disdain being shown for stocks, despite a massive performance run, investors worldwide continue desperately searching for yield in a very low-yield environment. Hence, they have bid up all classes of bonds and quickly squeezed down credit spreads (the difference between interest rates on various bond types). Should the global economy continue displaying signs of gaining its footing, interest rates will move higher which pushes the price of bonds lower. That could send money fleeing bonds and into stocks.

But maybe not - at least not as much as you might expect. As long as interest rates do not spike higher in dramatic fashion, the damaged psyches of stock investors could be such that investors are willing to stick with bonds and accept the 5-7% or so yield that they will offer. For us, we only need to heed our model's guidance. That served us well through two bear markets, and will continue to do so regardless of interest rates and investor angst.

FAQ of the Week

Question: What is the growth rate of ETFs?

We have been talking about ETFs since their early days. Over the past few years, however, ETFs have really started to be embraced by money managers, investment advisors, and stockbrokers. Even some 401k providers are beginning to recognize the demand for these flexible investment vehicles. According to industry data from ICI, ETFs have increased assets by almost 70% over the past year. Certainly the hefty stock market gains have contributed substantially to this huge ramp. Though fixed income ETFs are all the rage as investors seek ways to capture yield, stock ETFs still account for 85% of all ETF assets. Anyhow, the table below might be of some interest as it shows the explosion in ETF assets:

Chart 5: Assets of Exchange-traded Funds by type (Millions of dollars)



Warm wishes and until next week.

The TimingCube Staff