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A Buy signal was issued this week!

Yes, we are sorry to say, last week's Sell signal lasted only eight days and ended in a whipsaw. The bullish market action caused our Model to issue a Buy signal after the close on Wednesday October 19, 2005. Despite the shock of this rapid and unexpected reversal, and the sting of associated losses and trading fees, it is important for all of us to stay with the Model and be positioned with the intermediate trend, which currently is a confirmed rally.

The Market Update and Trend Timing School article below provide information about the latest turns of the market and shed some light on the corresponding signal. From the numerous questions we have answered during the last 48 hours it has become obvious that it is inhumane to issue a signal without at least some accompanying explanation, and we apologize to all of you for not coming to this realization sooner. As a result we have changed our signal issuance process with immediate effect, and from now on a new signal commentary will be posted on the "Current Signal" page of the Web site at the time a new signal is issued.

We hope that increased communication will make future trend transitions less confusing and easier to bear. In the meantime we have to deal with what the market throws at us today, so please read the content of this weekly issue carefully to make sure you are positioned properly.


Signal Update
Current Signal Performance as of
Signal Type
Trade Date
Index
Return since issued
Nasdaq 100
Russell 2000
S&P 500
QQQQ

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
QQQQ

Note: QQQQ returns are included for continuity sake.

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Market Update
Since setting a low for the pullback last week on October 13, markets have pushed upward following an erratic and increasingly volatile path. Besides a couple of unconvincing down days attributable almost exclusively to the energy and construction sectors, advancing days saw broad industry participation with insurance, medical and technology shares vying for leadership. In addition to market breadth and other improving internals, the surge in prices and volume seen on Wednesday confirmed the strength of the rally.

For the week, the primary indices we track finished mixed with the Nasdaq 100 leading the advance with a 1.55% gain, followed by the Russell 2000 with a fractional loss of 0.07% and the S&P 500 with a drop of 0.59%. Indices are experiencing somewhat of a divergence with the Nasdaq 100 and Composite above their 200-day moving averages while the Russell 2000 and S&P 500 remain below theirs. Nevertheless, the week's bullish action has caused our Model to issue a Buy signal, which moves us to a quadrant 4 (Bear/Buy) -- see the "The four market quadrants of Trend Timing" for details. The market's impact on our technical indicators points to a higher probability that this move is the resumption of the upward trend, and not a bounce in a new downtrend. Time will tell.

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Trend Timing School
The cost of insurance

Since when does a TimingCube signal last only a week? Was last week's Sell signal a mistake? Is this signal a mistake? We are not rapid traders and getting whipsawed is not part of the plan, but it happens. If you look over the history of the 16 years of TimingCube signals, you will see how extremely rare it is to have had two signals within a span of several days. This has happened three times since 1989, with the Sells on February 21, 1990, March 31, 2003, and last week October 11, 2005. The shortest Sell signal was just three days long, as compared to this eight day specimen. The market is currently working through very many cross-currents and that has made it extremely volatile. Volatility can work very well in our favor when it occurs over a period of weeks and months, not when it occurs over a period of days. Almost every indicator we look at is showing unusually high levels of volatility. We know this will not last. We also know that our investment strategy has performed splendidly over many years in many types of markets. Investors often fail because they abandon strategies quickly and follow the exuberance or fear generated by the market.

It is hard to admit, and we hate getting whipsawed into losing trades as much as you do, but in a very real sense the Model did exactly what it was designed to do; which is to protect us against the significant losses that come with major market declines. The markets very seldom do what is expected of them. Our Trend Timing Model walks the tight rope of wanting to run with all major market advances, which is done by not reacting to every minor pullback or correction (we are certainly grateful to avoid all these potential whipsaws), but also to keep us safe and even profit from the big plunges which can set back an unprotected investor for decades. This is what Sell signals are all about. They should be viewed as our insurance policy. The benefits are incalculable. Ask buy and hold investors who lost 80% of their nest egg in the tech bubble bust how long it will take to recover the losses. It took over thirty years to recover from the great bear stock market of the 1930's. As we have always stated, the TimingCube Model is by no means perfect, and it turns out that over our entire live and backtested history through 1989, our Sell signals have been wrong (i.e. resulted in small losses) 6 times out of 23, or returned small single digit gains 10 times. This is the small price we pay to avoid, and benefit from, the 7 times when Sell signals avoided substantial double digit losses.

The TimingCube Model consists of several proprietary components, but is primarily based on price and volume action of the Nasdaq Composite. It is completely unemotional and does not factor in any fundamentals such as interest rates, economics, external events or opinions of any kind. Yet, the stock market is not an exact science, and there are times when even our time proven Model can be misled by the market. After the length of time it took for the October 11 Sell signal to materialize, the Wednesday October 19 Buy signal may have seemed like a one day reaction, but it was not; our Model has confirmed a new emerging trend, so it reacted quickly to reposition us. It is OK to be wrong, but we must detect false signals quickly. Will this new uptrend last? Or will the initial downtrend resume? Unfortunately we cannot read the future, and we will have to wait for the market to answer.

We are always looking for ways to improve our Model, but when the markets are trendless and do not cooperate there is very little to be done. We will resist attempts to tweak the system in reaction to short term disconnects. Any change we consider has to work throughout our entire history, whether backtested or live. In other words, if a modification we test improves this year's results at the expense of prior returns, it is not good.

We love our mechanical investment approach because it removes us from these emotional decisions which we know to be the most counterproductive for an investor. Though the market has recently caused us pain and has hurt our performance, we ride on, stick to our strategy, follow our Model which has 16 years worth of outstanding performance, and wait for the trend which inevitably will take us to the next major gains.

Although we have never gotten whipsawed twice back-to-back, unless you counts the March 14, 2003 signal which lasted just 17 days as a whipsaw, there is always the possibility that the market will reverse course once again. We have no way to tell the future but in the meantime we will trust our Model to position us for the next big move. We patiently wait for a significant trend to develop.

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FAQ of the Week
Question: Can I avoid short term redemption fees on ProFunds and Rydex mutual funds?

Yes, by changing brokers. ProFunds and Rydex do not impose short term redemption fees on their mutual funds, but some brokers do. Brokers are free to set their own rules, commissions, and fees and as a result they are all over the map.

At the expensive end of the scale we find companies like Schwab, who do not charge commission for trading these mutual funds but, and it is a big but, they will charge you a short term redemption fee of 0.75% of your principal if you hold the funds for less than 6 months, even if you exchange between funds of the same family. Fidelity has a short-term trading fee of $75 applied each time you sell or exchange a fund held less than 180 days. Note that such fees are waived in Fidelity accounts managed by MARKETTREND Advisors.

Best suited to the type of trading we do are brokers like Ameritrade and Scottrade, who charge a commission when you trade ($17.99 and $17 respectively), but have no minimum holding period and therefore no short term redemption fees. We include BrownCo in this section because they charge no transaction fees (commissions) and the $75 charge for funds held for less than 180 days is waived as long as you exchange between funds of the same family.

Since broker fees and policies change fairly frequently you should ask the broker directly for the most current terms.

Warm wishes and until next week.

The TimingCube Staff

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