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

Market Update

This holiday-shortened week was a good one for the market as all major averages managed to move higher in each trading session, with the Nasdaq 100 closing Friday at its highest level since May 2001. The ISM factory index was released Monday and came in at 56, beating the expected 55 reading. The number confirmed that the manufacturing sector is on the rebound. The news, coupled with lower bond yields and takeover activity, helped stocks move higher on the day to start the second half of 2007 on a strong note. Keeping their spirits high ahead of the Fourth of July holiday, investors again pushed the market higher in Tuesday's abbreviated session. There was no change in market action when trading resumed Thursday as stocks were able to close higher despite initial weakness caused by jitters on the European and Chinese exchanges. The June employment report was released by the Labor Department on Friday: it was well received by market participants as it showed that the unemployment rate held steady at 4.5% while the economy added a respectable 132,000 jobs last month. Investors consequently pushed equities higher yet, helping Wall Street end the first week of the third quarter with solid gains.

The Nasdaq 100 closed 2.80% higher on the week while the Russell 2000 and S&P 500 respectively gained 2.23% and 1.80%. All 3 indexes remain above both their 50-day exponential moving average (EMA) and 200-day EMA.

For its part, our World Index Ranking portfolio gained 3.28% this week and is now up 35.27% since it was first introduced on September 15, 2006. The current portfolio consists of the 5 top-ranked world indexes as of June 22, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Technical divergence

Yes, there are many forms of divergence when comparing different items. One asset class is moving up while another one is moving down, a particular stock index has been rising steadily when another has been flat, or simply the market going against our long/short position, which for the stock market investor happens about every other day. In the technical analyst jargon, divergence has the more specific meaning of being between the price of an asset and a related indicator. Ironically, many of the indicators we reviewed in "Overbought and oversold indicators", which at the time were used by pundits and technical traders to indicate an imminent top, having now come down from these lofty overbought levels formed divergences which once again are used to call the market top. Which has yet to materialize.

The famous aphorism about there being "three types of lies: lies, damned lies and statistics" could probably be applied successfully to technical analysis. Don't get us wrong, we are fervent supporters of technical analysis, on which principles the TimingCube Model is founded. But we also recognize its limitations. The beauty of technical analysis is that there is something for everyone, and you can find an indicator supporting just about any theory you may have. And that also happens to be its downfall. As a case in point, let us examine technical divergence as an indicator of major market turning points.

With the visual assistance of the chart below, the Nasdaq Composite index exhibits a textbook divergence with its key indicators. Indicators most frequently used in this application are the oscillators which fluctuate between two extreme values identifying overbought/oversold conditions. The three common momentum oscillators we show are:

• Relative Strength Index (RSI). The RSI ranges from 0 to 100 and values over 70 are generally deemed overbought and values below 30 are oversold, becoming undervalued and likely to begin rising again
• Moving Average Convergence Divergence (MACD). MACD shows the difference between two moving averages
• Rate Of Change (ROC). Another momentum indicator, ROC shows the rate of price change

Nasdaq Composite divergence with its key indicators



Note that there are different ways of using MACD and, in addition to the divergence between the price trend of the index and its MACD trend, by adding the nine-day Exponential Moving Average (EMA) of the MACD as a "signal line" some traders use the crossovers as buy and sell triggers (See "MACD and momentum" for more details).

Divergences are detected by comparing the general price trend line with the indicator trend line. Currently, the Nasdaq Composite is setting higher highs with another six year plus record this week. At the same time the indicators are marking decreasing tops with every rally, thus the technical divergence.

There can be negative or positive divergences (also called bearish and bullish divergences), but both are supposed to indicate major shifts in the direction of the price. Or not, as the case may be. Yes, major tops and bottoms are usually preceded by technical divergence, but there are two aspects of divergence conditions which make them poor predictors of major turning points:

The divergence indicator is best used as a valuable complement to other tools, in particular the trend following tools we favor over iffy predictive ones. We might well be at a major market turning point, but the indicator divergence is not going to tell us if or when with any degree of certainty, until well after the fact. Instead, we will continue to rely on our Trend Timing Model to signal when a major market turning point has actually occurred.

FAQ of the Week

Question: Should I rebalance in sync with the TimingCube schedule?

To make sure everyone follows this topic, when we talk about rebalancing, it is in the context of the World Index Ranking 4-week upgrade cycle. There are a couple of answers to this question, depending on which strategy you implement.

For a Buy and Rebalance investor who remains invested in the World Index Ranking top 5 regardless of the TimingCube signals (the one with the grin on his face from the 14.4% return for the 1^st half of 2007), it does not matter when to start, as long as you rebalance faithfully every 4 weeks from your start date. The World Index Ranking is updated weekly to make sure that you always have the most recent data to get started. The results we show on the "Results" page are for our sample 5-index portfolio which was started on December 15, 2000, and is rebalanced every 4 weeks since. Our testing has shown that variations in results from one start date to another are not statistically meaningful.

For the Long Only and Long and Short strategies, the beginning of a cycle is always dictated by the TimingCube Buy signal. On the Trade Date, the day after the signal is issued, we take positions in the current top 5 of the World Index Ranking, and then rebalance every 4 weeks from that day on.

Warm wishes and until next week.

The TimingCube Staff