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

Market Update

Monday marked the kick-off of the First-Quarter earnings season. Stocks moved higher in early trade, but the main averages gave back their gains to finish the session almost flat. Late in the day, the first major company to report, Alcoa, missed its earnings target. Coupled with a sales warning from chipmaker Advanced Micro Devices, the negative headlines caused stocks to open lower Tuesday. Showing resilience, the major averages managed to close the session with only modest losses. Higher oil prices and a profit warning from UPS caused stocks to slide further Wednesday before they reversed course Thursday, posting solid gains on heavy trade after an analyst upgraded Intel and other prominent companies in the semiconductor industry. As stocks looked ready to move higher again Friday, GE took the wind out of the market's sails before the open by issuing an earnings report that missed estimates and providing a disappointing outlook. The bellwether company's stock shed 12.79% on the day and all major indexes posted losses in excess of 2%. The blow was softened by the fact that the drop occurred on lower volume, however.

The Nasdaq 100, S&P 500 and Russell 2000 posted respective losses of 3.60%, 2.74%% and 3.58% on the week. All three indexes are again located below both their 50-day and 200-day Exponential Moving Averages (EMAs).

For its part, our World Index Ranking portfolio significantly outperformed its U.S. counterparts this week with a gain of 1.16%. The portfolio consists of the 5 top-ranked world indexes as of March 28, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

The wash sale rule

In case you forgot, we are well into tax season (in the U.S. anyway).
We at TimingCube are not tax advisors but we regularly receive tax related questions at this time of the year. While we cannot fill your tax return for you, we feel it is important to address the tax implications of Trend Timing. This week we deal with wash sales, a little known tax rule which had some of you worried recently.

The essence of the rule is that you cannot deduct losses from stock or security trades in a wash sale. A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you directly or indirectly:

• Buy substantially identical stock or securities,
• Acquire substantially identical stock or securities in a fully taxable trade, or
• Enter into a contract or option to acquire substantially identical stock or securities

By "indirectly" the IRS means that if you sell stock and your spouse, or a corporation you control, buys substantially identical stock, you also have a wash sale.

Where many people interpret the rule strictly as "cannot deduct", the IRS is actually more generous than that because they only call for the deduction to be postponed. If your loss was disallowed because of the wash sales rule, you can add the disallowed loss to the cost of the new stock or securities. This cost basis adjustment effectively postpones the loss deduction until the disposition of the new stock or securities.

An even more obscure exception to the rule which could assist subscribers utilizing certain index options is that the wash sales rule does not apply to so-called Section 1256 contracts, which include non-equity options and broad-based stock index options (also see the related "FAQ of the Week" below).

You may ask why TimingCube subscribers should care about wash sales in the first place. Let's take a hypothetical example to illustrate how a wash sale could occur. Say you became a new subscriber mid-signal during November of 2007 and to get in sync with the then active Buy signal you purchased 100 shares of QQQQ at $50.63 at the open on November 28, 2007. By the time you sold at the open on January 7, 2008 following the Sell signal, QQQQ had dropped to $48.40 and your trade would have resulted in a loss of $223 ($5,063 minus $4,840), not counting commissions. The IRS normally allows such investment losses to be deducted from your income. However, if within 30 days of January 7 our Model had detected a trend reversal and issued a new Buy signal, you would then have purchased QQQQ shares again, and in the process created a wash sale. Luckily, the 30 days went by and our Sell signal remained in effect, and this time no one experienced a wash sale.

FAQ of the Week

Question: Can index-based options provide a tax break?

The answer to this question is a little known tax code gem we offer to subscribers who use options to implement the strategies. Effectively, this is a way to get long-term tax breaks on short-term investments. We cannot control the duration of our trades, as they are dictated by the market trends, but we can select what we invest in.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the security before you sell it. If you hold it more than one year, your capital gain or loss is long-term. Accordingly, if you hold Exchange Traded Funds (ETFs) in your taxable account for a year or less, any capital gains will be treated as short-term capital gains which are taxed at the same rate as ordinary income (as high as 35%). This is true even for ETFs that track a market index such as QQQQ, IWM, and SPY, or equity options on such securities.

The Internal Revenue Service defines broad-based stock index options as non-equity options which are treated as Section 1256 contracts. All three of our favorite indices (Nasdaq 100, Russell 2000 and S&P 500) are defined as broad-based indices which qualifies the related index options (NDX/MNX, RUT, and SPX respectively). As strange as it seems, for such contracts the holding period does not matter one bit and all gains and losses are automatically considered to be 60% long-term and 40% short-term. This means that 60% of the gains will only be taxed at the highest tax rate on long-term capital gains which is 15%, regardless of how long you hold them. Thank you Uncle Sam!

At the risk of repeating ourselves, we need to point out that we are not tax advisors and for more details on the tax treatment of index options or tax questions in general you should go to the Internal Revenue Service web site at http://www.irs.gov/ or consult a professional tax advisor.

Warm wishes and until next week.

The TimingCube Staff