• Trend Timing is a long-term wealth building system. While consistently achieving index beating performance over longer periods of time, the system cannot insure positive returns over shorter periods
• The Model detects broad market trends and lets us participate in meaningful advances and declines. We do not attempt to catch the very tops and bottoms or to exploit every little bump and dip in the markets
• Investing in the stock market, especially with short-selling and leveraged trading, presents some risks. You can lose part of your capital
• The more aggressive the investment strategy, the higher the downside risk

The facts about the current pullback
As highlighted in the Signal Update section above, the indices are down between -0.18% for the Russell 2000 and -2.16% for the Nasdaq 100 since we last traded on April 30, 2004. So far this is a very mild pullback not even close to being in correction territory which we define as at least a 10% drop (or increase since we are in a Sell position). Variations between the different indices are a good argument for diversification. We also understand that if you are using margin or some of the leveraged bear funds such as the ProFunds USPIX, your current paper losses could be as high as -9%. Beyond the fact that the mutual funds were bought at the market close on April 30, 2004 instead of the open for ETFs, the leveraged mutual funds can have unexpected behavior at times as we explained in the

Great expectations
When deciding which strategy - or blend of strategies - we will implement, many of us are tempted by the historically stellar results of Strategy 4, Long and Short with Margin. It seems like over most time periods the most aggressive Strategy 4 has been a run away winner. We get lulled into thinking that the historical returns will repeat year after year, and never experience losses. Yet, for most investors, concluding that all or even a large part of our portfolio should be placed in leveraged investments would be irresponsible. Before settling on the return expectation we need to understand how much heat we can stand.

Risk assessment
In order to make sure we stand a chance to achieve the anticipated returns, we should calculate what the corresponding downside risk is. To provide a practical example let's take our current Sell signal with Strategy 4. We know that from the entry point the Cash signal protects us after a drop in the Nasdaq Composite of 9%. The Nasdaq 100, other indices, and their various investment vehicles can lose more or less than the Composite. If we use margin or a leveraged fund, we are looking at a possible -18% or more. Depending on the investment vehicle and strategy used your actual losses could be higher or lower and there is no hard limit on how much stock investments could fall in a single trading day.

This simple individual exercise should help each of us settle our battle between greed and fear and help us find our sweet spot were we can feel comfortable.

Despite the recent market action against our current Sell signal, nothing has changed in the trend. The Model does not tell us how strong the trend is or how long it will last. Are we sure the signal is correct and will result in a gain? Of course not. No investment Model can be correct 100% of the time, but since it is a matter of probabilities we like the 80% winning trade odds we have accumulated so far. As usual the signal will remain active until the Model determines that the trend has changed, and since we never try to "second-guess" our Model, we will just have to wait and see. There will be plenty of pullbacks and corrections along the way; the key is to follow the strategy over the long-term, as our results clearly show.

If on the other hand you are still thorn and cannot stop questioning the current signal's validity, a quick re-read of the should do you a world of good.

The short answer is that Quadrants are in no way used as indicators in our Model and do not play any role in determining the market trend or the signals.

The Model primarily relies on price and volume action on the Nasdaq Composite Index. Unlike signals, quadrants or transitions between quadrants are in no way actionable in our plan. The four Quadrants have been introduced to help us understand and therefore cope better with the respective market psychologies. Please refer to our for more information on Trend Timing quadrants.

Now to the "So what Quadrant are we in right now and what does it mean to me?" question.

As luck would have it, after declaring the bear market and a Quadrant 3 Bear/Sell situation last week, the markets have conveniently decided to head the other way and rallied this week (handing us paper losses so far on this trade). Applying the EMA crossover rule to the letter would have us back in a bull market as of the close tonight. Clearly, this bull/bear indicator, just like most of technical analysis, is only an approximate science. Until the Nasdaq Composite's 10-day exponential moving average (EMA) decisively moves below the 200-day EMA and stays there, we are still in a transition zone between bull and bear, hovering between a Quadrant 2 and Quadrant 3. If a pronounced Quadrant 3 bear market develops, you will be the first to know.

Warm wishes and until next week.

The TimingCube Staff