Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

It has been a very volatile week on Wall Street. Worries over the financial sector resurfaced Monday after Standard & Poor's downgraded such institutions as Lehman Brothers and Merrill Lynch, and Wachovia's CEO was forced to step out due to mounting losses caused by the ongoing credit crisis. Stocks fell in the process and did so again Tuesday following news that General Motors's sales in North America dropped 30%. Thanks to lower oil prices and upbeat economic figures on service activity and productivity, the main indexes found some stability Wednesday. As has been the case lately, the tech sector outperformed and helped the Nasdaq Composite post a 0.9% daily gain. Despite a $5 jump in the price of crude, stocks rallied in earnest Thursday after bellwether retailers Wal-Mart and Costco both reported better-than-expected results. Small caps were especially strong and sent the Russell 2000 to a 2.6% gain for the session. The gains proved to be only temporary, however, as stocks suffered heavy losses Friday. Investors took money off the table after a disappointing jobs report showed that the unemployment rate jumped from 5% to 5.5% in May. The markets were also pressured by record oil prices, as the cost of a barrel gained almost $11 to hit $138. The selling caused all major averages to lose in the vicinity of 3% during Friday's session.

For the week, the Nasdaq 100, Russell 2000 and S&P 500 respectively lost 2.08%, 1.06% and 2.83%. The Nasdaq 100 and the Russell 2000 remain located above both their 50-day and 200-day exponential moving averages (EMAs) while the S&P 500 now finds itself below its two EMAs.

For its part, our World Index Ranking portfolio posted a 1.77% loss this week. The portfolio consists of the 5 top-ranked world indexes as of May 23, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

ETFs versus Indexes

A central part of the definition of open-ended Exchange Traded Funds (ETFs) is that they are index-based. As investors we have observed how accurately ETFs track their index, certainly those following the major U.S. indexes. So it is natural that we have come to see the index and the corresponding ETF as one and the same, and we frequently use them interchangeably in our every day vocabulary. The Nasdaq 100 is identified with QQQQ , the S&P 500 with
SPY , and so on.

Because it was always our intent to focus on the broad stock market trend and not that of individual investments, the TimingCube system has historically been index-centric and our Trend Timing Model has been and will continue to be driven primarily by the Nasdaq Composite
index . On that basis our subscribers are free to invest in the broad market trend and implement the strategies with whatever investment vehicle they desire: ETFs, mutual funds, options or futures.

Then, as our Trend Timing strategy diversified internationally, with most geographic ETFs having little or no historic data, we naturally stuck with the indexes that they invested in. In order to be included in the rankings, amongst other criteria, a country stock market index must have publicly available historical data. Which is more than most ETFs could say at the time. As a result, and as its name indicates, our World Index Ranking is entirely index-based. Yet, there have been some substantial differences between some international indexes and the related ETFs we invest in.

Now that all the ETFs we have been recommending have accumulated sufficient historical data for our proprietary algorithm, this is no longer the reason to base the ranking of world market strength on the indexes. But would there be advantages to focus on the ETFs rather than the indexes?

One drawback of using indexes is that fairly frequently, the only ETF available for a particular country happens to track some proprietary index for which no historical data is available. Picking a "comparable" public stock market index can be a risky proposition as the two will not necessarily be or remain correlated. In such instances, being able to use the ETF proper instead of some inexact index proxy would be a plus.

Another difference between indexes and ETFs are dividends and capital gains which all ETFs are required by the IRS to re-distribute to shareholders at least annually. Since the fund pays the distributions out of their accumulated cash, the net asset value of the fund diminishes approximately by the amount paid out. This explains why the share price gaps down at the open on the ex-dividend date by about the amount of the distribution. There is no such distribution or price dip for the index, so it looks like the ETF underperformed. For the shareholders who receive the distribution in cash on the payable date, there is no real dip in price.

There are other differences between the performance of an ETF and its index, such as how closely the fund actually tracks the index, the fund's costs and expenses, but when it comes to international ETFs, currency fluctuations are by far the largest contributor to the discrepancies. An index is a pure reflection of the local stock market strength, expressed in the local currency. The price of an ETF reflects not only the market strength but also the relative strength of currency exchange rates not factored in the index.

We can illustrate the point perfectly using Brazil and EWZ , our top ETF pick for quite some time according to our strength indicator. In Chart 1 below we can see that over the last six months the U.S. Dollar to Brazilian Real exchange rate (Yahoo!Finance ticker symbol USDBRL=X) has dropped by about 10%, which means that one U.S. Dollar buys about 1.63 Reals today versus 1.8 six months ago and above 2.0 one year ago. This gain in value of the Brazilian Real over the U.S. Dollar is also reflected in the share price of the Brazilian ETF (EWZ) which, with an 18.9% gain in the six month period, well outpaced the index it tracks, the Brazilian Bovespa stock index which returned a very respectable 8.2%. Note that over the same timeframe, stock markets in weaker geographies declined, as exemplified by a loss of 5.9% on the S&P 500.

Chart 1: The influence of exchange rate fluctuations on ETF performance



In this instance, the direction of the exchange rate shift worked in our favor. The Brazilian stock market as represented by the Bovespa index, ranked in the leading geographies consistently for over a year on its own merit and strength. As World Index investors, our position in EWZ has not only realized all these stock market gains, but it also added all of the currency gains.

While many are fretting about how to cope with the onslaught of inflation and a U.S. Dollar most likely to continue its downward trend against most foreign currencies, the TimingCube strategy targets the strongest world markets, not only by the relative strength of their stock market, but our international ETF investments also benefit from the muscle of their currencies relative to the U.S. Dollar.

FAQ of the Week

Question: Should the rankings and results be ETF-based?

Every once in a while, we side with recurring requests from our subscribers, if not with irrefutable logic, and we humbly admit that it is time to evolve from a "market-centric" view to an "investor-centric" one. To put it more clearly, as Trend Timers we mostly invest in ETFs, not indexes, and therefore the World Index Ranking should really be the World ETF Ranking and be driven by ETFs, and published results should reflect the performance of the ETFs themselves, not the hypothetical returns of indexes.

Now that all the ETFs we have been recommending (and a few more…) have accumulated sufficient historical data for our proprietary algorithm, there is no longer a reason to base the ranking on the indexes. In fact, as highlighted in the Trend Timing School article above, focusing on the ETFs themselves benefits us in more than one way.

Let this candid admission serve as a heads-up about various enhancements to the TimingCube service we are finalizing for introduction in the near future. Watch this space.

Warm wishes and until next week.

The TimingCube Staff