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

Markets started the week by moving modestly lower on higher oil prices and renewed fears that the Fed might have to keep hiking interest rates for a while longer. These concerns were partly alleviated as the week wore on, and as optimism returned following better-than-expected earnings reports, major indices regained their footing and moved solidly higher. Both the Dow Jones Industrial Average and S&P 500 finished the week at new 6-year highs, while the Russell 2000 closed at an all-time high. Friday's release of a weaker-than-expected April jobs report bolstered hopes that the Fed will soon stop its tightening campaign. The resulting bond rally, coupled with lower oil prices, helped stocks close the week on a strong note. The Nasdaq 100 and S&P 500 respectively gained 0.77% and 1.16% over the 5-day span. Both were outperformed by the Russell 2000, which finished the week 2.26% higher. All three indices still rest 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 Buy signal remains active.

Trend Timing School

Market divergence

Most of the time broad market indices are well correlated and move in harmony, with differences being in their relative strengths. At other times they can become disconnected and move in seemingly opposite directions. Right now, depending on which investor you speak with, they may be ecstatic with the recent performance of the stock market (they probably invest in the Russell 2000 or international indices which are all making new highs), or they could be close to despair (possibly because they are invested in the Nasdaq 100 which has been coming down since its January high, which wasn't all that high to begin with). Talk about a schizophrenic market. This is called a market divergence, and it is happening both in a long and a short time scale.

Let us take the long view first. Chart 1 below compares the Nasdaq 100 index with the Russell 2000 over the last 7 years. Today, the Nasdaq finds itself about 64% below the all-time high it achieved in March of 2000, bringing many Nasdaq followers to declare the beginning of a secular bear market. Indeed, even considering the nice gains since the October 2002 lows, it is plain to see that it will take quite a few years more to recoup the losses (but that is the curse of buy and hold). Since the beginning of 2003, using a Long and Short strategy, the Nasdaq 100 has gained about 50%, but in contrast, the Russell 2000 increased by 135%. The Russell 2000 erased the effects of the 2000-2002 bear market long ago and has been setting new all-time highs ever since. No sign of a bear market on that chart, secular or not.

Chart 1: Contrasting fortunes between the Nasdaq 100 and Russell 2000


The reason such divergences occur is that broad market indices are not identically broad, but differ in number of companies, market capitalization, industry mix, etc. At times these differences can become acute as was the case during the technology bubble. Yes, all markets were in one of the longest bull markets that culminated in early 2000, but the Nasdaq 100 and to a somewhat lesser degree the Nasdaq Composite are heavily dominated by technology giants like Microsoft, Apple, Intel, and Cisco. These were the high flyers which got bid up to such artificially insane multiples that the descent had to be much steeper than for the average stock. Even since the October 2002 bottom these erstwhile leaders have been mostly out of favor, and they got outpaced by most other stock groups.

Short-term examination paints a similar picture. The broad markets have been in a solid bull run and many indices have been making new highs, like the Russell 2000 and the Dow Jones Transportation Average. Those that have not yet made new all-time highs are within striking distance. Even the Wilshire 5000 which represents the entire market is close to a new high. Then there is the Nasdaq. As can be seen in Chart 2 below, the Nasdaq 100 has been going against the grain by coming down since its January high. And its chart looks sickly. In an attempt to find the root cause for this under-performance we took a look at the Nasdaq 100 Equal Weighted index in which each stock accounts for 1/100th of the index, unlike the regular Nasdaq 100 which is market-cap weighted, meaning that the mammoths like Microsoft dominate. The largest 10 companies account for over 40% of the index. These stocks have been falling out of favor and the equal weighted index shows that without their overwhelming influence, the rest of the companies in the index have been moving with the broad market, i.e. up.

Chart 2: Nasdaq 100 versus Nasdaq 100 equal weighted


Most of us see the Nasdaq 100 divergence as a cyclical rotation out of the large tech stock sector, but others point to the Dow Jones Utilities index, which has dropped over 7% since its October 2005 high, as a bad omen for the rest of the market.

As always, Trend Timers do not predict when the bull market will run its course, rather we let the market tell us. And in the meantime, for those of us who are still mostly or even exclusively invested in the QQQQ, despite our countless admonitions, it is high time to diversify. In addition to the Russell 2000 and international funds, you now also have the Nasdaq 100 equal weighted ETF to consider (see "FAQ of the Week" below).

FAQ of the Week

Question: Has the Nasdaq 100 equal weighted ETF started trading?

Yes. As promised, here is our notification that the Nasdaq 100 Equal Weighted index fund has just started trading under the ticker symbol QQEW. In the equal weighted fund, each company represents 1/100th of the index, unlike the regular Nasdaq 100 which is market-cap weighted towards the large tech stocks such as Microsoft, Apple, Intel and Cisco.

For more information about QQEW, read "What is your take on the new Nasdaq equal-weighted ETF?".

For more information about why an equal weighted investment may be better suited for current market conditions, read "Market divergence" above.

Warm wishes and until next week.

The TimingCube Staff