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

Market Update

Stocks posted strong gains for the second consecutive week, sending the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100 to their highest weekly close since September 2008. As a result of the sharp recovery that followed the steep pullback of two weeks ago, our Model issued a new Buy signal after the close Monday.
Indeed, stocks performed strongly during the first session of the week as all major averages posted gains in excess of 2% on news that G20 member countries will keep their accommodative fiscal and monetary policies in place to ensure a lasting economic recovery. Stocks held on to their gains the next day and then resumed their march higher Wednesday on renewed optimism over the global economy after China reported that its industrial output increased 16% last month. The Nasdaq composite gained 0.7% on the day. A sharp drop in oil prices sent stocks lower Thursday, affecting the S&P 500 primarily, as the large-cap index comprises many energy-related companies. The S&P 500 finished the day 1.3% lower but the tech-heavy Nasdaq 100 only lost 0.5%. Stocks finished the week Friday by rising across the board on the back of upbeat quarterly reports from J.C. Penney and Disney.

The Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively gained 3.31% and 2.32% over the five-day span. The two ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs) while the Russell 2000 (IWM) rests just a hair below its 50-day EMA despite a 1.12% weekly gain.

For its part, our World portfolio outperformed its U.S. counterparts this week with a gain of 3.49%. The portfolio consists of the 5 top-ranked world ETFs as of November 6, which marked the beginning of the current 4-week holding period.

We now have a Buy signal in effect.

Trend Timing School

Are Markets Efficient?

There are many interesting theories in the financial and investing worlds but few are as fervently defended, and disputed, yet as stubbornly enduring as the Efficient Market Hypothesis (EMH) and its predecessor the Random Walk Theory.

In summary, EMH is an investment doctrine that postulates that any attempts at beating the market are doomed because stock prices already reflect all relevant information. EMH states that there is no link between past prices and future prices, and no relationship between the price of one stock and that of another stock. Past movements or trends cannot be used to predict future behavior. The chance of a stock's price going up in the future is the same as it going down. About the only concession made by EMH proponents is that they recognize that over the long-term stocks exhibit an upward trend.

There cannot be any skills involved in buying or selling stocks because it is a pure game of chance. There is no such thing as an undervalued stock because that information is widely known and instantly rectified. No investor can have an edge in spotting a stock with a better gain potential or in identifying a trend because no one has access to information that is not already available to everyone else.

Not surprisingly, this purely theoretical concept was conceived in academia and is backed by mountains of research, books and thesis galore. The efficient market idea originated in the 1950s with Maurice Kendall and got developed further in the 1960s by Eugene Fama. The theory gained a lot of popularity in 1973 when Burton Malkiel published "A Random Walk Down Wall Street" which to this day is high on the list of top-selling finance book. Most of the evidence in favor of the hypothesis is circumstantial statistics showing that most investors and most mutual funds fail to beat the markets. Since Wall Street is founded on analysis and stock picking it is quite surprising to see how popular EMH has been. Maybe it has to do with the fact that the biggest beneficiary of EMH thinking is the Buy and Hold strategy. If you have no chance at beating or timing the market you might as well stop wasting your time trying!

Well, as Trend Timers you can imagine that we are not exactly fervent supporters of the EMH philosophy. And since EMH declares both fundamental and technical analysis futile and obsolete, we have a lot of prestigious company in opposing it.

Empirical evidence against EMH can be found in the fact that there are well known investors (e.g. Warren Buffett) that have beaten the market with techniques that are not supposed to work, consistently and over long periods of time. There are portfolio managers and mutual funds that year after year have better performance than others. How can this be when the efficient market is purely random? Anyone looking at charts comparing various stocks and markets can see that there are very strong relationships between stocks, and that price movements are very far from random.

An EMH paradox is that the profit-seekers and strategies that believe in and want to exploit market inefficiencies and temporary anomalies (which supposedly cannot be done) are in fact the stated forces that cause the markets to become efficient.

In the advanced information technology age we live in, more information is readily available in quasi real-time to more people than ever before. It is not just news or stock quotes, but just about anything about companies, politics, or the economy is available at our fingertips. With such superior communications the markets should be more efficient than ever.

The primary argument against EMH from technical analysts is that many investors base their expectations on information about the past and study the same technical indicators. It is then logical to suggest that past prices do have an influence on future prices. Some even suggest that technical indicators act as self-fulfilling prophecies because they are followed and trusted by so many.

Probably the major flaw in EMH, in our opinion, is that stock prices are not set by a fixed computation of all the data available but by how investors perceive this information. Human psychology is not easily reduced to models and constants. Perceptions change a lot from one individual to another and they can change rapidly. The great tech bubble of the late 1990s is a perfect example of how market valuations can get totally out of whack, with the "efficient market" failing to correct monstrous anomalies for prolonged periods of time. Despite the fact that all the information about the outrageous market over-valuation was available to everyone, the market was not efficient, and investors that bet that it would all come crashing down were handsomely rewarded.

Investors are very different from one another. They do not all look at information the same way, or at the same information. Some have access to or can afford better research and smarter analysts than others. Not everyone's risk tolerance is the same. Some bail out at the first sign of trouble, others can take the rollercoaster ride all the way down.

In conclusion we firmly believe that past market behavior has an impact on the future because of investor psychology. This is why our Model relentlessly looks for what the market is telling us, and once the trend is clear, we simply follow.

 
A Random Walk Down Wall Street: Completely Revised and Updated Edition
A book by Button G. Malkiel

FAQ of the Week

Question: How can you earn a reasonable return on your uninvested cash?

Certainly yields on savings vehicles are at historic lows. We recently noticed that Chase is paying a shockingly low 0.01% on savings and money market accounts (http://bit.ly/ABj8E). At that rate it would take over 10,000 years to double your money! There are online banks that offer FDIC insured high yield money market accounts with current yields as high as 1.5% (Bankrate.com is an excellent source for this information). Better still, inflation-protected treasuries (TIPS) are currently paying just over 3%. The iShares Barclays TIP Bond ETF is an easy way to invest in TIPS (http://finance.yahoo.com/q?s=tip).
Finally, municipal bonds, particularly longer term bonds have even higher yields but can be volatile and complex to research, purchase, and insure. To help individual investors invest in municipal bonds without many of the traditional challenges, one of our TimingCube partners, Christophe Olivier, has launched MuniFundInvestor, an online service that specializes in closed-end municipal bond fund timing. MuniFundInvestor is an intelligent cash management system that aims to deliver tax-free dividend income and capital growth while outperforming money market funds, CDs, municipal bonds and municipal bond funds. The MuniFundInvestor service has returned over 16% year to date. For more information please visit MuniFundInvestor.com.

Warm wishes and until next week.

The TimingCube Staff