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

Stocks managed to stop the bleeding this week. After continuing their descent until Wednesday afternoon, major indices turned back up as the S&P 500 and Russell 2000 found support around their respective 200-day simple moving averages (SMAs). We pointed out last week that the steep decline since May 10 had left the market oversold. It became even more so early in the week, as illustrated by the sharp increase in the VIX volatility index: after hovering around 12 for several months, the VIX suddenly accelerated as the market fell and almost hit 20 on Wednesday, indicating a high degree of fear among investors. When such pessimism reigns and results in a very oversold market, a bounce is likely to occur so we were not surprised to see the major indices move higher until the end of the week. The rally should of course be taken with a grain of salt as it was modest in regards to the scope of the previous decline and was accompanied by lower trading volume, indicating a lack of conviction among big players.

For the week, the Nasdaq 100 gained 0.34%. It still remains below its 50-day and 200-day exponential moving averages (EMAs). As for the Russell 2000 and S&P 500, they respectively closed 0.97% and 1.04% higher on the week. Both indices are still below their 50-day EMA and above their 200-day EMA. It should be noted that the 10-day EMA of the Nasdaq Composite crossed below the 200-day EMA this week, a condition that matches our definition of a bear market. For more on this subject, please refer to our article on the psychology of bull and bear markets in the October 31, 2003 weekly update. There is no change as far as our Model is concerned and our Sell signal remains active.

Trend Timing School

Over a barrel

Unless you have been living in a cave, the fact that oil and gasoline prices are at all-time highs is not a secret. The fact that energy plays an increasingly important role in the health of the economy and the stock market is only now becoming apparent to most people. While the origins and even the sense of the expression "to have someone over a barrel" are unclear, with the barrel of crude oil as context, "to have that person at your mercy" finds new meaning. Oil is the world's number one commodity and, as with most commodities over the last few years, demand and in turn prices have been booming.

A brief overview of oil history over the last century helps better understand the predicament we are in today. Until the 1940s the U.S. was the world's leading oil producer then, gradually, it slipped from net exporter to becoming the biggest consumer and importer of oil, depending more and more heavily on oil from the Middle East. This over-dependence only became a concern with the oil shocks of the 1970s, starting with the 1973 war in which Egypt and Syria attacked Israel, and the U.S. openly furnished arms and other support to Israel. In retaliation, Middle Eastern oil producers imposed an oil embargo on the U.S. which caused the long lines at gas stations. The same happened again during 1978-1979 after the fall of the pro-western Iranian regime. All the initiatives to reduce the country's dependence on foreign oil in general and Middle Eastern oil in particular, including major programs to develop alternative and renewable energy sources and build synthetic fuel plants, rapidly faded into distant memories with the oil glut that came during the 1980s and 1990s. In recent years we have returned to record breaking petroleum prices, driven primarily by geopolitical tensions in the Middle East and demand growth from Asia.

A look at the world landscape of oil producers and consumers helps explain the tight spot we are in (see Table 1 below for data). On the supply front we find that OPEC, the Organization of Petroleum Exporting Countries (whose members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela) accounts for only 40% of world oil production. Surprisingly, the former USSR (which includes Russia, Kazakhstan, Azerbaijan and other independent nations) is in the lead with a combined daily output of around 12 million barrels, followed by Saudi Arabia and the USA. Russia and other former Soviet republics have heavily invested and developed their production capacity but the U.S. which always used to be the most developed and leading producer has been on the decline for years, it recently reached its lowest output in 55 years.

On the demand front, as expected with a commanding lead, the USA showing no signs of slowing its binge on the black stuff, now followed by China with sustained increases in consumption of about 30% year over year for several years now. Although the U.S. represents only about 5% of the world population we consume over 45% of the world's gasoline supply.

