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 were almost unchanged for the week. They started by falling Monday and Tuesday on higher oil prices and renewed inflation fears. Then small caps and tech stocks led a rebound the next two days. the July employment report was released Friday and showed that non-farm payrolls only rose by 113,000, a number that was less-than-expected, therefore suggesting a slowing economy. The bond market rallied on the news, sending stocks higher at the open. The gains did not last, however, and the major averages closed lower on the day.

For the week, the Nasdaq 100 lost 0.43% while the Russell 2000 and S&P 500 were basically unchanged. The Nasdaq 100 and Russell 2000 still rest below both their 50-day and 200-day exponential moving averages (EMAs). For its part, the S&P 500 remains above its 50-day and 200-day EMAs. Our Cash signal remains in effect.

Trend Timing School

Between a rock and a hard place

Any observer of the stock market has noticed how Fed-focused investors have become of late. Sure, corporate earnings, the broadening situation in the Middle East and oil prices have their impact on the markets, but Wall Street has clearly been hanging on what the Fed might or might not do when they meet next on Tuesday August 8, 2006.

What times we live in when investors cheer a weak job report from the Labor Department! How can lower jobs creation and higher unemployment levels be bullish? It seems that most of the financial media and investors now view any evidence that the economic growth is slowing as a clear sign that the Fed will not raise interest rates again, therefore bullish for stocks.

Amazing what a difference a few weeks make, and proof that investors are fickle and their memories are short. Not so long ago, common Wall Street wisdom was that the Fed would be increasing the rates one more time in August, but hopefully announce they were done raising. The Fed's extensive coaching as to what economic signs they would be looking for to make their interest rate decision, and the perfectly timed, if not very subtle, release of Government data helped move the consensus of Fed watchers to being convinced that they are already done raising. Which means that this is the scenario that is priced in the market, and if the Fed was to raise by another quarter point, markets would most likely show their displeasure.

So what is the Fed to do? They surely have more important driving forces than how the stock market might react, right? The tight balance that they try to achieve is the proverbial soft landing of the economy, in which growth is reduced to a lower but sustainable rate while inflation is kept in check. Recent government data shows that the economy appears to be cooling, starting with interest rate sensitive sectors such as housing and automotive. Some economists already fear that the Fed might have overdone it with two years of rate hikes, and argue that with all of the jobs to be lost in these industries a ripple effect could throw us into recession. At the same time alarmists point to energy and resource costs, which they say are more likely to sustain upward price pressures for the foreseeable future, as the reason inflation is not yet under control, not to mention massive liquidity injections into the system. This is bearish for stocks because higher inflation eventually causes higher interest rates, causing price/earnings ratios to decline.

Yet, the less visible but probably more important aspect of the Fed decisions has to do with the U.S. dollar and the national debt. The public government figures put the 2005 deficit at a hefty $318 billion but, according to internal government data as just reported by USA Today, "The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005, or equal to $6,700 for every American household. If Social Security and Medicare were included - as the board that sets accounting rules is considering - the federal deficit would have been $3.5 trillion".

One of the big issues looming over this interest rate picture is that the dollar is highly vulnerable to the staggering U.S. government debt of about $60 trillion if you include the outstanding unfunded obligations such as Social Security and Medicare. Just the cost of interest on the debt is about $1 billion per day, which of course gets added to the debt by the sale of bonds. A large chunk of this debt is financed by foreigners, and the U.S. government's challenge is to make these foreigners want to keep buying more and more to keep our debt financed. The quandary is that these foreigners are growing increasingly skeptical about our ability (or desire) to curtail our deficit spending and keep the dollar strong. In the face of rising interest rates around the world, in several currencies viewed as stronger as the dollar, at some point the U.S. government will be forced to increase the rates of the Treasury bonds to make them attractive enough so the foreigners do not slow down their purchases, or worse, start selling the mountain of dollar denominated debt instruments they already own.

We don't envy the Fed's job; saving the U.S. from bankruptcy is not a small task. But we don't envy investors who trade on the daily anticipation of what the Fed will do next either. We will just have to wait until the market makes up its mind and tells us when a definite trend develops one way or the other.

FAQ of the Week

Question: Can dividend-focused ETFs be traded with the signals?

The short answer is no, but first, what are dividend-focused ETFs? Most stock market indices, and therefore the ETFs which track them, are so-called "cap-weighted" meaning that the stocks they represent are ranked by order of market capitalization, and most of the returns come from capital appreciation, or increases in the share price. On the other hand, there are those advocating a focus on stocks with high dividend yield instead, and accordingly, there are numerous "yield-weighted" indices which have mushroomed into dozens of dividend-focused ETFs over the last couple of years. There are even complete product ranges such as the 20 members of the recently introduced WisdomTree dividend fund family which specialize them by market cap and geography. Examples of such dividend-focused ETFs are:

• iShares Dow Select Dividend (DVY)
• Powershares International Dividend Achievers (PID)
• Vanguard dividend appreciation (VIG)
• WisdomTree Total Dividend Fund (DTD)

The proponents of such funds point to studies showing dividend-focused indices beating the S&P 500 over the long term, with less volatility. Such investments vehicles may well have a place as a permanent fixture, i.e. buy and hold, in the portfolios of more conservative, income-oriented investors, as they will generate a steady 5%-10% income, with comparatively less risk than cap-weighted investments. Just be aware that most are very new, very small, and have low liquidity.

However, we would recommend against trading such funds according to our trend following system because yield-weighted indices are not well correlated with the broad markets, or our signals.

Warm wishes and until next week.

The TimingCube Staff