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 continued to move lower this week, as the bears now appear to have the upper hand. The selling accelerated Wednesday after the release of inflation numbers that were worse than anticipated. The core Consumer Price Index (CPI) for April came in at 0.3%, topping the 0.2% rise expected by economists. The news instantly rekindled fears that the Fed will have to keep hiking interest rates in the coming months. Stocks plunged as a result, with the Dow Jones Industrial Average losing 214 points on the day, its worst showing of the past 3 years. Markets tried to rally Thursday only to tumble again during the last hour of trading, marking the 8^th consecutive daily loss for the Nasdaq 100 and the Russell 2000. The major averages eventually managed to stop the bleeding by posting a modest bounce on Friday. Such a rebound was to be expected, as the main indices had become very oversold following the steep decline of the previous days.

For the week, the Nasdaq 100 lost 2.14%. It moved deeper below both its 50-day and 200-day exponential moving averages (EMAs). As for the Russell 2000 and S&P 500, they are both under their 50-day EMA but remain just above their 200-day EMA. They respectively lost 2.68% and 1.87% on the week. Our Sell signal remains in effect.

Trend Timing School

A look at the dark side of the market

One of the small pearls of wisdom that comes with age and a long practice of Trend Timing is to always seek information which reinforces the current side of the market, whichever it is, and filter out everything else as noise. It goes without saying that this narrow-view practice is only workable with a Model which reliably keeps you on the right side of the trend. The motivation behind the practice is purely emotional. It feels a lot better to see and hear why we are going to make money instead of worrying about all the reasons why the market might reverse course and go against the signal. Plus it offers genuine entertaining value.

Let us first remember the jargon of the dark side and the respective levels. Anything between 0% and 10% loss is a pullback, then come corrections up to 20% where bear markets start. We are overdue for a major decline. It has been years since we had so much as a correction.

Most people in the financial industry have been trained to like an up market and hate a down market. This evidently black and white pavlovian behavior is no-doubt to be attributed to deeply rooted buy and hold. As far as we are concerned, we do not have a preference; well, to tell the truth we actually are pretty fond of the downside. When in a Sell mode we need to think upside down. Down is good because with our short positions we benefit from the decline. The other reason we particularly like the Sell signals is that they are when Trend Timing really makes a difference and when we get to outperform the averages. Maybe we should call it the bright side, not the dark side.

Then there are the perennial bulls and upbeat financial press who do not believe that there can be a real correction, and much less any risk of a bear market. The Dow Jones Industrial Average has been setting all-time highs just last week, after all. Well, as we like to say, all bear markets start at a top. In addition, a different perspective helps see the Dow Jones in a very different light. Chart 1 below plots the index in terms of hard money by plotting the ratio of the DJIA and gold. When the line goes down it signifies that the Dow Jones is weakening versus gold, and vice versa. In fact, in those terms, the Dow Jones Industrial Average has been in a severe bear market since 2001 when the ratio stood at over 42; it now is at about 16! No all-time highs in sight on this chart!

Chart 1: Dow Jones Industrial Average in hard money terms (gold)



Looking at the down side is also meant to remind us all that it can be extremely unhealthy to be on the long side (the wrong side) during severe market declines and remind us of why we follow the trends. Our best example remains the 22.61% percent decline IN ONE DAY when the stock market crashed on October 19, 1987, Black Monday (one of them anyways). Such drastic events never happen overnight they are always preceded by deteriorating market conditions and a change in trend.

There are lots of bearish theories ranging from the benign to the doomsday level. Some forecast the S&P 500 at 450 by October of 2006, without cracking a smile. It closed at 1,267.03 today and October is only 5 months away. Others are painting frightening parallels between the economic and market conditions now and the series of 1929 crashes that preceded and precipitated the Great Depression. From the more popular theories that make the rounds:

• Volatility at record lows
• The 4 year cycle
• Presidential mid-term year
• Sell in May and go away
• Long term trend lines
• Fibonacci retracement numbers
• Etc.

The reason we do not really favor any of these theories is that they all attempt to predict the future, and predictably fail to do so repeatedly and accurately. We have also written about the randomness of "Seasonality investing" in the September 3, 2004 Update. In the meantime we are satisfied to follow the trend and reap the benefits of what hopefully will prove to be a great Sell signal.

FAQ of the Week

Question: Why are there fees on my no-fee mutual fund?

The mutual funds we are focusing on are the bull/bear index mutual fund families from ProFunds and Rydex (see What to trade? for a list of the funds). These funds are no-load and no-transaction-fee products, if you have your account with the fund families themselves. After all, these funds were designed to permit exchanges among funds with no upper limit on size or frequency.

Alas, most of us have accounts at a brokerage firm and most of them charge various fees for these same funds. Brokers generally charge a transaction fee which varies widely, from $5 (at BrownCo now E*TRADE) to $49.99 (at Ameritrade). In addition, some brokers impose a short-term redemption fee, either a flat amount or a percentage of your transaction, if the fund is held less than 90 days, or even 6 months in some cases.

It may well be worth checking your broker fees and if they exceed what you think is fair you can take your business elsewhere.

Warm wishes and until next week.

The TimingCube Staff