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

Market Update

After two days of gains, stocks retreated the next 3 sessions to finish the week with modest losses. On the back of last week's ascent, the major averages moved solidly higher Monday, buoyed by news that retail sales rose 1.4% last month and by comments from Fed chairman Bernanke that implied a continuation of the Central Bank's accommodative policy. The Nasdaq Composite, and S&P 500, both gained 1.4% on heavy trade, closing the day at new 2009 highs. A rebound in the dollar caused a weak open for stocks Tuesday, but news that producer prices fell more than anticipated last month helped the main indexes right themselves to finish the session in the black. Equities remained little changed the next day, but sellers made their presence felt Thursday, resulting in a 1.7% loss for the Nasdaq Composite, as tech stocks were especially affected by Bank of America's downgrade of several companies in the semiconductor industry. A further rise in the dollar combined with a drop in housing starts and a disappointing earnings report from Dell to yield stocks additional losses Friday. Selling remained light for the day, however, as the S&P 500 only retreated 0.32% on reduced volume.

The S&P 500 (SPY), and Nasdaq 100 (QQQQ), respectively lost 0.17% and 1.30% 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 below its 50-day EMA after a 0.24% weekly loss.

For its part, our World portfolio posted a 1.32% loss this week. 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.

Our current Buy signal remains in effect.

Trend Timing School

High yield bonds follow the trend

You wouldn't think us trend-followers would be very interested in bonds. Bonds are a good counterweight to stocks for sure. But our view of the world is to concentrate your monetary forces behind the best investment ideas. With our trend following signals by your side for protection, diversification could be considered a waste of a good opportunity to make some money. After all, if you have a safety net why not jump as high as you can?

Because most investors simply cannot handle the heights. Otherwise, we would be loading up on options and futures to maximize our leverage with every signal change (obviously not something we would EVER recommend you consider!). Recognizing this inherent risk aversion in most investors, we admit that bonds actually can be rather appealing. As part of a portfolio, bonds dampen the volatility that leads most investors to make such poor decisions. They offer a nice, steady return much of the time. If only as a means to save us from our emotional selves, perhaps we should not be so quick to dismiss bonds.

But do we have to abandon our trend-following nature when thinking about adding bonds to our investment palette? We have found that the answer is a solid "No". Quickly reviewing the bond universe, we know that short-term bonds are far less volatile than long-term bonds. Municipal bonds offer tax-free income. We have ultra-safe choices such as U.S. Treasury bonds and mortgage bonds (Ginnie Maes). Moving further out the risk curve we find the broad range of corporate bonds. Individually, corporate bonds come in a wide range of risk, from very low risk AAA-rated bonds to higher risk "junk" bonds. However, ETFs provide an easier way for most investors to enter the bond market. The largest corporate bond ETF, symbol LQD, carries fairly high quality bonds and currently yields around 5%.

All bonds will trend with interest rates. As rates fall, the prices of the bonds and their associated ETFs will move higher. A rising rate environment will push prices down. For trend-followers the best bet in working with bonds is to look at high yield bonds. Often disparagingly called "junk" bonds, high yield bonds are issued by companies with lower credit ratings. As a result of the lower rating, the issuer must offer a higher interest rate to attract buyers. The good news is that the default rates on these bonds is really quite low. More important for us is that these bonds, because of their higher risk profile, tend to track stocks quite closely. The chart below shows clearly how correlated stocks and high yield bonds are.

Chart 1: Stocks and High Yield Bonds Correlation



The other key characteristic of high yield bonds is the relative lack of volatility when compared to stocks. They hew to the same course as stocks while offering a much smoother ride. Of course, in exchange for the smoothness, the potential gains are typically lower, and sometimes a good bit less. For investors whose stomach churns everytime stocks jump one way or the other, using high yield bonds might offer a less anxious investment choice.

Bonds do not always have to be a defensive investment. Using high yield bonds as a less volatile proxy for stocks can give us solid returns with a much less bumpy investment journey. Other good news: our TimingCube signal does a pretty good job with high yield bonds, delivering about 1.5x the return of buying and holding.

FAQ of the Week

Question: How do I invest in high yield bonds?

There are numerous choices for investing in high yield bonds. The chart below shows that not all high yield bond ETFs are the same. Depending on which bonds the ETF portfolio holds, the returns can be substantially different. But most offer a current yield of 8% or more. Other good choices are mutual funds from Vanguard (in the form of the VWEHX) or Fidelity (look at
FHIFX or SPHIX). The funds will be less volatile on a day-to-day basis than the ETFs will be. Finally, there are long/short choices from Profunds and Direxion if you want to play both Buy and Sell signals.

Chart 2: High Yield Bonds



Warm wishes and until next week.

The TimingCube Staff