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

Market Update

It has been a week of up-and-down action that left stocks little changed over the five-day span. After opening lower Monday following news of a disappointing manufacturing index for the New York area, the main indexes regained their footing to finish in positive territory, with the Nasdaq Composite posting a 0.4% daily gain. A better-than-expected 1% increase in industrial output for July gave stocks a boost during the next session, allowing the S&P 500 to close 1.2% higher. The major averages tried to push higher again Wednesday but had to settle for only modest gains after the Nasdaq Composite failed to retake its 50-day moving average. The market tone suddenly worsened Thursday morning following the release of several disappointing economic reports: first, weekly jobless claims came in worse than anticipated, then the Philly Fed index of manufacturing activity fell unexpectedly, pointing to a contracting economy. Finally, the Conference Board's leading economic index only increased 0.1% in July vs the 0.2% reading analysts had forecast. This triple whammy sent stocks into a broad-based decline on heavy trade, causing a 1.7% retreat for both the Nasdaq Composite and S&P 500. Investors' pessimism over the shape of the economy continued to weigh Friday, as stocks dropped during most of the session before recouping a good portion of their losses to leave the S&P 500 0.4% in the red by day's end.

The Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively gained 0.45% and 0.13% over the five-day span, while the S&P 500 (SPY) lost 0.72%. Both the S&P 500 (SPY) and Russell 2000 (IWM) remain located below their 50-day and 200-day exponential moving averages (EMAs) while the Nasdaq 100 (QQQQ) managed to close just above its 200-day EMA.

For its part, our World portfolio posted a 0.99% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of August 13, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details.

Our current Cash signal remains in effect.

Trend Timing School

Understanding the "Greek" risk ratios

Statisticians define five primary technical risk ratios: alpha, beta, R-squared, Sharpe ratio, and standard deviation. While all have to do with risk, these indicators are very different and their actual meaning is lost on most individual investors. Standard deviation (see "Standard deviation as a measure of risk") is the most common and widespread volatility measurement, an accepted substitute for risk. The Sharpe Ratio (see "Sharpen your Sharpe Ratio") is the most widely used direct measure of reward-to-risk. Alpha and beta are risk related measures which are used extensively in the mutual fund industry and as a result have become part of the financial industry jargon.

Let's begin with beta, which we have used in these pages when discussing leveraged funds. Much like standard deviation, beta is a measure of the volatility of a security or a portfolio. Where standard deviation measures volatility by itself, beta measures volatility in comparison to that of the market as a whole, or the systematic risk. Using the example of a leveraged ETF, a fund with a beta of 1 attempts to match the daily performance of the index it tracks. A beta of 2 will attempt to double the performance of the index. An investment with a beta of 1 would be perfectly correlated with the market and have the same volatility, up or down. Some stocks or market segments such as utilities will be typically less volatile than the market as a whole and have betas of less than 1, and others like high-tech offer the opportunity of higher returns in exchange for a beta higher than the market. The key here is to select an index of reference which is comparable with the investment.

Investopedia defines alpha as "A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a "fund's alpha". So alpha, or alpha coefficient, just like the Sharpe ratio is a measure of risk-adjusted performance, but unlike the Sharpe ratio it compares returns with the market as a whole. In other words, alpha is the portion of a fund's or portfolio's return that cannot be attributed to market returns, and is thus independent from market returns. It is a measure which many say most accurately gauges the real contribution or value-added, positive or negative, of the portfolio manager or the strategy used.

Alpha was all important in the days when most mutual funds were actively managed, because it squarely placed the spotlight on the managers producing the best returns, above and beyond what the market delivered. In fact, much of the manager's compensation was based on the alpha they produced. In today's environment where index ETFs are becoming the norm, alpha is an oxymoron, because the fund manager's objective is to match the performance of the index, which is the same as eliminating alpha. Conceptually, alpha still remains attractive to measure a portfolio manager or any other investment strategy other than strictly buying and holding an index. Practically speaking there are numerous issues with alpha. A portfolio with exposure to various markets or even asset classes really should have multiple betas and alphas, or risk comparing apples and oranges. To really isolate the non-market-related part from the market-related part of the performance can be enormously difficult. The sad truth is that too often, alpha is a propaganda tool which in skilled hands can be made to produce the most flattering results.

Another important aspect of any active investment strategy is that you really make a "beta bet" as much as an "alpha bet". In fact, you could argue that a large part of our returns, in particular with the World ETF Ranking strategies, come from the markets we select (the betas).

While we find many of the performance, risk, and performance/risk statistics interesting, more often than not they are used opportunistically by managers, yet largely misunderstood and nearly impossible to verify by investors. Instead of fancy statistical measures we believe there is nothing simpler and clearer than absolute returns as we report them on our "Results" page.

FAQ of the Week

Question: Are the TimingCube and TradeGuru services related?

No, the TimingCube and TradeGuru services are completely separate and use radically different models and strategies. TimingCube implements a purely technical trend following model to invest in broad U.S. and World market indexes through their ETFs. TradeGuru on the other hand performs top down selection of U.S. traded companies based on valuation and leadership fundamentals such as earnings growth. See the point by point comparison below. Comparison of TimingCube and TradeGuru services

	TimingCube	TradeGuru
Style	Index investing	Stock picking
Strategy	Trend following	Special stock opportunities
Investment selection	Purely technical	Purely fundamental
Market side	Long/Short/Cash	Long only
Investment vehicles	Market indexes via ETFs, mutual funds, options	Individual stocks, options
Geography	U.S./World	U.S.
Trading frequency	3-5x per year	12x per year

The two services are in fact complementary and we always recommend diversification of strategy over putting all your eggs in one basket. And in case imaginative subscribers get tempted to outsmart themselves by applying the TimingCube long/short/cash signals to the TradeGuru stock selections, we should stress that mixing them is not recommended (because it does not always work).

From a performance standpoint, both our TradeGuru portfolios have vastly outperformed the S&P 500 over the years. As an illustration, our value-oriented GuruFolio B sports an annualized return of 38.4% since January 2002 and returned 47.2% in 2009, well ahead of the S&P 500's 32.7% gain last year.

Warm wishes and until next week.

The TimingCube Staff