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

Market Update

Stocks experienced wild swings this week but finished little changed overall. Fighting last week's sell-off, the main averages opened higher Monday but later relinquished all their gains to finish the session in the red. The selling intensified the next day on worries that Ireland's debt crisis is getting worse and that China might tighten credit further by raising interest rates. The news triggered a global retreat that resulted in a 1.7% loss for the Nasdaq Composite. As had been the case during the previous week, the selling occurred on heavy trade, leaving no doubt that institutional investors were dumping shares. Acknowledging the degradation of the market tone, our Model issued a Cash signal after the close Tuesday. Stocks managed to stop the bleeding during the next session to finish almost unchanged before recapturing a good chunk of their recent losses Thursday, following better-than-expected weekly jobless claims data and reassurance by Irish officials that the country's debt problems would be addressed. The S&P 500 recovered 1.5% on the day. Profit taking initially took stocks lower Friday morning, but the main indexes gradually clawed back to finish the day with slight gains.

The Russell 2000 (IWM) gained 0.58% over the five-day span while the Nasdaq 100 (QQQQ) and S&P 500 (SPY) were basically unchanged. 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 1.22% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of November 5, 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.

We now have a Cash signal in effect.

Trend Timing School

Muni bonds come crashing down

Back in October, Jurian Timmer, Fidelity's Investment Strategist, quipped that the worst thing for the markets would be for the Fed to actually implement their QE2 plan. His point being that the Fed was getting plenty of mileage out of just talking about it - stocks were surging, interest rates were staying very low. Detailing the plan of action might be the ultimate downer, reminding investors that the Fed has already convinced markets to lower rates substantially and perhaps should turn its attentions elsewhere (more on that further down the page).

Alas, the Fed failed to heed Mr. Timmer's advice and implemented their plan in a fairly detailed fashion - $600B of bond buys through June 2011. Though markets initially welcomed the news with dancing in the streets. That turned out to be the last vestiges of a long party - you know, the stragglers that refuse to realize the party's over. The more sober investors have since given back all the initial gains and then some. Commodities have come undone as the U.S. dollar has turned higher on the back of a turn higher in rates and the usual ex-USA suspects of Eurodebt and Chinese slowdown (wait, wasn't QE2 supposed to trash the dollar?). And in the most shocking development municipal bonds have come under absolute assault.

Rewind the clock a couple of years and the Fed halts the market crisis by stepping forward and backstopping the credit markets. That November 2008 action sets off a two-year rally in all things bond with money pouring into the asset class in record waves. Of particular note is a powerhouse rally in muni bonds. Having been beaten down in the fall 2008 panic and facing a new Democrat regime that surely will raise taxes, muni bonds become a very attractive investment. Concerns about state and local government fiscal health are cast aside in the rush to lock in ultrajuicy yields. Federally-subsidized Build America Bonds are introduced to help expand the market for munis. Municipal bonds are off to the races!

Chart 1 shows the premium over asset value of a muni bond closed-end fund. This record-level high premium reflects the willingness of investors to grab the yield despite the potentially dire consequences when the premium inevitably goes away. It's a graphic depiction of a "bubble", albeit a rather focused one.

Chart 1: Muni bond closed-end fund premiums reflect excessive investor demand



This past week, this mini-bubble has popped in dramatic fashion with a whole year's worth of gains handed back in a matter of handful of blistering days. If we buy muni bonds when Democrats are elected, it would appear we sell them when Republicans have their day? Whether that, concern over this week's mountain of debt issuance (most notably from ailing California), the possible expiration of Build America Bond subsidies at year-end, profit taking, or just a collective rush for the exits, Chart 2 below displays the ugliness in muni bond world recently.

Chart 2: Muni bonds come crashing down - iShares National Municipal Bond ETF (MUB)



It is too early to know if this is just a temporary problem. There is a flood of muni debt issuance right now creating a tremendous supply-demand imbalance. Once that clears, we will have a better sense of the ongoing market and whether this is the beginning of a new dynamic or not. Initially, this panic in munibondland sent chills throughout other credit markets causing stocks and bonds to fall in unison. That action, along with market angst over the latest round of Eurodebt troubles, sent our model to Cash earlier this week. Thusfar, this appears to be a normal pullback after a strong two-month rally in stocks. A two-month rally in March/April of this year morphed into a flash crash and a summer of sideways trading. Retail sales look to be on the upswing (see FAQ below), but the market reaction to QE2 has ultimately been to sell the news which has driven the dollar higher and taken the wind out of the commodity-fueled stock rally. We'll see how this pullback plays out. For now, our model has put us out of harm's way until clarity returns.

FAQ of the Week

Question: What's the good word?

Okay, not really a specific question, but more of a grab-bag of questions related to the economy that often come across the electronic ether. It seems we get plenty of notice of the bad things that are happening - e.g. unemployment remains stubbornly high, housing is little improved, though flat, et al. The assumption is that the high unemployment and a general economic uncertainty has put the consumer flat on his/her back. Given that well-publicized metric of the consumer being 70%+ of our economy, this leads to plenty of downcast thinking. The data, however, is not so downcast. Consumer spending, as shown in Chart 3 below, is and has been on an increasingly sharp upswing, now having just about returned to pre-crash levels. Corporate profits have been growing well with balance sheets that are in fantastic shape - many companies having taken advantage of ultra-low interest rates to raise even more cash for investment, stock buybacks, dividends, etc.

Chart 3: Consumer spending not so bad



While this certainly doesn't mean we're out of the woods, it does provide some balance to the ills that we often hear about. The banking world is far from out of crisis mode as European banks continue to wrestle with exposure to debt-laden nations, U.S. banks have far more bad debt on their books than they would like.

Warm wishes and until next week.

The TimingCube Staff