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

Market Update

The major indexes experienced see-saw action over the five-day span to eventually lose ground from their levels of last week. Stocks recouped last Friday's losses during the first session of the week, allowing the S&P 500 to close Monday at its highest level in a year. Strong earnings reports from Apple and Texas Instruments resulted in a higher open for stocks Tuesday, but the gains quickly evaporated to turn into losses after housing data for September proved to be disappointing. The end result was a 0.6% daily loss for the S&P 500. Stocks were headed for modest gains Wednesday before investors took a downgrade of Wells Fargo as an excuse to sell. The last-hour retreat resulted in an additional 0.9% drop for the S&P 500, which the index more than recouped during Thursday's session following news that the index of leading indicators topped forecasts, therefore confirming improving economic conditions. After the close, both Microsoft and Amazon.com reported strong quarterly results which, together with better-than-expected earnings from other bellwether companies such as Schlumberger and American Express, provided initial support for the market at the open Friday. Investors apparently decided to sell the news as profit-taking sent stocks gradually lower all-day to yield the S&P 500 a 1.2% loss, albeit on lower trading volume.

Small stocks suffered the most this week as the Russell 2000 (IWM) retreated by 2.63% over the five-day span. The S&P 500 (SPY) did better with a modest 0.74% loss but the true out-performer was the Nasdaq 100 (QQQQ): it gained 0.82% on the week thanks to solid earnings reports from technology companies. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 0.30% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of October 9, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Is the U.S. dollar really "plunging"?

A few months ago we wrote about "soaring" U.S treasury yields. After our examination of those yields, we found that they were only returning to normalcy and that Treasury yields actually were in the midst of a 20-year downtrend, hardly soaring. Today, we turn our attention to the latest hyperbole in the investment world - a "plunging" U.S. dollar.

Not a day goes by right now without a new story about how the U.S. dollar is struggling and on the brink of collapse. As we learned in our review of U.S. Treasury yields, it is critical to understand the context of such grandiose statements. Chart 1 below shows that indeed the U.S. dollar has dropped sharply in recent months. In fact, it's decline is a mirror image of the stock market's sharp rise. However, you can also see that the dollar's recent "plunge" is really just a return to year-ago levels as the "safety" trade has been unwound. During last year's market crash, investors poured into U.S. dollars and U.S. Treasury bonds as a safe haven, seeking refuge from a collapse in credit and stock markets. Thus, it's perfectly normal and expected that as the markets normalized the dollar would too.

Chart 1: U.S. dollar recent drop



If we step back and examine the relationship between the U.S. dollar and stocks over a longer time in Chart 2, we see that the correlation between the two has changed from the beginning of the decade. We can separate the past 15 years into two phases. In Phase 1, the dollar and stocks are moving in tandem. The reason is that the late 1990s were a period where stocks were driven higher by the rising fortunes of technology companies and the innovative emergence of the internet. This revolution in technology was largely U.S-centric with money pouring into Cisco Systems, Microsoft, Amazon, and other high tech powerhouses. The U.S. economy was surging, especially relative to other parts of the world, and the dollar was a beneficiary.

Chart 2: Relationship between the U.S. dollar and stocks



Shifting forward to Phase 2 after the tech stock bust, we observe a world economy driven by growth outside the U.S. An emerging China, a sharply growing India, and the concomitant escalating demand for commodities spreads to Brazilian, Russian, and Australian economies sending them ever higher. In this phase, the U.S. economy takes a backseat to growth outside the U.S. Demand for international stocks takes off. Money flows to companies outside the U.S. pushes up other currencies and weakens the dollar. The other factor, and a related one, is relative interest rates. With U.S. interest rates at extremely low levels, investors will naturally be attracted to higher rates elsewhere in the world.

Currencies are a relative game, with money flowing to the higher rates and places where the economies are growing fastest. With the story of this decade being the emergence of China and the ripple effects on other emerging economies, it is no surprise that the U.S. dollar fell by over 40% during 2002-2008. After a brief foray into U.S. dollars during the market crash, investors are returning to the relative economic forces that are now resuming their trends. Thus, the Brazilian Real has advanced over 30% thusfar in 2009 as money returns to the lure of Brazil's fast growing economy. As our chart above shows, there is no consistent correlation between stocks and the U.S. dollar. The correlation is a question of what is driving the stock market. As long as U.S. interest rates are low and economies outside the U.S. are booming, investors will chase opportunities outside the U.S. and the U.S. dollar will decline on a relative basis.

As for the "plunging" U.S. dollar, the information above puts that into a much broader context. The dollar is merely returning to its normal relationship reflective of the shifting sands of the world economy. The rise of non-U.S. economies greatly benefits the world and naturally provides investment alternatives. Despite this dramatic change in global economics, the U.S. dollar is really little changed from where it was twenty years ago. As investors, we benefit from this shift by embracing the opportunities presented, namely those offered by our World Rankings. Investing outside the U.S. gives us the double benefit of strong market growth in places like Brazil, Russia, and India (all of which are currently heading up our rankings), with the added kicker of a weaker U.S. dollar further padding our gains.

FAQ of the Week

Question: How long do bull markets last?

With the market having shifted from bear to bull a few months ago, readers often ask how long we can expect a bull market period to last. While different people will perhaps define the beginning and end of a bull market differently, we offer a table put together by Bespoke (see Table 1 below) as one way to examine the topic. The table defines a bull market as a 20% or greater gain following a 20% or greater decline. The table shows that since the turmoil of the great Depression in the 1930s, bull markets have tended to linger more than 1000 calendar days, or beyond three years in duration. This makes our current bull market, at just over 200 days, very young and likely with at least another couple of years to go. Of course, we will have numerous Buy and Sell signals during any cyclical bull market. For us intermediate trend followers, this data is an interesting backdrop to let us know that the underlying market force is likely to be bullish rather than bearish for some time to come.

Table 1: Historical S&P 500 Bull Markets



Warm wishes and until next week.

The TimingCube Staff