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

Market Update

Stocks experienced mixed fortunes during this holiday-shortened week, as small stocks gained while large caps lost ground. The S&P 500 initially moved lower during the first session of the week, but a late rally allowed it to finish the day with only a modest loss while the Nasdaq Composite managed to gain 0.6%. Negative action returned the next day as the markets suffered widespread losses on news that a South Korean island had been attacked by North Korea. With worries over Ireland's debt situation adding to investors' anxiety, all indexes retreated sharply, with the Nasdaq Composite shedding 1.5%. Stocks rebounded strongly Wednesday to recapture all of the previous day's losses as investors took comfort in positive economic news: October personal income and weekly jobless claims data both came in better-than-expected. It should be noted that the rally occurred on light volume, as is often the case the day before Thanksgiving. When trading resumed Friday, investors were faced with renewed concerns over Europe's debt problems now involving Portugal and war threats from North Korea. Stocks retreated as a result, with the S&P 500 posting a 0.75% daily loss.

The Russell 2000 (IWM) and Nasdaq 100 (QQQQ) respectively gained 1.06% and 0.57% over the five-day span while the S&P 500 (SPY) shed 1.24%. 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 3.40% 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.

Our current Cash signal remains in effect.

Trend Timing School

A word on leverage investment techniques

Sophisticated investors have always exploited options to create leverage. Because of their complexity and leveraging power options can be deadly for the non-initiated, which is why they earn the highest level of risk of all the alternatives. Yet, in the hands of an expert, they can yield actual risk levels substantially lower than other approaches. We went into more details on this subject in the July 25th, 2008 Weekly Update, as we described an option strategy which can achieve performance comparable with that of equity based strategies with a much smaller portion of capital at risk (say about 10%). This means options let you apply much more leverage than margin does, and by applying them wisely your overall market exposure can be decreased substantially.

For a long time, the only way to simplify all of this and side-step many of the issues, and circumvent the no margin trading in retirement accounts rule, was to instead use the leveraged mutual funds that seek to achieve the same results as margin trading. Fund families such as ProFunds and Rydex have been around for years and have made Long and Short strategies practical for hundreds of thousands of investors. Offsetting the ease of use, the leveraged mutual funds have exhibited performance discrepancies as compared to ETFs (see June 25th, 2010 Weekly Update). A large contributor to their performance deficit is the lag incurred by the mutual funds for having to trade at the close on the trade date instead of at the open like ETFs, known as slippage. The remaining shortfall is mostly attributable to the negative compounding effect inherent in how the funds work (see January 23rd, 2009 Weekly Update).

Since then we have seen the apparition of more and more leveraged ETFs which go further in addressing investor concerns than any of the alternatives. They are by far the simplest to use and trade like stock at any time during the day. Their lower costs and risks make them the hands-down winners for most investors. The only remaining drawback is the negative compounding effect which under certain market conditions will negatively impact performance.
For information, here is a list of the leveraged ETFs available today for the major indexes:

ETF Long / Short	Reference Index	Leverage	Fund Family
QLD/QID	Nasdaq 100	2x	ProShares
TQQQ/SQQQ	Nasdaq 100	3x	ProShares
DDM/DXD	Dow Jones Industrial	2x	ProShares
UDOW/SDOW	Dow Jones Industrial	3x	ProShares
SSO/SDS	S&P 500	2x	ProShares
UPRO/SPSU	S&P 500	3x	ProShares
SAA/SDD	S&P SmallCap 600	2x	ProShares
UMDD/SMDD	S&P MidCap 400	3x	ProShares
UWM/TWM	Russell 2000	2x	ProShares
UWC/TWQ	Russell 3000	2x	ProShares
BGU/BGZ	Russell 1000	3x	Direxion
TNA/TZA	Russell 2000	3x	Direxion
MWJ/MWN	Russell Midcap Index	3x	Direxion

FAQ of the Week

Question: How do ETFs and mutual funds compare?

We take the opportunity of the TTS article above to elaborate a little more on ETFs and mutual funds. As the two primary investing choices for Trend Timers, we have been comparing the two alternatives for years. Due to the rapid evolution in the ETF industry the competitive landscape has been shifting, clearly in favor of ETFs.

There are many types of ETFs and mutual fund products, and it is hard to lump them all in the same bag for comparison. In order to focus on the type of funds we require to implement our strategies we have narrowed our comparison to ETF families which offer inverse, double and double inverse funds, i.e. ProShares, and matched them up with the bull/bear mutual fund families which offer the same choices (Direxion, ProFunds and Rydex).

The table below provides a quick assesment of how ETFs and mutual funds compare.

	ETFs	Mutual funds
Simplicity	Simple fund buy/sell	Simple fund buy/sell/exchange
Retirement accounts	All 4 strategies	All 4 strategies
Trade execution	Continuous while market open	At market close
Costs	Low expense ratio (0.95%)	High expense ratio (1.25-2.00%)
Index tracking	Good But leveraged funds can vary significantly*	Good But Leveraged funds can vary significantly*
Performance	Leveraged funds can outperform or underperform*	Leveraged funds can outperform or underperform*
Liquidity	High	Low to Medium
Trading restrictions	None	Brokers enforced frequent trading rules

* To understand the idiosyncrasies of leveraged mutual funds, read January 23rd, 2009 Weekly Update.

Warm wishes and until next week.

The TimingCube Staff