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

Market Update

Markets did not move much overall this week. As had been widely anticipated, The Federal Reserve announced Wednesday that it was leaving interest rates unchanged. Despite the fact that the Fed noted that economic growth has slowed and expressed concerns over the level of inflation, the decision was well received by investors as they bid stocks higher, allowing both the Dow Jones Industrial Average and the Russell 2000 to close at new all-time highs. The market mood changed Thursday, following disappointing retail same-store results. The negative news prompted investors to book profits, sending all indexes sharply lower for the first time in weeks. After the long run-up that started mid-March, such a pullback was to be expected and is not only normal, but ultimately healthy as it removes some of the complacency that has built up in the markets. Stocks were able to resume their advance and regain a good chunk of their losses Friday, therefore finishing the week on a better note. Investors were encouraged by the fact that the core Producer Price Index (PPI), which excludes food and energy prices, came in unchanged for the second month in a row, suggesting that inflation is actually well contained. This makes it more probable that the Fed will start cutting interest rates later this year.

For the week, the Nasdaq 100 gained 0.16% while the S&P 500 was virtually unchanged. The Russell 2000 underperformed, as it lost 0.40%. All 3 indexes rest above both their 50-day exponential moving average (EMA) and 200-day EMA. The fact that markets have not moved up substantially since the signal really presents an opportunity for subscribers who let the signal pass somehow, and we highly recommend they read the on-topic FAQ of the Week below.

For its part, our World Index Ranking portfolio posted a 0.35% loss this week. The portfolio consists of the 5 top-ranked world indexes as of April 27, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Closed-end versus open-end ETFs

Because of the broad availability of large index ETFs, the average U.S. stock investor has had little use for closed-end ETFs, unless they sought the skills of a particular money manager or to go after a specific market segment. Because from time to time closed-end funds top performance ratings, many are tempted to exploit these hot properties. We have long sided against closed-end ETFs because of a number of characteristics which we deem excessively costly and risky. Rather than simply trust our judgment we let you decide for yourself with all the facts laid out in this head-to-head comparison of the two types of funds. The following table summarizes the key characteristics reviewed in this article.

Closed-end versus open-end ETFs

	Closed-end ETFs	Open-end ETFs
Outstanding shares	Fixed	Variable
Price	Determined by supply and demand for the fund itself	Determined primarily by NAV, the sum of the stock prices in the index
Premium/Discount	Can be large at times (10%, 30%, 50% or more)	Small (typically smaller than 1%)
Liquidity	Dependent on the fund's trading volume	Dependent on liquidity of underlying stocks
Portfolio Management	Active	Index driven
Diversification	Some can be highly concentrated in a sector or few companies	Same as the index they track
Transparency	Poor	High
Costs	High (Average of 10 largest funds is 1.8%)	Low (Average of 10 largest funds is 0.3%)
Performance	Unpredictable. At times they can beat the markets, at others they lag substantially	Mostly matches the market index they track

Closed-end funds (sometimes also referred to as CEFs) have been around for a long time but have been largely eclipsed in market acceptance by their open-ended counterparts. Of the 20 largest ETFs in existence, all are of the open-end ilk. What distinguishes closed-end funds is that they raise their money like stocks, through an initial public offering (IPO) of a set number of shares. The number of outstanding shares is fixed and the issuance of shares is said to be "closed" to new investors. From then on, the outstanding shares are traded between investors.

In contrast, when an investor buys or sells shares of traditional open-ended ETFs (sometimes also referred to as index ETFs) through a stock exchange, the shares are actually issued or redeemed; the fund company and its agents create or unwind the fund shares from the shares of the companies in the underlying index. The so-called market makers (or authorized participants) are the companies that order the creation and redemption of ETF shares. They create or redeem shares depending on the market demand for the ETF.

The primary effect of a fixed number of shares is that the market price of closed-end funds is determined by supply and demand for the fund itself, not by calculation of net-asset-value (NAV) or sum of the values of all underlying stocks, as is the case with index ETFs. As a consequence, closed-end funds will be priced at a premium or at a discount depending on whether the share price is above or below the NAV. While the premium/discount can be monitored for all funds, it can be seen quite dramatically for country funds where indexes exist as a market gauge. We have recently highlighted divergence between country indexes and country funds with the example of the India closed-end funds (IFN and IIF) which recently have not correlated well with the India country index (^BSESN). See "What is wrong with Indian funds?". In this example, the premium for IFN surged to almost 35% by May 2006 because it had become somewhat of a fad amongst investors who bid it up. The downside of this occurred shortly thereafter with the premium not only evaporating but actually reversing to now stand at an 11% discount!

