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

Market Update

Stocks resumed their march forward this week, sending both the S&P 500 and Nasdaq Composite to their highest weekly close of the year. The main indexes posted modest gains Monday as fears that Dubai might default on its debt receded. Tuesday marked the first trading session of December and it was a positive one. Buoyed by news that pending home sales increased almost 4% in October and that manufacturing activity expanded last month as measured by the ISM index, stocks rose for the second straight day on solid volume, yielding the Nasdaq Composite a 1.5% gain. After the next session left the major averages almost unchanged, stocks retreated late Thursday to finish in the red despite initial early gains brought by a better-than-expected reading on weekly jobless claims. Friday saw the release of the much-anticipated November employment report. The Labor Department said that only 11,000 payrolls were lost last month, far less than the 130,000 economists expected, and that the unemployment rate fell to 10% from a 26-year high of 10.2% in October. Not surprisingly, investors cheered the news by sending stocks higher at the open, but a sudden wave of profit taking hit to temporarily send the main indexes into negative territory. Stocks eventually recovered to finish in the black on strong volume, with the Nasdaq composite gaining 1.0% on the day.

The Russell 2000 (IWM), Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively gained 4.93%, 1.40% and 1.31% over the five-day span. With the resumption of the rally this week, all three ETFs are now back above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 2.64% gain 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. Please note that the World portfolio is being rebalanced today, as the current 4-week holding period is now over.

Our current Buy signal remains in effect.

Trend Timing School

A wild ride this past year as markets broadly return to normal

It is astounding how far we have come in one tumultuous year. Last December kicked off a dramatic change in mindset for investors who were focused on credit markets. Having become convinced that the Fed and U.S. Treasury would support credit markets at any cost, investors came out from hiding to begin a historic rally in bonds and high yield bonds in particular. Since that time, credit market spreads - the difference in yields between various bonds and U.S. Treasury bonds - have almost entirely returned to normal.

It was also about a year ago that the stock market wrestled with what it meant to put one of our largest companies, General Motors, into bankruptcy under the supervision of the federal government. Only nine months ago, investors feared that our biggest banks were so sickly that being nationalized might be the only solution. Remember the U.S. workforce losing over 700,000 jobs earlier in 2009? This mountain of problems led many to conclude that we were on the verge of another economic depression.

Yet, stock investors concluded differently. Perhaps realizing that these problems were not insurmountable and that the federal government's backstops would work, investors returned to stocks. At the beginning of the year, it was technology stocks that received the money. Arguing that tech firms, with their relatively small debt loads, were less exposed to fragile credit markets, investors found reason to tiptoe into tech stocks. Then came March, when stock investors finally came around to what bond investors already had determined back in December - namely that the federal government's backstop was working to restore confidence in markets. With the fear of bank nationalizations and further market crashes increasingly dispelled, weary investors gingerly bought beleaguered bank stocks, and stocks in general.

Chart 1 below shows the performance of the stock market sectors compared to the S&P 500. (So, a gain of 2% means 2% MORE than the S&P 500 over the time period). Financials were the clear leaders having been the most beaten-down while most other market sectors merely tracked the broader market (thus the relatively small gains when compared to the S&P 500).

Chart 1: Stock Market Sectors compared to S&P 500: 3/31/09 - 6/30/09



By the summer months, economic data and corporate earnings had begun to improve. Cyclical market sectors like materials, industrials, and consumer discretionary (read: retailers, restaurants, autos) joined financials in leading the market higher. Defensive sectors like healthcare, utilities, and consumer staples (read: companies that make things people buy regardless - i.e. Proctor & Gamble) fell behind as you expect in a budding economic recovery.

Chart 2: Stock Market Sectors compared to S&P 500: 7/1/09 - 9/29/09



The most recent quarter saw investors turn cautious. Whether just taking profits, unwilling to risk healthy gains, and/or continued angst over the true strength of the economic recovery, investors rotated out of the cyclical sectors and into the defensive market areas in recent months.

Chart 3: Stock Market Sectors compared to S&P 500: 9/30/09 - 11/30/09



Bond gains have largely flattened out leaving gold apparently the only game in town. Gold is often a winner when real interest rates are near zero. One can argue that it's fear of inflation and no doubt some investors find that justification attractive. Far more are just looking for a good return and see a quickly rising investment. They jump on board whatever train is moving. Inflation is very near zero and likely to remain under wraps for quite some time. With factory utilization around 70%, no pressure on wages from a workforce that would rather just have a paying job, rents falling as office and residential supply far exceeds demand and will for a good while, the only possible source of inflation comes from rising commodity prices. But oil, the most pervasive economic commodity, shows no signs of really taking off with inventories remaining engorged amisdt weak demand. The inflation trade may fall away with as much gusto as it arrived.

The only counter argument being the effects of a weakening U.S. dollar, which we have spoken about in a prior weekly. The U.S. dollar is just returning to normalcy after a year-long stint as the "asset of last resort; asset of safety". With low interest rates well into 2010, it's unlikely the dollar turns markedly higher anytime soon. However, that appears to be good news for stocks. Clearly, stocks like a weak dollar. Indeed, the dollar fell almost by half during the last bull market cycle (that's 2003-2007). (Somehow, today's fear-inducing commentators missed that sharp decline?)

Our philosophy is not to question markets, but to profit from them. Thus, our World approach continues to handsomely benefit from the nice move in commodity-driven countries such as Brazil. With a brief respite a few weeks ago, our TimingCube signal has been fully invested since April 1^st and the onset of what has turned into a new cyclical bull market. There are always doubts, always worries, and multitude of other reasons to question the market's trend. As we've said repeatedly in recent months, a cyclical bull market rests, bends, but is unlikely to break anytime soon. Recent market action suggests investors are unwilling to risk their gains and pursue more risk. Thus, they have moved toward cautious market sectors and large-cap stocks over riskier small-caps. Investors seem quick to take profits and are keeping the market contained these days. At some point, maybe this year, maybe early next, it is likely a news item will light the fire again and send the market moving upward. There is a mountain of cash sitting on the sidelines having let bleak commentaries scare some hand-wringing investors into believing that the economy was not recovering and that the market was wrong. This early in the cycle, it would be surprising to see any huge damage inflicted on the market. Of course, we are just expressing an opinion here, and the market could prove us wrong. That is why we exclusively rely on our unemotional Trend Timing model to identify turning points. It allows us to avoid the fretting and just concentrate on making money and building our wealth. Maybe the time to really worry is when those same sky-is-falling commentators start to smile .

FAQ of the Week

Question: What is "window dressing"?

Imagine you are a stockbroker or money manager. You are preparing to send the monthly, quarterly, or annual statement to a client. The client knows that gold has been hitting new highs. Would you rather show that client a statement that has them invested in gold? Or have to answer why you have chosen to miss out on what seems like a big gold rally? I'd say most people would choose the former; get some gold in that portfolio! Thus, the broker makes sure that there is at least a little gold in that portfolio by the time the month, quarter, or year ends. THAT is the proverbial "window dressing", making the portfolio look the way the broker thinks the client expects or wants it to look. The broker obviously cannot fix the value of the portfolio, or the gains or losses generated. But they can very quickly impact what investments do and do not show on the statements at period's end.

Warm wishes and until next week.

The TimingCube Staff