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

Market Update

Last week's big rebound on light volume did not last as stocks instead resumed their descent over the five-day span. If the major averages managed to stay afloat Monday after overcoming intraday losses, they could not repeat that feat during the next session, as a higher open quickly gave way to renewed selling pressure, resulting in a broad retreat for stocks. The S&P 500 shed 1.4% on the day as news that Germany would restrict short-selling spooked investors and caused a heavy sell-off among financials. With the market's mood turning sour, the major averages fell again Wednesday on increased trade. If losses for the day remained modest, the worst was yet to come. Indeed, stocks plunged on heavy volume Thursday in what turned out to be the worst session of the year for all major averages. By day's end, both the Nasdaq Composite and S&P 500 had lost around 4% and were down more than 10% from their April highs, therefore officially entering correction territory. The VIX volatility index reached 45 on the day, its highest level since March of last year, clearly showing that fear was rampant among investors. The sharp move lower left stocks deeply oversold and it was therefore not surprising to see the main indexes rebound some Friday despite an initial drop to fresh three-month lows. A rally by financials led the turnaround, yet gains for the day remained modest in light of previous losses as the Nasdaq Composite only managed to recapture 1.1%.

The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively lost 4.20%, 4.45% and 6.45% over the five-day span. If both the Nasdaq 100 (QQQQ) and Russell 2000 (IWM) remain located in-between their 50-day and 200-day exponential moving averages (EMAs), the S&P 500 (SPY) finished the week below its 200-day EMA.

For its part, our World portfolio posted a 6.72% 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. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. 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.

Our current Cash signal remains in effect.

Trend Timing School

Ignore the news and your own worldview to find investing success

One of the most perplexing aspects of investing for most people is how the markets do not necessarily follow the news. Instead, they follow perceptions and sentiment about the news. Perhaps most important, markets are driven by a very wide collection of opinions and sentiments. That collection may or may not include the mysterious "smart money" (ever heard someone say that the market was being controlled by "dumb" money!). And the collection of opinions may not be hewing to your particular view of the world. For much of 2009, for example, a number of investors fretted about the nature of the economic recovery. In the summer of 2009, some doubted whether there would be ANY recovery occurring. Then, as economic statistics began to steadily improve, the worry was whether the economic recovery would achieve liftoff from a cocoon of government support.

There was the hand-wringing a year ago about how U.S. Treasury bonds were a disastrous investment. After all, rates had nowhere to go but up. And the U.S. government's expensive "plugging holes in the dike" policies were bound to destroy U.S. Treasuries as an investment. A year later, investors who shorted U.S. Treasuries have been disappointed. A year from now, those investors might well be sitting on handsome profits. But their timing was way too early, to say the least. U.S. Treasuries just bounced back to a more normal range ... and have stayed there ever since.

Chart 1: U.S. Treasury Rates Nearing Bottom of Trading Range



Back in October, the drums were beating that the U.S. dollar was doomed. Again, those harboring concerns about U.S. government spending, etc. pushed the needle of noise fully to the extreme with the scenario of a crashing U.S. dollar. Since then, the U.S. dollar has done nothing but move higher. Pundits failed to point out that the value of the U.S. dollar can only fall if other currencies rise, namely the Euro and Yen. Maybe the U.S. dollar has a future day of reckoning. Thusfar, Europe's woes have center stage in the market's mind and the dollar has been the beneficiary..

Chart 2: U.S. Dollar Soaring



With Euro-angst the prevailing market concern right now, investors are looking past very strong earnings and outlooks from technology stalwarts like HP, IBM, and Cisco who all spoke glowingly about a revival of corporate spending. Is it because the market has already factored this into stock prices? If so, some of those prices are well lower now despite those outlooks.

And therein lies the challenge for investors. Investors are placing money into a market that is a stew of opinions. The market prices are determined by people. People are emotional beings with a tendency toward herding behavior. As a result, markets reflect the prevailing emotion of the herd at any point in time. That emotion may or may not reflect the news of the day, and may or may not align with your personal views. Instead, it is a reflection of all inputs that drive our collective mood. Given that people tend to seek out, listen to, and talk with people and information sources that confirm their own opinions, investing based on your own opinions can be a hazardous pursuit.

As Trend Timers, we seek to profit from this herd behavior by not focusing on the underlying economic fundamentals because investors' reactions to those fundamentals depends on their emotions at the time. We want to remove the emotion from our investing decisions and merely react to the migration of the herd.

As shown in the examples above, opinions, though often rooted in very defensible, sensible logic, can be poor guides to investment success - especially in the short and intermediate-term. Following the news can also be a poor guide, as we have found that investor sentiment/mood can overwhelm the impact of news. Thus, we are left with a strategy of observing the herd and going where they go. When the herd scatters and markets are volatile, we move to the sidelines and wait for the next migratory move. And so we wait today for investors to return to the positive attitudes that drove the market relentlessly higher in March and April, or reach such a level of concern about a slowing global economy that prices break into a full-fledged downtrend. Cash can be a comfort in such volatile times!

FAQ of the Week

Question: What's behind discussions about short selling?

Almost every time markets suffer a meltdown, questions are raised about the value of selling shares short and the role such short-selling played in the market's plummet and volatility. Though volatility is a natural outcome of markets that are free to set prices, volatility is a bad thing for most investors. It creates uncertainty, which most people shy away from, and generates fear when it comes to our hard-earned investment resources. Thus, it is predictable that a sharp increase in volatility (though only when it leads to losses!) is followed by questions, committees, and general angst about the causes. Short-selling is a bet against an asset's price; a bet that the price will decline. Some hold this negative view of an asset as being distasteful, or even immoral. Recall the cries from leaders of Bear Stearns, then Lehman Brothers, that their stock prices were being "manipulated" by short sellers and pleading with the market regulatory bodies to rein in the short sellers. The short sellers always argue that they are just exposing the true fundamental nature of the company or market in question and, secondly, that they are actually performing a service by providing liquidity to the market. The latest version of this argument occurred earlier this week when the German government sought to ban "naked" short selling in certain assets in an attempt to head off "attacks" on the prices of those assets. Unfortunately, at least in the short-term, the markets viewed this negatively and further sold the Euro. For more on this issue, take a look at this summary of articles: http://www.ritholtz.com/blog/2010/05/germany-bans-naked-short-selling/

Warm wishes and until next week.

The TimingCube Staff