The fixed number of shares also makes closed-end fund liquidity critical. When you want to sell your shares you depend on finding a willing buyer, this makes the fund's trading volume very important. On the contrary, you will always be able to sell your open-end funds immediately with small spreads, regardless of trading volume of the fund.

Closed-end funds are also actively managed, where open-end funds are index based. The difference in that regard is that the portfolio manager for a closed fund actively works his holdings according to a stated strategy or focus seeking to beat the broad market, whereas the manager of an index tracking open-end fund will simply build his portfolio as per the index composition. The former requires (or should require) a highly skilled and experienced money manager while the latter gets by with a competent administrator. This renders the closed-end manager a critical ingredient and many funds have gone astray following manager changes. The manager also has full discretion on what to invest in which, given their performance-based compensation, tends to be detrimental to diversification. Closed-end funds can be excessively concentrated but open-ended ones are as diversified as the index they track. The type of management also directly impacts the transparency of the funds which is complete with open-end funds and quite poor for the closed-end ones. The closed-end manager is in a fierce battle to outperform the market and rival fund managers and usually wants all the secrecy he/she can get away with (a lot).

Fund costs, which include management fees and other expenses are typically much higher for closed-end funds. The largest 10 closed-end funds have average costs of 1.8% (with the highest at over 4%!) while the largest open-end funds average a more acceptable 0.3%.

Potential performance is of course the wild card, and the only reason we can find for anyone to be tempted to use closed-end funds. As open-end ETFs quite reliably track their index, they do not have the upside opportunity the closed-end ones have. When the stars align, the manager gets a hot hand, the narrowly targeted segment is booming, and the fund becomes the market rage, watch out above. Finding which fund is going to be the next moon shot is the tricky part.

In conclusion to our overwhelmingly negative assessment of closed-end ETFs we must concede that there is a place for them, and that certain active and experienced investors can find them useful in implementing specialized trading strategies. Also, because closed-end ETFs exploit derivatives to create leverage, something which is only available with a few ProShares funds in the world of open-end ETFs, some will elect to ignore the added costs and risks. For the rest of us, we rely on the fact that both TimingCube's trend following Model and momentum-based World Index Ranking system are index driven to regard open-end index ETFs as our obvious investment vehicle choice.

FAQ of the Week

Question: I let the signal pass, what should I do?

Statistically, the best possible method of market entry is to invest your funds as a lump sum at the open on the morning of the trading date (the day following issuance of the signal). The next best thing is to invest as soon thereafter as you can. Sometimes, the market provides temporary pull-backs gifting the stragglers with an opportunity to get in even cheaper than on the trade date. Any near term weakness could be just such an opportunity.

Sadly, there is no shortage of reasons to let a signal pass without acting. If it is because you did not receive the signal notification e-mail you need to take immediate action to fix the issue (please read "How can I be sure I receive e-mails from TimingCube?"). Otherwise, it does not really matter if you missed the signal, second guessed it, forgot to trade, had cold feet, procrastinated, hesitated or simply could not bring yourself to pull the trigger. We are not here to judge or place blame. These are all human frailties and occur to most every Trend Timer once in a while.

While there is no doubt from our experience that taking a full position immediately is the optimal way to implement the system, it does not mean that having missed the trading date you are condemned to wait on the sidelines until the next signal. The only thing worse than not acting promptly when the signal comes, is to not act at all. This might be tolerable during a Sell signal because many of them turn out to be shallow and short lived, but is certainly ill advised during Buy signals. While not all Buy signals develop into the strong sustained rallies we crave, the odds of winning are with us (nearly 78% with the current Model with World Index Ranking statistics). There have been extended up trends lasting well over a year and you do not want to chance missing those. Even if you risk a few percentage points by entering late in case the trend reverses, you stand to lose substantially more by sitting on the sidelines in a rising market. This is why we always recommend getting in sync with the signal at your earliest opportunity.

In order to optimize the investment entry and minimize the downside risk of such mid-signal entries, technicians have invented a technique called Dollar Cost Averaging. Instead of committing the entire amount we are prepared to invest in one single lump sump, we invest it in a series of smaller fixed dollar amounts over a period of time. It is safer because we buy more shares when the price is down and fewer when the price is up. Also, if the market reverses and the signal changes rapidly, we lose less than if we had invested the entire amount.

For a detailed description of the technique with examples read "Dollar Cost Averaging explained".

Warm wishes and until next week.

The TimingCube Staff