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

Market Update

Stocks sold off heavily this week as the correction returned in earnest, resulting in five consecutive losing sessions. If the major indexes only fell modestly Monday on a rising dollar, they succumbed to a global sell-off the next day on very heavy trade, showing that large institutional investors dumped shares in droves. The move in effect killed the nascent rally that had started two weeks earlier and caused our Model to issue a Cash signal after the close Tuesday. The rout was triggered by deep losses in Asia and Europe and the release of a weak consumer confidence reading for June. The Nasdaq Composite fell 3.9% on the day to close below its June lows. Stocks attempted a rebound Wednesday, but news that Moody's is considering a downgrade of Spain's credit rating triggered a negative reversal late in the day that left the main averages with further losses. Faced with weekly jobless claims that came in worse than anticipated and a disappointing ISM index of manufacturing activity, stocks kept falling for most of Thursday's session but managed to cut their losses, as the Nasdaq Composite partly recovered from a 2.3% intraday loss to only finish 0.4% in the red. The main indexes failed to capitalize on the turnaround Friday to instead post more losses, following the release of a disappointing June employment report: only 83,000 private-sector jobs were added last month, much less than the 112,000 economists had forecast. Friday marked the seventh consecutive losing session for the Dow Jones Industrial Average, the worst showing for the large-cap index since October 2008. Please note that U.S. markets will be closed Monday July 5 in observance of the Independence Day holiday.

The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively lost 5.26%, 6.19% and 7.44% over the five-day span. All three ETFs are now located well below both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 5.02% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of June 18, 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.

We now have a Cash signal in effect.

Trend Timing School

Market technicals under assault

In a recent weekly update (06/18/10), we offered an array of incidental metrics which could serve as fodder for stocks to respect our recent Buy signal and move higher. However, the market has thusfar chosen a different path, eventually pushing us back to the sidelines and this week's Cash signal. The S&P 500 has now given up all its gains for the past nine months; and perhaps stands on the precipice of further declines if continued violation of 2010's key support levels holds much longer.

Chart 1: S&P 500 going backward



Chart 2: Support no more?



Investment, and indeed most of finance, is a game of confidence. You are committing money today in the expectation that future investors are willing to pay yet a higher price for an even brighter future. Unfortunately, today's investors have little confidence in any positive economic scenario looking forward. Thus, they are steadily reducing risk while continuing to embrace bonds. The graphic below provides an excellent overview of the evolving mental state of investors as markets bounce between euphoria and despair. The color-coding aligns the investor mood with the economic cycle.

Chart 3: The turbulence of investor psychology


This graphic begs the question - just where are we now? Though we should still be early in the typical economic recovery cycle, disbelief, caution, and concern have remained at the forefront of investor's minds. As usual at the early stages of the economic cycle, there are concerns over a double-dip recession and whether the economy will really be able to take flight. The foundation of this recovery being massive global government support breeds a deeper level of worry about that lift-off. The attendant problems of high sovereign debts compounds the angst investors feel and has served as a large storm cloud hanging over investors since October. Thus, in Chart 3 above, we remain for an extended period in the 'disbelief' phase with only occasional lapses into the 'hope' phase.

Will the economy stall without ever really lifting off? Will corporate earnings save the day and prevent the market from rolling back into bear territory? This week's Cash signal responds to continued investor uncertainty; a level of uncertainty that dealt stock markets with a truly dismal second quarter.

FAQ of the Week

Question: What is a "dark cross"?

This week some technical analysis observers noted a 'dark cross' (aka 'death cross'). This refers to the 50-day moving average crossing downward through the 200-day moving average, thus reflecting a relatively extended period of market weakness. There are two common types of moving averages: simple and exponential. It was the simple moving average that crossed downward this week and created the 'dark cross'. The exponential moving average is more sensitive to the market and has not crossed...yet.

Below is this week's picture of the S&P 500 with these crosses highlighted. You can see that the green exponential 200-day moving average is a good deal more reactive to the market. It appears the 50-day will cross the exponential 200-day average very soon unless the market reverses higher quickly in July.

Chart 4: Recent 'dark cross'



The second chart shows a somewhat similar pattern in 2004, another market that was in its second year of a recovery and trying to convince investors that the economy could achieve a more sustainable liftoff. In 2004, stocks found their footing after several months of churning and avoided the dreaded dark cross. Can 2010 repeat that pattern? Or are the headwinds and doubting investor psyches just too great for stocks to overcome?

Chart 5: 2004 'dark cross'



Warm wishes and until next week.

The TimingCube Staff