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

Market Update

Stocks did not move much Monday in a session that was marked by very light volume, as many traders were off for Columbus Day. Investors were back Tuesday and pushed the market significantly higher after the release of the last Fed meeting's minutes showed that the Central Bank is more concerned about downside risk to the economy than with inflation, fueling hopes that more rate cuts are on the way. Both the Dow Jones Industrial Average and the S&P 500 finished the session at new record highs. Stocks remained mostly flat the next day and started Thursday by resuming their march higher before reversing late in the day to post losses on heavy trade. The sharp reversal was supposedly due to a negative analyst report on Chinese search engine Baidu.com that put pressure on tech stocks and to comments by an European Central Bank official that inflation is still looming and that rates may have to go higher in the euro zone. A more logical explanation for the drop is simply that stocks were due for profit taking after an almost uninterrupted run-up since the middle of August. Stocks did not stay down for long as they rose again during the last session of the week to recapture almost all of Thursday's losses. Investors were encouraged by better-than-expected economic readings: retail sales rose by a healthy 0.6% in September while core wholesale prices only edged up by a moderate 0.1%.

For the week, the Nasdaq 100 and S&P 500 respectively gained 1.32% and 0.27%. Small caps lagged as the Russell 2000 posted a 0.44% loss during the same period. All three indexes remain located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World Index Ranking portfolio outperformed its US counterparts by posting a 1.83% weekly gain. The portfolio consists of the 5 top-ranked world indexes as of September 14, which marked the beginning of the current 4-week holding period. The World Index Ranking 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

Seasonal predictions

Last week's Trend Timing School article included the following sentence: "We are also fast approaching the best stock market investing season which typically lasts from fall to spring, November through April, the best 6 months of the year." There is little doubt that this statement caused numerous Trend Timing purists to raise their collective eyebrow at such a blatant prediction, but it also perked the interest of others. As we are smack in the middle of the dreaded month of October it seems timely to review the topic of cyclical stock market predictions.

Yes, we recognize that the stock market follows the never-ending succession of bull and bear markets which take place on a recurring basis. In fact, there are multiple cycles of varying frequencies and relative strength which constantly combine and interact in the market. There are the longer secular market phases which can last decades intertwined with the shorter cyclical bulls and bears, to which we can add many other periodic and repetitive patterns. As soon as a cycle emerges, someone turns it into predictions and investment strategies. A major sub-category of cyclical predictions consists of those that depend on or are controlled by the time or season of the year. There is no denying that many things in nature and in society are affected by seasonality, and changes in business and economic activities such as employment or buying patterns occur predictably at given times of the year. The real question is how regular and predictable these patterns are as an investment discipline.

But before we begin, we must state categorically so there can be no confusion whatsoever: seasonality plays no part in our Trend Timing Model. Instead of making predictions, be they cyclical or not, we let the market tell us what it is actually doing, and we go with the predominant trend.

There are countless theories which seek to exploit market cycles ranging from some with uncanny predictive accuracy, to the complete quack. We will review a few of the most popular theories here, but we'll spare you the one about astrological convergence and also the hemline theory (stocks moving in the same general direction as the hemlines of women's dresses).

The best 6 months of the year. This is the corollary to the worst 6 months theory, immortalized by the old Wall Street saying "sell in May and go away". Various studies have shown that statistically the period from November 1^st to April 30^th delivers gains nearly 80% of the time, and on average has vastly outperformed the May 1^st to October 31^st stretch.

October panic. Many investors get spooked by the month of October, as if there was some supernatural effect at work to crash the stock market (For the actual facts, please read "What are the risks of an October crash?" in the FAQ of the Week below).

Pre-Thanksgiving buy signal. The adepts of this scheme buy on the Monday before Thanksgiving and sell on the third day of January (and stay in cash for the rest of the year). Simple, and beats buy and hold consistently over the years according to proponents.

Election predictions. Popular wisdom has it that the stock market does better with a Republican president. Wrong! Over the last hundred years or so, the average yearly gain under Democrats is almost 30% higher than when the Republicans occupied the White House. How about: there has never been a loss in the year preceding an election year (almost true). Interestingly, the pre-election years or year 3 (2007 in the current cycle), is the best. This is also the most convincing statistic of the lot, with ALL third years showing the highest returns since the great depression (which by no-means guarantees it will happen this time around, but it sure is shaping up this way).

The January effect. One of the most reliable seasonal predictions is that January tends to be the best month of the year for investors. Per our investigation, January months are up an impressive 78% of the time for an average gain of 4.45%. In fact, it should probably be renamed the November/December/January effect because they are often the three strongest gainers of the year.

The spring thing. This theory contends that the January through April market performance is a reliable indicator for the balance of the year. If spring is up, the year will be up. Even if frequently correct, this theory is not very useful because by the time you know how stocks performed during spring a lot of the year's gains are already behind you.

For those interested in all the stock market historical facts and figures, and seasonal strategies galore, the 2008 Stock Trader's Almanac is a must read.

 Stock Trader's Almanac 2008 (Stock Trader's Almanac)
A book by Jeffrey A. Hirsch

FAQ of the Week

Question: What are the risks of an October crash?

As is common this time of the year, perhaps it has to do with the approach of Halloween, many investors get spooked by the prospect of another October stock market crash.

October has a terrible reputation in the stock market because it has seen its share of large stock market crashes. Looking at the 10 worst single day drops in the table below, 5 of them occur in October, including the largest and most infamous: October 19, 1987. On that day, also known as Black Monday, the Dow Jones lost 22.61% of its value. The 4 largest one-day losses occurred in October.

10 worst single day drops on the Dow Jones Industrials index

Date	Loss
October 19, 1987	-22.61%
October 28, 1929	-13.47%
October 29, 1929	-11.73%
October 5, 1931	-10.73%
November 6, 1929	-9.92%
August 12, 1932	-8.40%
January 4, 1932	-8.10%
October 26, 1987	-8.04%
June 16, 1930	-7.87%
July 21, 1933	-7.84%

These statistics are misleading. Stock market crashes are sensational and are what everyone remembers. Reality is quite different. Measured on the Dow Jones Industrials over the last 50 years or so, about 58% of Octobers generated gains, not losses. Contrary to general assumption, October is not the worst month of the year by far, that honor goes to September which experiences losses over 63% of the time. Statistically, the months of February, May, August, June, and of course September all have worse records than October.

The bottom line is that not all crashes happen in October, there is not a market crash every October, and October is not even the worst month of the year. Playing the monthly averages is a game of low probabilities.

Just to set things straight for those reading this FAQ without having read the preceding Trend Timing School article entitled "Seasonal predictions" above: we are trend followers and we do not predict what the market is going to do. Our system has nothing to do with seasonal stock market prediction methods. Stock market crashes are never isolated one-day phenomena and catastrophic events generally do not have lasting effects on the markets. All large historic crashes were preceded by significant deterioration in the market technicals which more than likely would have placed the trend follower out of harm's way before the big drops.

Warm wishes and until next week.

The TimingCube Staff