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

Market Update

Stocks rebounded strongly over the 5-day span, recovering the entirety of the heavy losses they experienced last week. Weakness was still present Monday as the Nasdaq Composite closed at its lowest level since May 2003 and the S&P 500 approched its October 10 low. From then on, it was mostly up with the majority of the gains posted on Tuesday: the Nasdaq Composite and the S&P 500 respectively jumped 9.8% and 10.8% higher during the session on anticipation of a significant rate cut by the Fed the next day. Indeed, the Federal Reserve announced Wednesday that it was reducing the funds rate by 50 basis points to 1%, which helped stocks hold onto their big gains of the previous day. The main indexes advanced again Thursday, albeit on lower volume, following the release of the latest gross domestic product report: GDP only dipped 0.3% in the third quarter, less than the 0.5% drop economists expected. A strong showing by the financial sector helped stocks post additional gains Friday and close the week and month on a positive note. Despite this week's gains, October 2008 will have turned out to be the worst month for stocks in 21 years.

The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY) posted respective gains of 13.95%, 11.45% and 11.25% on the week. All 3 ETFs remain located well below both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 10.07% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of October 10, 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

The stock market and the presidential elections

As we approach the important U.S. presidential elections to be held on Tuesday November 4, 2008, some investors wonder what impact the results may have on the stock market. Others doubt there is any connection between the world of politics and the stock market. And we ask ourselves, even if there is a relationship, how reliable a market timing indicator could politics be?

First, we apologize for our non U.S. readers, but we would miss a great opportunity to do our civic duty if we did not dedicate at least one paragraph to brush up on our U.S. electoral system knowledge. Presidential elections, which occur every four years are also the occasion to elect many state and local officials as well as one third (33) of the members of the U.S. Senate for six year terms, and all seats (435) of the House of Representatives for two year terms.

Now back to the link between the election cycle and the stock market. Note that this is the first time since the Great Depression that a presidential election is occurring at the same time as a financial crisis, and accordingly, this year there may be some distortion between the historical statistics we are referring to and what is currently happening.

For once, those who argue that the stock market cannot be manipulated and other government conspiracy disbelievers are clearly proven wrong by history. The fact that the stock market generally follows the four year presidential election cycle is clearly borne out by statistics. Much research has been done on the subject by many people over many years and data abounds, some of it quite compelling.

Whether we like it or not, the President, his administration and his political party all stand to benefit greatly from continuing to apply the influence that Washington has exerted on Wall Street throughout history, at critical points of the four year election cycle. The way the four year election cycle is driven is that the administration in power wants to make the economy look as good as possible during the presidential election year (year 4 in the cycle) to pacify and energize the voters, as an exception to the rule, it seems that something went wrong this time though! The way this generally plays out is that the first two years of a President's term is when all the bad stuff tends to happen. It is then that wars frequently get started and when recessions and bear markets occur. Somehow, the first two years in the cycle are on average the worst for the stock market, with year 2 the worse of the two. Again the current term did not follow this cycle that well, but the key word to remember is "on average", and you cannot take statistics to the bank.

Interestingly, the pre-election years or year 3 (2007 in the current cycle), are usually the best. This is also the most convincing statistic of the lot, with the third years showing the highest returns since the Great Depression, but again 2007 failed to follow that trend.

The government, at least some of the time, attempts to shape the economy for the better, not necessarily the stock market (although jawboning the markets by government and Fed officials is a long and rich tradition in this country). Still, since it is widely accepted that the economic and stock market cycles are broadly correlated (see "Economic indicators and market cycles"), it makes sense that by influencing the economy one would indirectly impact the stock market. Since the stock market generally leads the economy, it also makes sense that the stock market should do best the year prior to the economy doing best.

Not all statistics are nearly as clear cut as the pre-election year record, and some of the widely held beliefs are actually wrong. For example, 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. Nevertheless, the election cycle phenomenon has been going on regardless of the party residing in the White House, so this is really not a partisan discussion.

We have mentioned election based stock market predictions before in "The seasons of the stock market", and this reminds us that, as we leave October for November, we are also at an annual crossroads for the markets. October is known as the "jinx month", probably because it is when many of the worst stock market crashes occurred (e.g. 1929, 1987, 1997 and 2008!) and because it is also the month during which bear markets frequently end, but despite this reputation it is not the worst month on average. That distinction goes to September.

Still, according to Nasdaq statistics we should be excited because the November through January period is the strongest of the year, with the three individual months also the leading gainers (January being the best of the best). November also marks the beginning of the best 6-months of the year, statistically sgpeaking, let us hope that the statistics will be true this time and that the coming months will bring some relief to the stock market and thus to all of us.

With all of this in mind, there are a couple of key points to remember:

FAQ of the Week

Question: Does your Model factor in the election effect?

From what we read in the press and in some of the e-mails you send us, many believe they know about the impact the election has or will have on the stock market and would like us to issue signals accordingly. Some have been forecasting a sure-bet market rally or debacle in anticipation of such or such candidate win, others believe that we have to be very cautious during the pre-election market manipulations or because regardless of who wins the election on November 4^th, the economy and the stock market are bound to tank further anyway. The main point of sharing these views with you is to highlight the simple fact that of those people with an opinion about the impact of elections (or anything else for that matter), about 50% will prove to be wrong.

So, instead of long explanations, and as mentioned in today's Trend Timing School, the answer is: no, we do not "factor-in the election effect", nor will we ever artificially taint the signal with our opinions. The Model exclusively looks at what the market is actually doing to determine the trend. If an influence, event or other, is strong enough to move the markets into a trend change, the Model will react to it as well. What we or anybody thinks the market should do for this reason or that reason plays no part in our Model.

Warm wishes and until next week.

The TimingCube Staff