1. Summary
The Timing Outlook remains positive at 8.5. This is the 18th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally has lasted nine months. In that time, the S&P 500 has risen 62% without so much as an 8% correction along the way.
As I’ve said many times in the past, this market is news-driven. News comes mainly from two sources: (1) Government statistics and other reports about the economy (such as unemployment figures or the default last month by Dubai World on its loans). (2) Earnings and revenue reports from companies, with a focus on how figures compare to expectations and the companies’ own forward-looking statements. I call this “net news flow.” When the news is, on balance, good, the market tends to go up. When it is not good (such as the Dubai default), the market tends to go down. When it is net neutral, the market makes little moves up and down.
The Q3 earnings season just ended. The news was generally good. Around 75% of companies beat earnings expectations, and around 60% beat revenue expectations. Forward-looking statements were mixed, but overall sounded more positive than a quarter ago and much more positive than a year ago. In Q3, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year—encouraging rates of increase considering how bad things looked just a year ago.
Economic news in the past week was generally positive. Examples:
· The Conference Board’s consumer confidence report Monday took everyone by surprise, rising to a level not forecast by even the most optimistic. Most forecasters had expected a downturn.
· Retail sales improved 1.3% from October to November, almost double the gain that had been expected. On a year-over-year basis, retail sales were up 1.9%.
· And consumers did this without taking on additional debt. For the 9th consecutive month, the level of outstanding consumer debt (excluding real estate loans) decreased.
· For the first time in more than a year, the level of inventories held by businesses increased. While modest, October's 0.2% gain was a welcome surprise, given the expectation of another decrease. Furniture and accessories, electronics, and appliance stores led the way. Analysts cautiously interpret the rise in inventories as positive: Retailers are building depleted stocks in anticipation that they will be sold.
The fine print: The market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/11/09)
Last Outlook (11/29/09): 8.5 (positive)
S&P 500 last time (11/29/09): 1091
S&P 500 now: 1106 Change: +1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1106 Change YTD: +22%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1106 Change since 3/9/09: +63%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: Unchanged, no new report since last time. Index has had seven consecutive monthly increases. Positive. +10
· Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
· S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is 20.0. This is in the neutral territory of 17.4 to 21.2. +5
· Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at exactly 1.00 Thus the market is “fairly valued” by this indicator. (Interesting historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
· S&P 500 Short Term Technical Trend: The S&P 500 chart is currently in its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. For a couple of days last week, the index did drop below its 20-day SMA, but rose back above it on Thursday and Friday. Positive. +10
· S&P 500 Medium Term Technical Trend: Positive. +10
· DJIA Short Term Technical Trend: Exactly the same situation as with the S&P 500, including the two-day drop below the 20-day SMA. Positive. +10
· DJIA Medium Term Technical Trend: Positive. +10
· NASDAQ Short Term Technical Trend: The NASDAQ chart displays essentially the same pattern as the other two. Positive. +5
· NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE
Sunday, December 13, 2009
Tuesday, December 8, 2009
The Top 40 Dividend Stocks for 2010--Getting Closer to Publication
Preparing the new edition of THE TOP 40 DIVIDEND STOCKS is a little like the NCAA basketball tournament. First, the Selection Committee--that would be me--must decide who is even eligible. Theoretically, all stocks, worldwide, are eligible. But because this is a book on dividend investing, the very first step is to select a starting universe of dividend-paying companies with half-decent records. I did that a couple months ago, ending up with about 700 companies. That's my starting universe.
Next, I put those companies through what I call "Stage 1" testing. I applied five ground-rule requirements. Each stock must have:
--Increased its dividend distribution in each of past 5 years.
--Current yield of at least 3% (2.5% is allowed for stocks that have raised their dividends at least 20 years in a row).
--Positive return in 3 of past 5 years.
--Total return over past 5 years of at least even.
--3-year percentage increase in dividend payout of at least 16% total (12% is allowed for members of the 20-year club).
