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

Market Update

Stocks resumed their march forward in an impressive way this week. An analyst's buy recommendation on Goldman Sachs sparked a strong rally Monday, yielding gains in excess of 2% for the main averages. After the close, the investment bank released an earnings report that far exceeded expectations. The news helped the market move higher again Tuesday. It was then Intel's turn to report its results. The tech giant did not disappoint: both sales and profits topped forecasts and the company said that conditions are improving for the PC market. The news triggered a huge rally Wednesday. Trading volume was very high, clearly showing that institutional investors bought heavily. Not surprisingly, the tech-heavy Nasdaq Composite outperformed, gaining 3.5% on the day. The Labor Department said Thursday that weekly jobless claims fell to their lowest level in 6 months. The news helped stocks post further gains, ahead of much-awaited earnings reports from major corporations such as IBM, Google, General Electric and Bank of America. Despite the fact that all four companies delivered strong results, stocks remained stuck in a narrow range Friday to close little changed. Yet, the Nasdaq Composite managed to finish higher on the day, marking the eighth consecutive winning session for the index, an impressive performance by any means.

The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively gained 7.90%, 7.56% and 7.01% over the five-day span. With the resumption of the rally this week, all three ETFs are now back above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 7.66% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of June 19, which marked the beginning of the current 4-week holding period. Please note that the World portfolio is being rebalanced today, as the current 4-week holding period is now over.

Our current Buy signal remains in effect.

Trend Timing School

Traditional investing strategies come under scrutiny

A recent front-page Wall Street Journal article proclaimed:

"Asset allocation, a bedrock of investing for decades, appeared to fail miserably in 2008. The conviction shared by most investors - that they should spread their money across myriad asset classed to minimize losses - was shaken as nearly all markets tumbled in unison."

This conclusion follows other articles in both individual and institutional investor publications regarding the "death of buy and hold" and highlighting corporate and government pension funds that are significantly altering their investment strategies to avoid exposure to future market meltdowns. The coordinated plunge in virtually all asset classes in fall 2008 is driving a sea change in investment philosophy.

Modern Portfolio Theory, which forms the foundation for almost all of the investment strategies presented to individuals by brokers and financial planners, argues that the key to investing success rests in buying a variety of uncorrelated assets. By doing so, as one asset class - e.g. stocks - goes down another uncorrelated asset class, such as bonds, goes up. Owning both asset classes insures steadier investment returns with less volatility.

But what if seemingly uncorrelated assets actually become MORE correlated when the market is at its most vulnerable? Last fall's unified plunge in asset classes has begged this question and led to a complete reevaluation of portfolio theory. It turns out that it's rather common for a broad swath of asset classes to move in tandem when market's fall apart. It also happens that such market "crashes" occur with some frequency, on average about once every ten years, or many times over an investor's lifetime. In just the past twelve years, investors have witnessed at least four significant market declines, some brief - 1998's Long-Term Capital Management's debacle - and some long, the current two-year market headache.

Chart 1 tells the tale. In this chart, a wide variety of asset classes are examined over a 36 year period. Reading the chart (please click on 'Enlarge Picture' to display the chart in a better definition): the taller the bars, the more correlated the asset class is to the S&P 500 . Each bar represents a different market environment - e.g. best months for stocks, worst months for stocks, 2008 crash, etc. We've drawn a box around the assets that show very little correlation with stocks during the weakest market periods. The uncorrelated assets are almost all U.S. Treasury bonds, a pattern that held true during the 2008 swoon as well. It's interesting to note that emerging market stocks have the absolute highest correlation, in almost every case, with the S&P 500, more so than small-cap stocks or the broader U.S. stock market. Emerging market bonds, by contrast, have a very low correlation despite being considered a risky asset. Similarly, risky high yield bonds (called U.S. junk bonds in the chart) also display little correlation with stocks.

Chart 1: Asset Classes Correlation

Enlarge Picture

Enlarge Picture

There are a couple of broad messages that we take away from the recent angst over asset allocation, buy and hold, modern portfolio theory, and the general questioning of traditional investment strategy. For one, we are witnesses to an investment industry that has a tremendous herd mentality when it comes to recommending strategies to individuals, in particular, but also when considering institutional strategies. Whether it's index annuities, 130/30 funds, index investing, et al, we find that the industry tends toward swallowing and selling whatever is the hot item of the day (with the curious exception of trend timing, of course! ). For example, the secular bear market concept we outlined in a recent weekly has been around for many years and likely decades. However, few practitioners mentioned it prior to last fall's market plunge. Now, there are many pundits and strategists suddenly pointing out that the market has cycles and extended periods of bearish behavior.

All of this reinforces the agnostic benefits of trend following. We do not project our values or beliefs on the market. We do not argue whether stocks are fairly or unfairly valued. Instead, we respect the power of the market to incorporate all of the disparate inputs from an audience of participants that have innumerable justifications for their viewpoints. Some are optimists, some pessimists, some value investors, some growth, some day-traders, some long-term buy and hold practitioners. And we recognize that emotion is a powerful force behind the day-to-day market behavior. The chart above supports that emotional underpinning to the markets. When fear strikes, investors rush to perceived safety. Is that gold? It doesn't appear so. Instead, they rush to U.S. Treasury bonds along with cash. Following the market's signals (which TimingCube seeks to provide), you would have avoided last fall's disastrous meltdown in asset classes of all stripes. Listen to the trend of the market rather than the minefield of investment theories that are ever-changing and built to sell, rather than built to protect and serve.

*Above chart from Wall Street Journal article, "Failure of a Fail-Safe Strategy Sends Investors Scrambling", July 10, 2009, written by Tom Laricella.

FAQ of the Week

Question: When will there be a broader menu of emerging market ETFs?

Our weekly update notes the very high correlation between emerging market stocks and the
S&P 500 . That is no surprise to us here at TimingCube. We have noticed consistently that emerging market stocks make a terrific investment vehicle for our trend-following signals, delivering returns well in excess of any domestic market index over recent years. With the increasing enthusiasm over investing in the BRIC (Brazil, Russia, India, China) and other emerging countries, Proshares and other ETF providers have substantially enhanced their offering in this area. Proshares recently introduced a leveraged long emerging market ETF (symbol: EET) to go along with their short 1x and short 2x emerging ETFs (symbols: EUM and EEV, respectively). Direxion funds has its 3x long and short versions (symbols: EDC and EDZ). As we have written many times before, using leveraged ETFs in a volatile market will deliver less than the 2-3x index returns you might expect. This is simply a function of the negative compounding mathematics of leveraged ETFs. So, be careful when investing in the leveraged ETFs. But don't be afraid of applying our signals to emerging markets. The historical results are outstanding!

Warm wishes and until next week.

The TimingCube Staff