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

Market Update

It has been an impressive week for the markets, thanks to better-than-expected earnings reports from several high-profile companies. With the negative tone set by GE's profit warning last week still present, stocks started Monday by posting modest losses on thin trade. Energy stocks helped carry the main averages to small gains during Tuesday's session, as investors awaited Intel's quarterly results. The semiconductor bellwether company did not disappoint, beating expectations and providing a bullish outlook. With JPMorgan also reporting profits above estimates, stocks were set for strong gains Wednesday. Indeed, the Nasdaq Composite gapped up at the open and climbed all day to finish the session 2.8% higher on heavy trade. The major averages held onto their gains the next day, before Google delivered its own set of good news after the close by reporting a 32% increase in first-quarter earnings. Shares of the internet giant soared 20% on Friday as a result and helped spark a huge market rally.

Not surprisingly, tech stocks benefited the most with the Nasdaq 100 sporting a 3.23% gain for the day. The index finished the week 5.65% higher and is now located above both its 50-day and 200-day Exponential Moving Averages (EMAs). The Russell 2000 and S&P 500 respectively gained 4.78% and 4.31% over the 5-day span and both indexes are now situated well above their 50-day EMA.

For its part, our World Index Ranking portfolio underperformed its U.S. counterparts this week with a gain of 1.44%. 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

Credit crisis status update

We are not investing in subprime mortgages, credit derivatives or financial stocks, but in view of the fact that the beginning of the stock market decline last summer coincided with the revelation that subprime loan problems were behind two troubled hedge funds (managed by none other than Bear Stearns), it is obviously in our best interest to know how far we are into this financial crisis and where it is headed down the road.

Just to recap how the banks got into this pickle, we have to go back to the years when the Federal Reserve encouraged easy credit by all means to dig us out of the last recession which followed the bursting of the tech bubble. In turn, this flood of liquidity engendered the real estate market bubble which sent prices soaring, motivating banks to make riskier loans and getting ever more leveraged with all sorts of credit derivatives. It turns out that a large portion of their big fat earnings and bonuses for the last few years came from that very activity. All was cool until the housing bubble burst. With prices plunging, and adjustable rates pushing mortgage payments beyond the limits of many unqualified borrowers, foreclosures exploded and set off a downward spiral. The market for the various credit derivatives dried-up and the losses at the more aggressive financial firms started to mount.

Many respected economists have declared a crisis of historic proportions the like of which, some argue, has not been seen since the Great Depression. The near bankruptcy of Bear Stearns, Wall Street's fifth largest investment bank, brought the credit crisis into focus as a credible threat not only to the economy but to the very fabric of the U.S. banking and financial system.

The Federal Reserve has aggressively lowered interest rates to spur the economy, has injected massive amounts of liquidity through creative money supply and, more importantly, has announced its willingness to bailout any major financial institution on the verge of collapse. Fed Chairman Bernanke's statement "the failure of Bear Stearns could have led to a chaotic unwinding of investments throughout the U.S. economy" tells us clearly how scared they are of the situation. Ironically, the day of the Bear Stearns rescue also marked an intermediate bottom for the stock market.

According to Bloomberg, the losses on subprime-linked securities by banks and brokerages since July 2007 surged to $255 billion. Yet, hardly a day goes by without another financial institution announcing massive write-offs. While staggering, these kinds of losses do appear to be discounted, for now, by stock market investors because of the knowledge that the Fed will pick-up the tab. No questions asked. In that, the Fed has won a major battle. In financial markets more than anywhere else, perceptions and trust are everything.

If we needed only one piece of evidence that an intermediate market low has been established, the fact that small investor bearishness reached an 18 year high, coupled with the knowledge that small investors are consistently wrong, satisfies our contrarian test.

Another more tangible sign that an intermediate rally is underway can be found in the Dow Jones Transportation index which broke out of its recent range to an 8 month high (see Chart 1 below). Unlike the other major U.S. indexes which are just above their 50-day Exponential Moving Averages (EMAs), which in turn are still substantially below their respective 200-day EMAs, the Dow Transportations has risen above both, and its averages just delivered a bullish crossover with the 50-day moving past the 200-day average.

Chart 1: Dow Jones Transportation index breakout



Dow Theorists who have long maintained that the Transport index is the stock market leader are now waiting for the Dow Industrials to confirm this bullishness by establishing its own intermediate highs.

In this environment it is not surprising that many industry pundits are declaring the end of the credit crisis. Leading the parade was JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who just this week told reporters that "the credit-market crisis is more than halfway finished as financial firms reduce leverage, and may be as much as 80 percent over."

Don't be fooled. Even if for now the stock market clearly is suggesting that Bernanke will be successful in keeping the financial system from coming apart and in preventing the economy from slipping into a deep recession or depression, many experts warn that the situation is far from resolved. The Fed has embarked on an unprecedented path of market intervention and few have considered the ramifications and long term consequences of their actions. We will enjoy the market rally for as long as it lasts, but we will not become complacent.

FAQ of the Week

Question: Why is the Russia ETF not included in the World Index Ranking?

As its name indicates, our World Index Ranking is entirely index-based. In order to be included in the rankings, amongst other criteria, a country stock market index must have publicly available historical data AND have an ETF tracking that same index. This is alas not the case for RSX (the Market Vectors Russia fund). The principal Russian stock market index, called the Russian Trading System Index , has some historical data but the RSX fund tracks another index for which data is not available.

The main reason we require historical data is to establish that the market in question is well correlated with other world markets. Since the timing signals generated by our Model are applied to the strongest world markets, it is imperative that the markets we track demonstrate a history of good correlation. When we first looked at correlation of Russian markets in the "The correlation coefficient", they were actually inversely correlated (meaning that they were more likely to move against world markets). In our most recent investigation, see "Correlation of world stock markets", correlation had substantially improved but remained one of the lowest correlation coefficient of all the world markets we track.

Chart 1 below visually explains why Nasdaq Composite index mid-term trends may not be the best timing indicator to invest in the Russian market. Until that changes we will not include Russia in the World Index Ranking.

Chart 1: Comparing the Russia ETF with the Nasdaq Composite index



Warm wishes and until next week.

The TimingCube Staff