Those five simple tests (eased a little bit so as not to lose borderline candidates) reduced the starting universe of 700 down to 169 stocks. Then in November came Stage 2. I appplied the same five tests to those 169 stocks, with no easing this time. The tests were applied rigorously. That got the number down to 108. These are the Semi-Finalists, sort of like the Sweet 16 round of the basketball tournament.
The December task for the Selection Committee (me) is to reduce that list again to what I call the Finalists. I am working on that right now. What I do is "score" those stocks using a partial version of the complete Easy-Rate system. This allows me to eliminate those stocks that, while they may be very good investments, are not the championship calibre of the Top 40. I try to identify 50 to 60 Finalists. I do this by recording the score for each of the stocks, then sorting the list by score. The stocks sort themselves out, from obvious winners to stocks that may now even fall short of the original tests from the first stage. For example, a stock's rising price may have driven its yield below the acceptable minimum.
I will take a first shot at identifying the Top 40 by the end of December. But the final selection will take place in the first week of January, when I have complete 2009 data to work with. By then, I will have written all of the Finalists' Stories and prepared their Easy-Rate sheets that will appear in the book. One final pass through the latest data will allow me to make any necessary changes to my first crack at the Top 40. When I know exactly who the winners are, I will update all their Easy-Rate sheets and combine them with the text.
Ah, the text. Throughout the year, I have been collecting information and tidbits to update the text. I start with last year's text, of course, but a good portion of it--more than 25%--gets changed for the new edition. New statistics and charts are added. The scoring system has been further refined this year, to place a little more emphasis on high-yielding stocks. I completed a first draft of the new text in November. Later this month, after I have identified the Finalists as explained above, I will go through the text again and complete the second draft.
Just as with the Top 40 stocks themselves, I will make one final pass through the text in January, with complete 2009 information available. Tables will be prepared showing how 2009's Top 40 stocks did and presenting the 2010 Top 40 in a variety of ways for easy access and use.
Finally, when they are merged, the text, the Top 40 list and its tables, plus an Easy-Rate sheet for each stock, will form the complete e-book. I hope to launch it on or about January 20. And then, I'm going on vacation!
Next, I put those companies through what I call "Stage 1" testing. I applied five ground-rule requirements. Each stock must have:
--Increased its dividend distribution in each of past 5 years.
--Current yield of at least 3% (2.5% is allowed for stocks that have raised their dividends at least 20 years in a row).
--Positive return in 3 of past 5 years.
--Total return over past 5 years of at least even.
--3-year percentage increase in dividend payout of at least 16% total (12% is allowed for members of the 20-year club).
Those five simple tests (eased a little bit so as not to lose borderline candidates) reduced the starting universe of 700 down to 169 stocks. Then in November came Stage 2. I appplied the same five tests to those 169 stocks, with no easing this time. The tests were applied rigorously. That got the number down to 108. These are the Semi-Finalists, sort of like the Sweet 16 round of the basketball tournament.
The December task for the Selection Committee (me) is to reduce that list again to what I call the Finalists. I am working on that right now. What I do is "score" those stocks using a partial version of the complete Easy-Rate system. This allows me to eliminate those stocks that, while they may be very good investments, are not the championship calibre of the Top 40. I try to identify 50 to 60 Finalists. I do this by recording the score for each of the stocks, then sorting the list by score. The stocks sort themselves out, from obvious winners to stocks that may now even fall short of the original tests from the first stage. For example, a stock's rising price may have driven its yield below the acceptable minimum.
I will take a first shot at identifying the Top 40 by the end of December. But the final selection will take place in the first week of January, when I have complete 2009 data to work with. By then, I will have written all of the Finalists' Stories and prepared their Easy-Rate sheets that will appear in the book. One final pass through the latest data will allow me to make any necessary changes to my first crack at the Top 40. When I know exactly who the winners are, I will update all their Easy-Rate sheets and combine them with the text.
Ah, the text. Throughout the year, I have been collecting information and tidbits to update the text. I start with last year's text, of course, but a good portion of it--more than 25%--gets changed for the new edition. New statistics and charts are added. The scoring system has been further refined this year, to place a little more emphasis on high-yielding stocks. I completed a first draft of the new text in November. Later this month, after I have identified the Finalists as explained above, I will go through the text again and complete the second draft.
