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

Market Update

This week saw stocks post solid gains and our model issue a new Buy signal after the close Tuesday. Building up on last Friday's action, the major averages opened higher Monday on news of better-than-expected industrial production data in Europe. Stocks kept climbing for most of the session but relinquished all their gains in the last hour of trading after Moody's downgraded Greece's bonds to junk status. In previous weeks, such a negative reversal would have triggered further selling the next day. It was not the case this time around, as stocks instead surged in heavy volume Tuesday, buoyed by a strong performance from the chip sector and a euro that hit its highest level of the month vs the dollar. The Nasdaq Composite gained 2.8% on the day. The solid move confirmed the improvement of market action that started last week and resulted in the issuance of a new Buy signal after the close. Stocks managed to hang on to their gains Wednesday despite disappointing data on housing starts. They did so again the next day, as early weakness, resulting from an increase in weekly jobless claims and a lower-than-expected reading for the Philly Fed index of manufacturing activity, was overcome late in the session to yield modest gains for the major averages. Stocks finished the week with a quiet session Friday, as the main indexes traded in a small range all day to close modestly higher.

The Nasdaq 100 (QQQQ), Russell 2000 (IWM) and S&P 500 (SPY) respectively gained 3.30%, 2.86% and 1.87% over the five-day span. The Nasdaq 100 (QQQQ) has now recaptured its 50-day exponential moving average (EMA) while the other two ETFs rest above their 200-day EMA and just a hair below their 50-day EMA.

For its part, our World portfolio posted a 2.65% gain 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. The World portfolio is being rebalanced today, as the current 4-week holding period is now over.

We now have a Buy signal in effect.

Trend Timing School

A rally's building blocks

With this week's Buy signal, we take a look at the prospects for stocks at this time. Our Model has simply noted that momentum has shifted from a period of predominant selling to one where buying appears to have the upper hand. We never know how long that buying support will last, nor how strong it will be. However, we do know that stocks typically climb the proverbial "wall of worry" which led investors to flee stocks throughout the month of May.

At this point, it appears that a solid, healthy wall of worry is firmly in place to drive stocks higher. Chart 1 shows the level of bearishness among investment newsletter publishers.

Chart 1: Bearish Sentiment: January 2007 - Present



The chart shows that bearishness among this distinguished group is at its highest level since last summer when the economic recovery was fully in doubt and no earnings growth had yet been on display. The chart also shows how quickly that bearishness changes, at least in short-term bursts.

The second arrow in the bull's quiver could be market valuation, which is cheaper than average. A recent investor note from Oppenheimer says the following:

"The S&P 500’s current forward multiple of 12.9x represents the lowest level for the index since early 1995. According to our analysis, market performance has been relatively strong in all periods following similar forward P/E levels. The S&P 500 averaged a roughly 12% 12-month return in all periods since 1960 when the forward P/E was between 10x and 15x."

Finally, we refer back to points we made in our Weekly Update a couple of weeks ago (06/04/2010): 1) stocks have only shown gains after spikes in the VIX similar to what we saw in May, and 2) July is one of the best months of the year for the market.

The bottom line of all this can be presented from two opposite directions. The first is that we are in a cyclical bull market coming out of a typical correction with a wall of worry in place to drive stocks to at least the top of the recent price channel. The opposite view would be that we are in a secular bear market where P/E ratios should be lower than average as investor angst overwhelms everything else. The bearishness may relent temporarily. But it will come roaring right back at the slightest news of further problems. And from a fundamental perspective, there is no shortage of reasons to fret over the financial state of the world - a mountain of global debt still to be worked off in an economy that is thusfar lukewarm.

In the end, we follow the market's trend, regardless of the underlying fundamental, sentiment, or accounting metrics. Almost every chart shows a downtrend that has been broken after investors stepped in to support the market at or near the February lows. Our Model has sniffed out a change in market tone and trend. Whether you focus on technical, fundamental, seasonal, or sentiment indicators, there is some metric out there to support at least a short-term rally. Hang on and let's see how this rally develops.

FAQ of the Week

Question: What is the different between "secular" and "cyclical" markets?

We frequently reference secular and cyclical markets. Secular trends are long-term trends lasting many years. Rising commodity prices throughout the 2000-2010 decade (and maybe into this decade as well) are an example of a secular trend. These trends can be kicked off and driven by fundamental supply-demand reasons, but are usually influenced just as heavily by investor enthusiasm or lack thereof. It's a behavioral phenomenon to a significant degree. The behavior eventually reaches an unsustainable peak. Some argue that the heavy flow of money into bond funds in recent months, despite historically low interest rates, is evidence that the end of a secular bull market in bonds is nearing an end. The investor enthusiasm is just overdone they claim.

Cyclical trends are more intermediate-term typically lasting months or years. The cycles can have the same fundamental and behavioral influences. They are just less pronounced and long-lasting. For example, stocks are in a cyclical uptrend since March 2009. Given the discussion above about the pervasive caution regarding stocks, one would have little evidence to support stock investors as being overly enthusiastic. The economic cycle should last for at least a couple of years with stock investor enthusiasm typically increasing as the cycle goes on. At some point, that enthusiasm will be out-of-whack with investment prospects and the cyclical Bull market for stocks will come crashing down.

That "crashing down" scenario seems likely because stocks remain in a secular bear market. You see it in the reluctance of investors to embrace stocks. You see it in the tremendous amount of cash sitting on the sidelines earning nothing. That is secular bear market behavior, in stark contrast to the end of the last secular Bull market in the late 1990s when everyone bought stocks with abandon. Within that 10-20 year secular period, a bullish stock market cycle is underway. How long it lasts is anyone's guess, but figure a 2-3 year ride punctuated by fits and starts such as we have seen thusfar in 2010.

Warm wishes and until next week.

The TimingCube Staff