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

Market Update

The highlight of this week has been the big rebound of the US dollar against all the other major world currencies. Stocks were under pressure the first two days of the week as sentiment weakened following renewed concerns over the Dubai debt and the downgrading of Greece sovereign rating (later followed by a lower rating of Spain's debt too). Ben Bernanke's cautious speech on Monday where he reiterated that fed funds rates will remain low for an "extended period" did not manage to cheer up investors. Later mid-week, stocks reversed their course after the general concern over the solvency of some foreign countries started to dissipate, and also thanks to the unexpected narrowing of the trade deficit and a 300,000 decline in continuing jobless claims. The good fate of the US dollar had a negative impact on commodities as exemplified by the sharp fall of the price of gold which lost more than 8% from its peak a week ago. Crude Oil accelerated its decline too, moving below $70 per barrel. On a different topic, Friday will be remembered as the date when the House passed the long awaited bill aiming at restructuring the federal financial regulations, a major undertaking not seen since the New Deal.

All major indexes finished virtually flat for the week as the Russell 2000 (IWM) , Nasdaq 100 (QQQQ) and S&P 500 (SPY) respectively returned -0.41%, 0.02% and 0.09% over the five-day span. All three ETFs still remain above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio posted a 1.40% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of December 4, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

The importance of trading volume

Stock market prices are the variable that most analysts, investors, indicators and tools focus on to gauge the market and determine trends. Most technical analysis and charting techniques deal with price exclusively. In our brand of trend following there is another variable which in many respects is even more important than price, that is volume.

But before we get to volume we must step back and remember what moves the markets and how trends are made. Ultimately, what causes the stock market cycle is the economic cycle, but the direct link between the two are the institutional investors. For good or for bad, collectively they are the overwhelming force which changes the course of markets at important inflection points. If you can tell when the institutional crowd is on the move and which way it is headed, you know the market trend.

Institutional investors are financial organizations that share one common trait: they manage and invest assets on behalf of others. They include banks, insurance companies, mutual funds, pension funds and hedge funds, and are often referred to as "the big money" or "the smart money". The smart money moniker originates from the fact that big institutions have all the best data resources, analytic tools and armies of analysts at their disposal to make the right decisions. As a result, their professional money managers are more often than not the first to react to changes in the economy. Some dispute how sharp the smart money really is, but that is beside the point. They own the majority of shares of many publicly traded companies, and they account for most of the trading taking place on stock exchanges, at market turning points in particular, routinely above 70%. The stock market ups and downs being a product of supply and demand, it stands to reason that institutions and the large asset pools they command have an impact. They are the giants who form the market trends, and our Model endeavors to detect their moves.

Volume can be very accurate in showing the buying and selling activity of the big institutions that move the market. While our Model looks at a variety of indicators, it is primarily driven by the relationship between price and volume action. Major changes in market direction involve the massive shift in asset allocation by institutional investors and the resulting trading volume, while not all neatly concentrated in a few sessions, delivers identifiable patterns for the trained observer. Volume viewed over a period of time becomes an indicator of acceleration, momentum and money flow, all of which assist greatly in pinpointing trend changes.

There are numerous ways to look at volume with indicators such as the Chaikin Money Flow or the Percentage Volume Oscillator, but we particularly like using accumulations and distributions which quite frequently precede major price moves. An accumulation occurs when the price of a stock or index closes substantially higher AND with noticeably increased volume than the previous day. Conversely, a distribution takes place when the price of a stock or index closes substantially lower AND with noticeably increased volume than the previous day. We say "substantially" and "noticeably" to make sure we discard small variations as meaningless noise. Individual accumulations and distributions are not significant by themselves, but rather when they occur in succession over a given period of time. Alternating accumulations and distributions tend to cancel each other out as they signal conflicting trends.

Our Model is primarily fed with the price and volume data for the Nasdaq Composite index. Besides being a very broad and varied index it tends to have higher volatility than other indexes, another useful attribute for a trend indicator. This volatility accentuates the amplitude of both price and volume swings and in turn facilitates detecting changes in primary market trend.

Of course, just as institutional investors are not perfect and do not form a monolithic block all acting in concert, volume is not a perfect indicator either. Extracting patterns from the noise is always challenging. One factor which also mitigates the usefulness of trading volume as an indicator is that it is influenced by many things other than the moves made by the big money. For example there are seasonal patterns, holidays and special market events such as quadruple witching days. On such a day, stock index futures, stock index options, stock options and single stock futures all expire simultaneously, which causes the trading volume to be heavier than usual.

Regardless of whether institutional investors are smart enough to anticipate changes in the economy and the stock market, at TimingCube we are firm believers in their collective sway on the markets. Further, our years of research have led us to conclude that changes in trading volume, and the direction of price movements during these changes, are the most reliable telltale sign of what institutional investors are up to. Therefore, our Model primarily relies on volume as an "institutional investor detector" to recognize changes in the broad market trend, and issues Buy, Cash and Sell signals accordingly.

FAQ of the Week

Question: Which U.S. index ETF performs best?

We know the World ETF Ranking as our guide to the strongest world geographies, but we often forget that it also serves to rate the various segments of the U.S. market. Of the 31 ETFs we rank, 7 are U.S. based and they reflect the strength of the type of stocks in their respective index. For the portion of your assets you dedicate to the U.S. market, if any, past history favors the ETFs ranked the highest.

Currently the ranking shows the large caps in the Nasdaq 100 ETF (QQQQ) being the strongest.

Warm wishes and until next week.

The TimingCube Staff