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

It has been a punishing week on Wall Street. As had been widely expected, The Fed decided to raise the funds rate to 5% on Wednesday, marking the 16th consecutive hike since June 2004. Investors expecting a dovish accompanying statement were disappointed, as the Fed clearly left the door open for more rate increases if future economic data warants it. As gold and commodity prices reached new highs Thursday morning, renewing inflation fears once more, heavy selling kicked in to send all major indices significantly lower. Markets failed to regain their footing Friday and instead closed at their lows of the day, capping a week in which sentiment appears to have clearly shifted. Volume increased markedly as the major indices went down, indicating that institutional investors were major participants in the sell-off. The failure of the Nasdaq Composite to reach new highs last week, coupled with the strongly negative market action we experienced these past few days caused our Model to issue a Sell signal after the close on Thursday. This signal change comes close to the top for the Russell 2000 and S&P 500, as both indices hit new highs just last week.

The Nasdaq 100 lost 4.55% over the 5 day-span, crossing below both its 50-day and 200-day exponential moving averages (EMAs) in the process. It is now sitting at its lowest level of the year. As for the Russell 2000 and S&P 500, they have both settled below their 50-day EMA, respectively losing 5.04% and 2.60% on the week. To illustrate the negative change in market tone, it should be noted that it is the first time since early November that the Russell 2000 has closed below its 50-day EMA. We now have a Sell signal in effect.

Trend Timing School

When action speaks louder than words

So it looks like the market divergence that we discussed last week has come to a head and resolved itself in favor of the bears and a Sell signal was triggered. For most of us a new signal brings a sense of excitement, relief and closure, especially when it has been over 6 months since the last one. We finally get to enter our trades, lock in the profits from the previous Buy, and get positioned for the new downtrend. Most of us have conscientiously placed our orders last night or early this morning for today's execution, and we are all set. Others, for various reasons have not yet traded and, if you fall in this category, this issue of the Trend Timing School is dedicated to you and to getting you over the hump.

Whether you missed the e-mail, did not have the time, got cold feet, started wondering if this signal was too late, or too early maybe, whatever your specific reason, it is not too late to act. The TimingCube system can only help you build wealth if you actually follow it.

Why do we have Sell signals?
This is the most basic principle of Trend Timing: we want to participate in all meaningful market moves and to control the downside risk by stepping aside during major down drafts. History has shown the Trend Timing strategies, even simple Long Only, to consistently outperform buy and hold, because instead of suffering down market losses, the Trend Timer's portfolio is protected or even benefits from such market losses. While not all Sell signals coincide with major down moves or big gains, they are to be viewed as insurance. Without downside protection your portfolio is exposed to unacceptable risks, in our humble opinion.

When to trade?
Now! Yes, the ideal time to enter your trades would have been last night or earlier today before the market open, and your trades would have been in the ballpark of the open prices we list in the "Results" page. All is not lost. Our analysis shows that delaying your trades by one or two days only reduces average signal performance moderately (see What is the effect of slippage?). Remember that as more time passes since the signal without action on your part, the less likely you are to execute the trades and follow the system. If you fall off the Trend Timing wagon through inaction, you expose yourself to potentially large downside risk. You have the entire weekend to place your orders and they will be executed on Monday. For your financial health, do it now.

Which index to short?
This is the eternal question. Remember, to have the best short performance we want the investment that will go down the most in price. Is it better to short the index which has been weakest during the just completed Buy cycle, or should we short the strongest? If only we knew which index will go down the most during this Sell signal. Well, we still cannot predict the future but can bring history and statistics to the rescue. We analyzed our entire live and backtested trade history since 1989 (live since June 2001) and, leaving out this most recent one, there have been 23 Sell signals. As shown in the table below, the best Buy signal performer gave the best Sell return 43% versus 30% of the time for the worst performer during the previous Buy. Somewhat better, but odds of less than 3 to 2 are not very good.

The odds that come out stronger in the analysis are that of the Russell 2000 which was the best Sell signal performer 65% of the time, regardless of how it did during the preceding Buy signal. Further examination reveals that all but one of the Nasdaq 100's best Sell returns came as you would expect during the burst of the tech bubble in 2000-2002, making the odds in favor of the Russell 2000 look even better. It looks like when the market turns sour more often than not, the little guys, e.g. the small caps in the Russell 2000, fall faster and further than the large caps in other indices. The current market action seems to support this pattern, but it can be unwise to forget the saying "There are lies, damn lies, and statistics".

Best return during Sell signals
(Short strategy)

	(% of all 23 Sell signals since 1989)
Best performer of previous Buy	43%
Worst performer of previous Buy	30%
Russell 2000	65%
Nasdaq 100	26%
S&P 500	9%

What to invest in?
If you implement a Long Only strategy, the main task is to liquidate your long positions and simply sit in cash or money market fund until the next Buy signal.

For Long and Short strategies, the choices are many, but as with most things, keeping it simple usually wins the day. If you are in a qualified retirement account your shorting choices are limited to doing it with bull/bear index mutual funds from ProFunds or Rydex (certain brokers also allow the trading of options). Because of the simplicity of one step exchange between funds of the same family, many investors select these funds over other vehicles, even in non-retirement accounts. Find all the fund choices in the What to Trade? section of the "Resources" page. These bull/bear selections have recently been enhanced with pairs of international choices (see FAQ of the weekly we sent on 04/21/2006: "Are there leveraged international bull/bear funds?")

In non-retirement accounts the preferred long investment alternatives are probably the many ETFs, whether U.S. or international. The catch is that when it comes to shorting, the choices are relatively few. While technically an ETF can be shorted like a stock, depending on its liquidity and availability from your broker, it may not practically be shorted. One notable exception is EWJ , the Japan ETF which frequently can be shorted but also has put options available. When it comes down to it, regardless of what you invest in during the Buy signals, during Sell signals it may be just as effective to simply short good old QQQQ and IWM.

In conclusion, there may be many questions and artificial complications but what ultimately counts is to participate. You cannot win if you do not compete. Luckily the system is very simple and all the instructions are at hand. There is no excuse for keeping your portfolio in harms way. Give your wealth building plan a chance to work, trade now!

FAQ of the Week

Question: Which do you prefer, QQQQ or QQEW?

When we discussed the Nasdaq 100 equal weighted index fund in last week's FAQ (see "Has the Nasdaq 100 equal weighted ETF started trading?") we did not intend to start a run on the QQQQ . We did not say dump all your QQQQ and buy QQEW instead. What we said is: "... 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..." We have no preference. Sometimes, as it has been the case recently, the QQQQ can underperform, but there will be times again when it outperforms. Since we cannot predict when that will be, it is safer to diversify (and not just between QQQQ and QQEW). By the way, another item to be wary of is that QQEW is very new, very small, and very thinly traded. While shares are created as needed, large overnight demand swings can induce price gaps and we recommend tight limit orders as a safer trading discipline when placing orders before the market opens.

Now that a Sell signal was issued, this whole discussion is moot and instead of everything you just read you should indeed dump both QQQQ and QQEW, and either stay in cash or find a way to short the market somehow. While you will have no problem shorting QQQQ if that is the path you choose, you would have no such luck shorting QQEW or any other thinly traded ETF because your broker will simply not have any shares to loan you.

Warm wishes and until next week.

The TimingCube Staff