Table 1: 2005 World crude oil supply and demand

Leading Oil Producers	Leading Oil Consumers	Leading sources of US imports
Former USSR (12)	USA (21)	Canada (18%)
Saudi Arabia (10)	China (7)	Mexico (15%)
USA (8)	Japan (5)	Saudi Arabia (12%)
Iran (4)	Former USSR (4)	Nigeria (12%)
Mexico (4)	Germany (3)	Venezuela (10%)
All data in million barrels per day              Source: EIA (Energy Information Administration)

Further, considering the U.S. imports about 60% of its oil (which also happens to be the single largest component of our trade deficit), looking at where the oil comes from reveals another set of challenges. Three of the top 5 sources of our oil are at risk from anything from terrorism and threats of regime change in Saudi, to civil unrest in Nigeria to political unrest in Venezuela. Mexico, arguably, is only one political change away from becoming a problem as well. We now even have to import tens of millions of gallons of gasoline because we do not have the refining capacity.

Looking at the long-term evolution of crude oil prices (see Chart 1 below) clearly shows that they are primarily driven by supply and demand, although many in Government and the media blame soaring oil prices, and commodities in general, on speculators and traders. The worry with this scenario is that speculative bubbles have a tendency to eventually deflate abruptly as they did during the first Gulf War in 1990 when speculators, fearing prolonged supply disruptions from the war, sent prices almost doubling only to snap back a few months later (see the corresponding spike in Chart 1). Certainly today's situation has at least in part been fueled by the increased risks presented by Iran's obstinate pursuit of uranium enrichment, including the possibilities of embargo or even military strike. An interesting aspect of Chart 1 is that while crude oild has reached new all-time highs recently, when adjusted for inflation, we see that a barrel of crude would have to reach $100 to even match the high achieved back during 1979.

Chart 1:


So, why is the supply problem not simply going to go away like it did every time before? Many of the issues could be overcome with the development of new technology and renewable energy sources the optimists say. Perhaps, but the fact remains that the policies of the U.S. Government are clearly pro-oil, whether they admit it or not, and its policies broadly favor the big oil industrial complex and friendly oil producing nations (and even not so friendly ones) while offering mere lip service to alternative energy sources. Politicians feel any supply issues can be resolved by opening new areas for drilling (i.e. nature preserves) and giving oil companies more financial incentives and tax breaks. Yet, the sad fact remains that the easy to find, easy to access, and easy to extract deposits have already been found and exploited.

On a global scale the demand for oil is simply not going away any time soon, even at higher prices, and beyond the sordid debate about whose fault all-time high gas prices are, there is the vastly more important topic of what the future looks like, what the world oil reserves and production forecasts are. As you can expect there are different factions in this debate and there is wide disagreement. The notion that petroleum is a limited resource takes center stage with a growing number of specialists and scientists who claim that "peak oil", which marks the beginning of the long-term decline in world oil production, is already behind us and that in fact we will never be able to increase production again. Higher and higher prices for the dwindling commodity are most likely a fact of life and because of the devastating impact this can have on the economy and the stock market, Trend Timers need to stay with the broad market trends more than ever.

Related oil and energy information resources:
There is tons of great information available about oil and energy in general at sites such as the International Energy Agency and the Energy Information Administration. Both are clearly pro-energy and largely pro-oil but a lot of the data is factual. For a view of the other side of the argument you can do a Google search for "peak oil" and you will be astounded with all the sites that come up (if you cannot stand a good doomsday scenario, don't look).

FAQ of the Week

Question: Any news on inverse and/or leveraged ETFs?

Well, what a coincidence , just this week the U.S. Securities and Exchange Commission (SEC) announced that ProFunds Advisors had won approval for 12 new Exchange-Traded Funds (ETFs) including the first ones with leverage. The funds will be known as ProShares and they will range in objective from double, inverse, and double inverse the daily performance of a number of indices, possibly including the Dow Jones Industrial Average, the Standard & Poor's 500 index and the Nasdaq 100 index.

The reason these new products have been expected with so much anticipation (at least by Trend Timers like us) is that they will provide an effective way to short and apply margin, even in qualified retirement accounts like IRAs, which could only previously be approximated with bull/bear index mutual funds. Until ProFunds actually launches the new ETFs we can only guess at the specifics, but we anticipate funds which mirror the objectives of their mutual fund family counterparts, and as generally is the case with ETFs, lower costs, better index tracking and of course, the ability to trade as a stock any time during the day. In fact, when they arrive, we expect these new ETFs to become so popular and successful that they will supplant bull/bear mutual funds in short order.

As always, you can count on us to let you know as soon as the funds are announced and available.

Warm wishes and until next week.

The TimingCube Staff