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

Market Update

Stocks experienced wild swings during this holiday-shortened week to finish with more losses, leaving the S&P 500 and Russell 2000 at their lowest close since the correction started late April. Tuesday's session turned out to be a choppy one that saw early gains evaporate to turn into steep losses after the Obama administration announced criminal and civil investigations into the Gulf of Mexico oil spill. The energy sector took a beating on the news, with the broad market following suit, resulting in a 1.7% loss for the S&P 500. Stocks rebounded strongly the next day on the back of better-than-expected April pending home sales. The S&P 500 leaped 2.6% on the day but did so on low volume, showing a lack of conviction among institutional investors. The same pattern of gains on light trade occurred again Thursday as the S&P 500 added another 0.4%. Unfortunately for the bulls, sellers returned in earnest the next day following a disappointing May employment report: the Labor Department said before Friday's open that 431,000 jobs were created last month instead of the 513,000 economists expected. The market gapped lower on the news and kept falling all day on heavy volume. Renewed anxiety over Europe's debt crisis also took its toll, sending the dollar to its highest level against the euro in over four years. By day's end, the S&P 500 had lost 3.4% to cap yet another negative week for stocks as the correction continues.

The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively lost 1.12%, 2.33% and 4.06% over the four-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) still rests below its 200-day EMA.

For its part, our World portfolio posted a 2.61% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of May 21, which marked the beginning of the current 4-week holding period. 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

Volatility soars

The beauty of being a Buy and Hold investor is that you take a very long-term view of the world, assuming you can. By investing when stocks are cheap, you lower your downside risk and maximize your upside opportunity. When stocks are cheap is never very clear - "cheap" is in the eye of the beholder after all. For example, based on recent estimates of corporate earnings, the S&P 500 is trading around a P/E ratio of 12 times those estimated earnings. That is cheaper than the typical 15-20 leading some experts to contend that stocks are a good buy.

Of course, the market has been struggling to come to that same conclusion. We cannot get passed one calamity without another showing up. If it's not the European Union striving to figure out how to navigate the financial storm, it's an oil leak of epic proportions. A backdrop to all of these market wobbles remains China's insistance that domestic growth must slow and its real estate bubble must be popped. In a nervous market where every worry is magnified, these calamities compound into a minefield of volatility. As measured by the VIX , volatility has soared to levels consistent with past crises.

Chart 1: Euro angst sends the VIX to crisis levels



Chart 1 shows that reaching the crisis level is usually the peak of the market volatility. The market crash around the Lehman Brothers implosion where virtually all financial markets seized up is the only exception in recent times. Given that markets thusfar show no evidence of such widespread trauma (and with economic data generally improving), one would expect the VIX to stabilize and return to lower levels. In recent decades, this elevated level of the VIX has led to market gains as investors got beyond their fears and returned to buying stocks. The chart below shows how the market has responded after prior VIX peaks.

Chart 2: Major VIX Tops and the S&P 500: 40 Days Later


Source: http://efficientish.blogspot.com/

Of course, we do not know for sure that May 20 marked the VIX peak for this move. If it did, however, we should expect the market to show reasonable gains in the days and weeks ahead. Perhaps helping this phenomenon along this time will be the healthy month of July - one of the best months for the market historically. Has the VIX peaked already, or is there a higher level of investor nervousness still ahead? Of course, our Model will keep us safely on the sidelines until the answer is clear. In the meantime, cash is king.

FAQ of the Week

Question: Do you recommend using stop loss orders?

This question has become even more difficult to answer in the wake of the May 6 "flash crash" where some stocks and ETFs briefly lost all links to reasonable valuation. Typically, we would say that stop loss orders, though a very imperfect tool, can be very helpful. For example, if you want to limit your downside loss to 5%, placing a stop loss order on a fairly liquid (read: high volume) security will tend to provide the protection you are looking for. That way, you do not have to pay so much attention to the market day-to-day. Just let your stock run and adjust your stop loss order as needed to protect you in case the market and/or your stock encounters more turbulence than you want to handle. The problem with stop loss orders is always that your order can be triggered and your stock sold only for the stock to reverse back upward leaving you sitting on the beach having missed the boat. Most of the time, that's not such a huge problem. You can just buy back into the stock at a little higher price and carry on. However, the May 6 market move where stocks plunged only to quickly recover caused some stop loss orders to execute that were probably just there as insurance against a catastrophy. May 6 was a catastrophy in a market functioning sense. But not in a fundamental economy-coming-unglued-and-investors-heading-for-the-exits kind of way. It was just a horrendous market imbalance that came and went rather quickly. If you weren't watching the market during that crazy period, you wouldn't have been affected by it at all. Unless you had a stop loss order sitting out in the market. Then, you may have found your order executed only to see the market zoom back upward as normalcy returned.

The market overseers have indeed "busted" or disallowed some of the most extreme of these trades. But there are no doubt some folks who wish they would never have put those stop loss orders out there. Such flash crashes are extremely rare events and we wouldn't recommend investors necessarily plan for such a rare event. If you want to use stop loss orders, maybe place them at a reasonable 5-10% level (depending on the volatility of what stock you are working with), review them regularly for adjusting higher or lower, and recognize that the price of this "insurance" might be a trade you wish, in retrospect, would not have happened. Stop loss orders can help us sleep better at night and generally work to limit losses to a level of comfort for us. As always, you just need to understand what you're doing and recognize that markets can become irrational, putting your insurance into play when you may least expect it.

Warm wishes and until next week.

The TimingCube Staff