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

The major indices reversed course this week to post healthy gains. After marking a pause on Wednesday and Thursday, markets resumed their march higher Friday after the release of GDP data for the second quarter. GDP growth came in at 2.5%, less than the 3.1% figure economists had expected. The chain deflator, a quarterly measure of inflation, rose to 3.3%, just under estimates of 3.4%. The news pleased bond investors as the evidence of a slowing economy means that the Federal Reserve may be done with its rate-hike campaign. Bond yields dipped as a result, which in turn helped stocks score big gains on the day. However, one should note that Friday's rally occurred on the lowest volume of the week. It clearly shows that institutional investors largely remained on the sideline, even though their participation is required if the gains are to be sustained.
For the week, the Nasdaq 100 and Russell 2000 respectively gained 4.02% and 4.18%. Both indices still rest below both their 50-day and 200-day exponential moving averages (EMAs). As for the S&P 500, it closed 3.08% higher and has now moved back above its 50-day and 200-day EMAs. Our Cash signal remains in effect.

Trend Timing School

Bottom fishers

Somehow, it must have been a given all along that last week's watery analogy of market cross currents had to lead to this week's topic of bottom fishers. Let us explain.

Just a week ago the market tone and the financial airwaves were dominated by the bearish crowd who believes that this correction has lower to go yet, or worse, that it is not so much a correction as it is a renewed bear market. Subscribers who belong to this general category itched to have a Sell signal instead of Cash. We have not heard much from them this week. As outlined in the Market Update above, the bulls have found renewed optimism and some of the Government figures released today provided good bait for bottom fishers.

A bottom fisher, a close cousin of the top caller, is someone who has a belief that the market must go higher, be it for a bounce or for a serious rally, and likes to spin the roulette wheel by guessing the bottom. It is necessarily a guess because a bottom is only established by an ensuing market rise, and the track record for top and bottom callers is pretty dismal. Greed being part of human nature, and the desire to follow the ageless "buy low, sell high" popular wisdom, inevitably leads to an urge to call tops and bottoms. This tendency is probably increased by the "buy and hold" camp arguing that trend followers always miss the beginning of good rallies.

All of this gives us a perfect opportunity to review a key characteristic of any trend following investment method, including Trend Timing, which is that they never seek to predict the market in general and the market tops and bottoms in particular. Not simply because no one can do so reliably, but because a new trend can only be detected after it has begun which, by definition, happens after the tops and bottoms.

To place our current situation in perspective we provide Chart 1 below which depicts the Nasdaq Composite index. From a technical stand point it is clearly in a down trend since the April top. From the recent low established last Friday July 21, 2006 we have now risen 3.65%. As a point of comparison, we recently wrote in this space that "The May 11, 2006 Sell signal was as close to perfect as any trend follower can wish for", yet it came at about 4.51% off the previous top. Another data point, for those with really short memories and the inclination to label every move of a few percentage points as a new trend, is the failed rally from mid-June to early July which rose 5.69% from bottom to top, before giving it all up and more.

In fact, we became so curious about such statistics that we went back and checked the historical record to see how far from intermediary bottoms our Buy signals normally arrived. Measured on the Nasdaq 100 , the average rise prior to a Buy was 8.6% over our entire live and backtested history to 1989. The Sell signals came on average 6.4% down from the preceding top.

Chart 1: Nasdaq bottom or another bear rally?



We understand that other indices such as the blue chip heavy large cap indices, e.g. the Dow Jones Industrials and S&P 500 , have recently fared better than broad indices like the Nasdaq Composite or the small cap Russell 2000. We also know that with the currently widespread investor indecision we risk daily reversals purely based on the latest news.

Sure, this rally could well turn out to be the beginning of the big move we have all been waiting for, but if it is, it will show itself clearly to our Model. Just because we are in a Cash signal does not mean we have to get over-anxious about the next signal. In fact the Cash signal provides us a well deserved rest and positions us for the next significant move, be it up or down. During a period when both up and down trends are closely intertwined, we want to keep our powder dry and be fully prepared for when the next trend clearly declares itself.

FAQ of the Week

Question: Are trading limits common in retirement plans?

Yes, alas the mutual fund industry has been waging war on anything that resembles market timing with various types of excessive trading policies. As the large mutual fund companies also dominate employee retirement plan administration, a recent survey shows that over 70% of such plans have policies in place designed to curb frequent trading. Many firms such as Fidelity, Merrill Lynch, Schwab, and Vanguard to name a few, also want to restrict trading of their mutual funds outside of employer sponsored retirement plans, through means such as short-term redemption fees. You should make sure you understand your plan's policies.

To quote Fidelity, a leader in the fight to reduce trading freedom, "The policies implemented to control disruptive trading are intended to protect the long-term best interest of the majority of those investors from the potential negative effects of the smaller number of investors who trade disruptively." Yet, the only proven adverse impact of more frequent trading is increasing expenses (such as trading commissions), and fund families such as ProFunds and Rydex have long demonstrated that funds can be designed and operated effectively for active trading.

The policies, monitoring and enforcement differ from plan to plan. Definitions also vary but they often start with the concept of "roundtrips", the action of going in and out of a fund within 30-days. Some impose a maximum of one roundtrip per fund per 90-day period, others a maximum of four roundtrips on any fund within a 12-months period. Actions taken in the case of policy violation goes from warning letters to outright rejection of purchases or trades that they feel are not allowed.

One thing to remember is that such policies cannot restrict your ability to withdraw from your account or to sell out of the funds. They can only affect your ability to re-purchase mutual funds for some period or time.

Over our history, our Trend Timing system has issued sufficiently few signals to stay mostly clear of most excessive trading definitions. The two recent whipsaws have placed some of us either on notice or in temporary jeopardy. If the retirement plan you have issues with is with your current employer you are pretty much stuck with no alternatives and you will have to live with whatever policies they throw at you. Still, remember that over the long term, even a partial "long only" strategy will beat buy and hold.

If the retirement plan in question was established with a former employer, you need to inquire about transferring out, such as the ability to rollover a 401(k) or 403(b) plan, to a brokerage house which offers alternative investment choices and fewer restrictions on trades.

Warm wishes and until next week.

The TimingCube Staff