Terminology

For those who are first time reading Trend Watch, please click here to understand the term definition and/or how to interpret it.

Part I - Market Comments

The market has basically remained flat to slightly down for 2 weeks since WATTS issued the short-term SELL signals. It's very typical that when a new trend just starts, the market always trades in a narrow range for a while.

From the viewpoint of the market price and volume information, it seems that the current status of the market is safe and nothing to worry about. But from the signal readings of WATTS, we know that the inner structure of the market is deteriorating and the downside pressure is gathering. Although the market looks peaceful by far and most market comments regard the recent market slip as a minor correction which will ends soon, WATTS clearly tells us that the downtrend is accelerating.

One more proof from WATTS is that it issued the intermediate-term SELL signals last week for both the Nasdaq Composite and S&P 500. A short-term signal could be reversed very soon in less than 3 weeks if it is a weak and short-lived trend but an intermediate-term signal is not so easy to get. An intermediate-term signal following a short-term signal is almost a guarantee to the market trend. The trend would keep on for a while and the investment based on the signal would be profitable, and sometimes very profitable.

Based on the fact, we suggest that all short-term investors lift the short position to 50% of the portfolio from 25% if you are an aggressive investor. For those who can't margin or can't get shares to short from their brokerage houses, we also have a suggestion.

There is a new type of fund called inverse index fund. It's an index fund but its performance is inversely correlated to the index it tracks. For example, the Potomac OTC Short Fund (ticker: POTSX) is a passively managed fund that seeks to provide the investment results that will inversely correspond to the performance of the Nasdaq 100. In other words, if the Nasdaq 100 is going down 5%, this fund will get 5% return, and vice versa. The minimum investment requirement to this fund is $10,000. Please refer to the section of Model Portfolio for the allocation percentage.

Please be aware of that if you are not an aggressive investor who can take more risk than the usual investors, shorting the market involves more risk and volatility. Holding 100% cash (or money market/short-term bond fund) would be good enough in a downward market. When the market loses 10% of its value from where you liquidate your long positions, you can buy more shares back at 10% discount.

The above chart clearly shows that the leading indicator has turned down since the beginning of August. This supports the SELL signals of WATTS. Another evidence that the market may have more downside to go is the technical trend indicator MACD of the leading indicator as shown in the chart has broken down its June's low. Which means that the leading indicator is going to decline more with a high possibility. Since the leading indicator leads the market up and down, the more the leading indicator declines, the more downside the market is going to have.

Anyway, as a trend follower and investor, we will just simply sit and enjoy watching the market moving along with the direction in favor of our wealth building.

Part II - Signal Update

WATTS Short-term Signal Status

Last Closed Short-term Signal

WATTS Intermediate-term Signal Status

Last Closed Intermediate-term Signal

WATTS Bottoming Zone Alert

Part III - Model Portfolio Update

Model Portfolio provides investor who doesn't know how to react to the WATTS's signal a simple guideline of how to manage his/her portfolio. If you are interested in following this guideline table, please Read This Important Note first.

Model Signal	Account Type	Equity Type	Most Aggressive Portfolio	Least Aggressive Portfolio
WATTS Short-term Signal	Stock Trading Account (Margin Account)	Stock & ETF	50% QQQQ Short, 50% cash	100% Cash
		Mutual Fund	None	None
	Stock Trading Account (Non Margin Account) Self-managed Retirement Accounts (IRAs, 403b...)	Stock & ETF	75% Cash	100% Cash
		Mutual Fund	25% POTSX	None
	Company-managed Retirement Account (401k)	Stock & ETF	Not Available	Not Available
		Mutual Fund	25% POTSX, 75% Money Market or Short-term Bond Fund	100% Money Market or Short-term Bond Fund
WATTS Intermediate-term Signal	Stock Trading Account (Margin Account)	Stock & ETF	0% QQQQ, 100% Cash	0% QQQQ, 0% SPY, 100% Cash
		Mutual Fund	None	None
	Stock Trading Account (Non Margin Account) Self-managed Retirement Accounts (IRAs, 403b...)	Stock & ETF	0% QQQQ, 100% Cash	0% QQQQ, 0% SPY, 100% Cash
		Mutual Fund	None	None
	Company-managed Retirement Account (401k)	Stock & ETF	Not Available	Not Available
		Mutual Fund	0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market	0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

1. Wednesday action to test bullish - Markets are at an inflection point:http://www.marketwatch.com/news/story.asp?guid={10a07c13-55cc-4157-a45b-1346e1cab888}&siteid=mktw&dist=SignInArchive&archive=true&param=archive&garden=&minisite=

As usual, we bring up a bullish market comment to compensate our bearish signal view. Well, the article may not be that bullish. More precisely, it's kind of mixed but slightly toward bull end. That's the problem we would like to point out. By the classic technical analysis, no matter how good you are doing, you still don't have a clear answer to where the market is going up to now. You have to wait for some important levels to be broken to bring you the evidence you need.

That's really bad not just because you have to wait for so long. That's because you are not only late but also don't know if the support breaking is a true or false signal. We mentioned this observation before - more and more false breaking in the market nowadays. The traditional technical analysis still works sometimes. You just don't know which time it works, which time it doesn't.

We are not against the technical analysis. We still use it and integrate it to our system analysis. It has its value, needless to say. We just wanted to point out that the technical analysis is a tool based on probability. When one tries to use it, one must be very careful.

2. Don't Get Crushed by Your Home: http://biz.yahoo.com/fool/050815/112413195705.html

We are not surprised that so many well-educated persons lacking of the fundamental financial knowledge. Just like what's presented in the article, even though one has a house and a mortgage, she still doesn't understand the ABC of a mortgage. We believe that our subscribers are financial literate. This article tells us that if and when the housing market is not doing well in the future, the side effect could be much worse than what we expect.