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

Market Update

It has been a horrendous weeks for stocks, one for the history books as all world bourses dropped precipitously on heavy trade on escalating worries over the sovereign debt of European nations. If stocks managed to recover some of last Friday's losses during the first session of the week, they did so in unconvincing manner as volume was clearly lacking. Sellers returned in earnest Tuesday as investors simply dumped shares on renewed concerns that the Greek bailout plan may have been implemented too late and might fail. Stocks gapped down at the open and retreated all day, yielding the Nasdaq Composite a 3% loss. With European debt worries expanding to Spain and Portugal, markets moved lower again Wednesday, the S&P 500 shedding an additional 0.7%. A disappointing reading for the ISM index of service activity in March also provided an excuse to sell. Thursday's session turned out to be a wild one. A steep market sell-off took place, triggered again by European debt issues and news of riots in Greece. The Dow Jones Industrial Average lost up to 1,000 points intraday before stocks moved off their lows late in the session. Apparently, the tremendous plunge may have been caused by errant trades at large financial institutions. By day's end, the major averages were left with losses in excess of 3% on very heavy volume. The day's action, combined with the rapid deterioration of the market tone in the previous sessions caused our Model to issue a Cash signal after the close Thursday. Investors were not finished with losses for the week, however, as stocks dropped further Friday despite news that employers added 290,000 jobs last month, far more than expected, for the largest increase in four years.

The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively lost 6.35%, 7.78% and 8.78% over the five-day span. All three ETFs have now crossed below their 50-day exponential moving average (EMA) but remain located above their 200-day EMA.

For its part, our World portfolio posted a 10.65% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of April 23, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details.

We now have a Cash signal in effect.

Trend Timing School

Bears come out from hiding

After two months of a non-stop slow grind higher, a collection of fears have combined to give investors reason to sell stocks. Last week, stocks marked their first down week after eight consecutive weeks of gains. Investors had been viewing even minor dips as an opportunity to get in the game and buy an increasingly compelling global economic recovery.

Clearly something has changed though. After weeks of relatively light daily moves, volatility has spiked with triple-digit moves in the Dow becoming an almost daily occurrence. Chart 1 below shows the volatility spike in the context of the past few months. It is the 3^rd such spike in volatility in recent months, with each spike driven by a fresh concern over a foreign debt crisis. Typically, you would expect volatility to continue trending downward as the cyclical bull market matures and investors become increasingly comfortable with owning equities. Prior to Thursday, this scenario was playing out with volatility spiking but remaining in a channel as shown in the chart.

Chart 1: Volatility spikes but stays within its downtrend



While the Dubai debt crisis was rather short-lived as a concern, similar issues in Greece will not go away and on Thursday gave way to full-bore panic in markets. The Euro has been and continues to be pounded on fears that the Greek problems will ripple through to other nations and banks saddling the Eurozone with a heavy debt albatross limiting future economic growth. The falling Euro makes the U.S. Dollar relatively more attractive. Sometimes, a higher dollar means lower commodity prices, which can put pressure on commodity-driven stocks, as we outlined in a recent weekly. This chain of events was put into overdrive Thursday pushing all risk-based assets through the floor before settling out with substantial losses. Some stocks have given back two months or more of gains in mere days. Just last week, investors were heartened by a strong earnings season. Now, it all appears to be forgotten as Europe fumbles through its first real crisis of confidence in the Euro currency. The VIX has now burst through the channel shown above and vaulted to levels reminiscent of the late-1990s currency crises.

Chart 3: Volatility bursts higher



However, as the news headlines regarding the Greek debt and, in the U.S., the Gulf of Mexico oil spill have taken center stage, it is a lesser headline that has been working to put a damper on stocks' two-month rally. That is China's relentless drive to slow its economy. Chart 2 below shows the dramatic turn of events that began on April 16^th. On that day, while U.S. investors were focused on the SEC's fraud charges against Goldman Sachs, the bigger story for markets perhaps was China's taking major steps to rein in purchase of second homes. Our chart shows that simultaneous with this roll over in Hong Kong's stock index was a resurgence in the "Safety Assets" of the U.S. Dollar and U.S. Treasury bonds.

Chart 2: As China rolls over, money flows to safety



The weakness in China's stock market quickly spread to all commodity-related country and sector ETFs keeping them down in April while U.S. indexes marched ever higher. The Shanghai index is down over 10% year-to-date, so it's correction is well along. With U.S. small cap stocks up almost 20% at one point this year, there has been a substantial divergence between the fastest growing major economy and the U.S. market. However, this week the party is clearly at an end.

After eight straight weeks of low volatility gains, the U.S. stock market has become much more jumpy as the battle between bulls and bears heats up quickly. Investors who have participated since the rally began in early February have built up large gains and perhaps are willing to take some profit at any sign of weakness. Other investors have been waiting for any pullback to dive in. This activity has led to wild swings and seeming confusion in the markets. Behind the scenes, however, money has clearly been flowing to safety as international markets reflected concerns over China's efforts to slow things down. Thursday's rout in all risk assets signaled a sudden ramp in market concerns as fear of something, anything, EVERYthing shook investors. Either that or some rogue trading problem rippled through the highly connected world of computerized trading world setting off a series of stop loss selling until sanity was returned. (But that's for another day and more information to come forth.) What we do know is that until the markets become convinced that the debt monsters are under at least some level of control (and there is some plan to deal with them), they will continue to be a thorn in the side of stocks and a bearish shadow over investor's psyches. Our Model has reacted to Thursday's heightened tension to issue a Cash signal.

FAQ of the Week

Question: What's new in the ETF world?

We were intrigued by the recent introduction of target date muni bond ETFs from iShares. Our readers know well that we do not necessarily endorse any particular brand of ETFs, but rather endorse the concept of ETFs as a great way to invest. The Muni Series, as iShares calls it, provides an ETF that fits more what individual bond investors are used to - a fixed end-date investment with clear income and principal characteristics. When you buy an individual bond you have entered into a contract to receive certain interest payments and the return of a given principal amount. The iShares Muni Series attempts to provide a similar structure for ETF investors. With end-dates ranging from 2012 to 2017, investors can choose their desired bond maturity date. These ETFs can be used in place of buying individual bonds in a bond ladder, for example. Some investors may be put off by the caveats regarding return of principal, however. IShares concedes that they cannot guarantee return of a particular amount at the end-date maturity. This is due to the nature of running an investment pool. They do not know what purchases and redemptions will be, and may vary the monthly income distributions as a result. That said, we think this is an interesting evolution in the ETF landscape and would not be surprised to see other types of bond ETFs along these lines, such as corporate end-date bond ETFs, or even AAA-rated bond ETFs with specific end-dates.

Warm wishes and until next week.

The TimingCube Staff