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

Market Update

After two down days, stocks rebounded strongly to finish the week with solid gains. The major indexes moved lower Monday morning as worries over debt-ridden Ireland continued, but a late rebound helped the Nasdaq Composite trim its loss to only 0.4%. Weakness returned the next day as concerns over the euro zone continued to weigh on the markets, with news that Standard and Poor's is considering a possible downgrade of Portugal's credit rating. All major averages fell on heavy trade, the Nasdaq Composite finishing the day 1.1% lower. Encouraged by news of strong factory activity in both China and the U.S., investors bid stocks higher across the board Wednesday, yielding all major indexes gains in excess of 2%. The buying continued the next day, spurred by better-than-expected home sales and retail sales data, allowing the S&P 500 to capture an additional 1.3%. The Labor Department reported Friday morning that employers added only 39,000 jobs last month, far less than anticipated, and that the unemployment rate unexpectedly rose to 9.8%. After opening lower on the news, stocks were able to right themselves to finish with gains for the third consecutive session. This week's rebound has sent both the S&P 500 and Nasdaq Composite back to their early November highs, but it should be noted that the move has occurred on declining volume, showing a lack of enthusiasm among the large financial institutions and therefore casting a doubt over the sustainability of the rally.

The S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQQ) respectively gained 3.44%, 3.35% and 2.08% over the five-day span. 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 4.41% gain 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. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. 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

Does the dollar hold the key?

We read often these days how understanding the movement of the U.S. dollar is the key to discerning which way stocks will move. The broad idea behind this is that the secular trends behind today's stock markets come from strength in commodities and commodity-based economies such as the "emerging" markets. This strength in commodities, while largely driven by the economic emergence of China, gets a helping hand from a declining U.S. dollar. Thus, if the dollar is declining, commodities are rising which supports emerging market stocks. Emerging market stocks have been leading the way for U.S. stocks, by and large, so rising emerging market stocks encourages risk-taking among investors and higher U.S. stocks, in turn.

The recent correction, which could be nearing its end this week, was marked by the usual lift in the U.S. dollar and corresponding selloff in emerging market stocks. However, unlike this summer's market malaise, high yield bonds showed marked weakness, as have bonds of virtually all stripes. Rather than driving yields lower, QE2's announcement has served to move investors OUT of bonds perhaps as they sense the end of the easing regime finally coming. Whether that trend extends into next year will be a key component of how stocks perform in 2011. It would be easy to take the view, given recent data, that bond yields have gone as low as they can go; that their cyclical decline connected with the recession and financial crisis is going to unwind pushing investors out on the risk curve. If so, stocks will benefit.

The two wildcards are the same ones markets have wrestled with throughout 2010: 1) the extent of the Euro debt crises, and 2) the drive by China's government to keep their economy from overheating. These two items have been catalysts for most of the weakness in stocks this year. Neither is resolved and will certainly drag on into 2011. The difference might be that investors will grow increasingly less concerned about their impacts if the U.S. economic data continues to improve, which appears more likely than not at this moment.

This thread of analysis supports a rising dollar AND a rising stock market, if only because the Euro should be capped by lingering debt worries. The table below taken from Liz Ann Sonders' recent commentary shows the relationship between stocks and the U.S. dollar. It's quite common for stocks to move higher along with a rising dollar. It's also very clear from the table that the dollar is a great place to go when stocks are weak - the dollar always rises when the S&P 500 falls, per this analysis.

Chart 1: S&P 500 Performance During Dollar Bull and Beat Markets


Source: Schwab.com

It's not obvious from the history that the dollar holds all the keys to stocks, only that the dollar wins when stocks stumble. This week, breakouts in small and midcap stocks, industrials, and some consumer and commodity-driven sectors speaks to investors believing that economic growth is underway and they are embracing cyclically sensitive areas. This plays well with our recent weekly pointing out that we are entering the best period for stocks from an election cycle perspective, and also, we note now, a strong seasonal Nov-Apr period, for those that like that notion.

The stars might be aligning for a good run here for stocks. It's too early to be sure and heightened troubles in Spain's debt situation would surely send a hefty winter chill through markets. Thankfully, our Model's helpful signals will keep an eye on the market weather for us and keep us warm when ill winds are blowing.

FAQ of the Week

Question: When will there be more equal-weighted ETFs?

Last year, we showed some beautiful examples of how equal-weighted ETFs signficantly outperform traditional market-weighted indexes during market uptrends. This makes sense as investors bid up smaller companies during periods of economic growth (it's well documented that small cap stocks outperform large caps during cyclical upturns). Rydex has been the source of the equal-weighted ETFs. They offer an equal-weighted version of the S&P 500 and the S&P sectors. Unfortunately, after this initial thrust at expanding their roster with equal-weights, they stopped. Now, Rydex is back in the game and preparing to launch equal-weighted versions of all the major indexes not previously covered. They will be launching on December 8^th equal-weight versions of the Russell large, mid, and small cap indexes along with equal-weight international large-cap and emerging market indexes. In January, they will add an equal-weight world index. While we would expect an equal-weight small cap ETF to be a less obvious performance winner over the normal index, the equal-weight large cap and internationals are very attractive. We think these will be great additions to the ETF world as we are big believers that equal-weight is an easy way to get more performance during cyclical upturns.

Warm wishes and until next week.

The TimingCube Staff