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

Cumulative Returns since First TimingCube Live Signal ( ) as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500

Market Update

During this holiday-shortened week, stocks gave back some of the recent gains obtained after the last Fed meeting. First, record oil prices and news that North Korea fired several test missiles caused the markets to move lower Wednesday. Then on Friday, a mixed jobs report combined with profit warnings from bellwether companies 3M and AMD to push the major indices lower again. The economy added a lower-than-expected 120,000 non-farm payrolls in June, raising fears of an economic slowdown. Overall, technology companies where the hardest hit this week, as a downgrade of Intel and AMD's warning especially weighed on semiconductor stocks. The end result was a 2.64% weekly loss for the Nasdaq 100. Comparatively, both the S&P 500 and Russell 2000 did better, respectively losing 0.37% and 2.12% on the week.

Both indices are now below their 50-day exponential moving average (EMA) but remain above their 200-day EMA. For its part, the Nasdaq 100 remains below both its 50-day and 200-day EMA. Despite this week's disappointing action, our Buy signal remains in effect.

Trend Timing School

The Fed

Many have observed that a large part of the stock market's choppiness over the last couple of months has been largely driven by words uttered by members of the Federal Reserve System, Fed for short, and the attending interpretations by the media and investors. Sure, geopolitical tensions and the ebb and flow energy prices have added to the volatility, but the Fed has more often than not been the swing factor lately. There had been a growing perception that the Fed would stop raising rates at the 5% mark pushing the markets higher. This came to a brutal end when new Fed Chairman Bernanke thought to correct the misperception by indicating that rates could go higher, which they finally did on June 29. But since there were some positive wording changes in the accompanying statement, investors jumped for joy. There seems to be a new twist and related market jitters every week.

Before going too far it might be worth a quick review of what the Fed is and what it does.

The Federal Reserve System is the central bank of the United States. In their own words "It was created in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system". Over the years, its role in banking and the economy has expanded. The Federal Reserve System is a network of twelve Federal Reserve Banks and a number of branches under the general oversight of the Board of Governors.

The most visible part of the Federal Reserve is known as FOMC, short for Federal Open Market Committee, and is in charge of the country's monetary policy. The Committee meets eight times per year to decide whether or not to change its target for the federal funds rate, and if so, by how much. The federal funds rate is the interest rate banks charge each other for overnight loans. Contrary to popular belief, they do not really set other interest rates which instead are set by supply and demand forces in the market place. The FOMC also issues a statement after each meeting explaining its decision, and these statements contain some important clues as to their view of the economy and their future inclination.

As we have seen recently investors are flip-flopping between one day worrying that the economy is cooling too fast for the good of corporate profits (bad for the stock market), to the next about the economy's strength moderating to a non-inflationary level which the Fed wants to see in order to stop hiking interest rates (good for the stock market). There are many tea leaves investors and traders look at to guess the future of the economy and in turn the stock market. The financial media provides a non-stop flow of corporate news and economic indicators, mostly government provided, such as labor statistics from the Labor Department, the U.S. Treasury officially presiding over the fate of the dollar, and of course the Commerce Department with vital statistics such as GDP and CPI. But above all, investors and the markets watch the Federal Reserve Board, Fed for short, and listen and analyze every word coming from it. This stems from the widely held belief that the Federal Reserve can and will continue to maintain the balance between a strong economy which could cause inflation and a weak one which would cut corporate profits.

To represent all sides we should point out that many scholars and free market economists disagree with the premise that the stock market can be controlled by something other than natural market forces.

Nevertheless, after 18 years on the job, Alan Greenspan had acquired an almost mythical aura, and many saw him as one of the most powerful people in the world, with the ability to create a Cinderella economy or architect a "soft landing" on demand. This market fixation has only become amplified with the veteran's retirement in February, and anyone remembering that Greenspan had started his tenure just two months prior to the October 19, 1987 stock market disaster will understand why unproven incoming Chairman Ben Bernanke is now being tested by the markets.

It is interesting to note that then Fed Governor Ben Bernanke has been one of the primary architects and driving force behind the unprecedented levels of liquidity injections that have been taking place since 2002. Ominously, under his guidance, the Fed has also recently stopped publishing M3 the measure for money supply. He has often repeated his bias for growth at all cost to prevent deflation, including his famous "dropping dollars from helicopters" analogy to describe the remedy (for example in his November 21, 2002 speech entitled "Deflation: Making Sure "It" Doesn't Happen Here"). Since he became Chairman, Bernanke has gone out of his way to please fiscally conservative audiences and the media with a continuation of the Greenspan tightening policy and a lot of talk about aggressively fighting inflation, but at the same time, much less publicly, has been a source of monetary inflation by pushing the money printing presses full on.

Long time Fed observers know that the Fed Chairman is appointed by the President and that throughout its history they have been loyal to the administration in charge, leading to the general understanding that much of their rhetoric and actions are designed and timed for optimum political effect. Accordingly, many economists expect the Fed to stop increasing interest rates to spur the equity markets ahead of the November 7, 2006 elections.

We do not join the masses and the financial media in trying to parse the words of Fed spokesmen or anticipate their next move, as such an activity has proven generally meaningless, but because their words and actions can move the markets, our Model pays attention and listens to what the market does.

FAQ of the Week

Question: How can short and leveraged ETFs help skirt the settlement period?

Most accounts, with the notable exception of margin accounts, suffer from the settlement period issue. For stocks and ETFs, it takes three business days to settle an order which means, for example, that you can only use the proceeds of a security sale three days after the trade date to buy another security. You can read more about the settlement period issue in "What is the impact of the settlement period on trading?".

It is not possible to follow the signals in a timely manner with such trading delays. To avoid the settlement period issue, investors have used the following tactics:

• Invest only half the money in your account (so you always have the cash available for the second leg of the Sell/Buy or Buy/Sell switch)
• Use a margin account where possible (your broker will be happy to loan you the funds while your trades settle)
• Use mutual funds (exchange transactions between funds of the same family do not incur a settlement period)

When we introduced the ProShares short and leveraged ETFs (see "What are ProShares ETFs?"), we identified one of their potential benefits as avoiding the one day lag issue of mutual funds (most mutual funds are only traded at the close of the market, a delay from the ideal trade at the open). Logical minds will point out that someone using mutual funds to go long/short in a non-margin account would swap a one day lag for a three day settlement period by going with the ETFs. Yet, ironically, for such non-leveraged investors, the leveraged ETFs actually help skirt the settlement period altogether. The trick is to only invest half the money in your account in a 2x leveraged ProShares ETF (which should be a close approximation to investing all your account's money in a non-leveraged fund).

Note that the four promised short and leveraged "UltraShort" ProShares funds have not yet been launched, but our inside sources tell us they are scheduled for next week (which we would not fail to confirm to you then).

Warm wishes and until next week.

The TimingCube Staff