Just as with the Top 40 stocks themselves, I will make one final pass through the text in January, with complete 2009 information available. Tables will be prepared showing how 2009's Top 40 stocks did and presenting the 2010 Top 40 in a variety of ways for easy access and use.
Finally, when they are merged, the text, the Top 40 list and its tables, plus an Easy-Rate sheet for each stock, will form the complete e-book. I hope to launch it on or about January 20. And then, I'm going on vacation!
Sunday, November 29, 2009
Timing Outlook Remains Positive
1. Summary
After a sharp rise in early November, the market has been going sideways, driven as usual by the news of the day. Last Friday, the biggest news—that Dubai has asked for a moratorium on its debt payments—took the market down significantly. But on other days, positive news has pulled the market up. The Timing Outlook remains positive at 8.5. This is the 17th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally is now well into its ninth month. In that time, the S&P 500 has risen 61% without so much as an 8% correction along the way.
The Dubai news spooked investors, as Dubai has about $80 billion in loans outstanding. It turns out that Dubai has little oil, unlike most of its neighbors, so it has been borrowing to fund its incredible building spree. You have probably seen pictures of the world’s tallest building, the series of man-made islands, and other wonders. As I said last time, the Dubai story, which came out of nowhere, is exactly the kind of news that seems to have been moving the market the entire time.
Some other recent news has been more positive.
--In the third quarter, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year, rather startling rates of increase considering how bad things looked just a year ago.
-- The Conference Board’s consumer confidence report on Monday took everyone by surprise, rising to a level not forecast by even the most optimistic forecasters. Most had expected a downturn in confidence.
--The early reports on Black Friday's shopping have been generally positive. Hard numbers will be released later in the week.
--As of the end of last week, 480 of the S&P 500's companies had reported their results. Per Thomson Reuters, 80% of them exceeded Wall Street’s consensus profit expectations. (Historically, the rate is about 60%.)
--And the earnings recovery is now accompanied by good news on the revenue front. Nearly 60% of companies beat analysts’ revenue expectations for the quarter.
I always feel the need to repeat the fine print: The market can turn on a dime. Sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/27/09)
Last Outlook (11/13/09): 9.0 (positive)
S&P 500 last time (11/13/09): 1093
S&P 500 now: 1091 Change: -0%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1091 Change YTD: +21%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1091 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: Last monthly report showed seventh consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E is not available on the Morningstar site nor several other sites I have checked. Will presume that it has not changed significantly since last time. Neutral. +5
--Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at 0.98, compared to 1.0 last time. Being within 10% of 1.0, the market is “fairly valued” by this indicator. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: Two of the three charts (S&P 500 and Dow) remain in their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. The market’s sideways movement since last time has tightened up the four values, but given the configuration, the technical indicators for these two indexes remain positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: The NASDAQ chart has tightened up enough that the index’s value, its 20-day SMA, and its 50-day SMA are practically identical. That drops this indicator to neutral. +5
--NASDAQ Medium Term Technical Trend: This longer-term indicator remains positive, as the index and the two shorter moving averages all remain well above the 200-day SMA. +10
TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE
After a sharp rise in early November, the market has been going sideways, driven as usual by the news of the day. Last Friday, the biggest news—that Dubai has asked for a moratorium on its debt payments—took the market down significantly. But on other days, positive news has pulled the market up. The Timing Outlook remains positive at 8.5. This is the 17th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally is now well into its ninth month. In that time, the S&P 500 has risen 61% without so much as an 8% correction along the way.
The Dubai news spooked investors, as Dubai has about $80 billion in loans outstanding. It turns out that Dubai has little oil, unlike most of its neighbors, so it has been borrowing to fund its incredible building spree. You have probably seen pictures of the world’s tallest building, the series of man-made islands, and other wonders. As I said last time, the Dubai story, which came out of nowhere, is exactly the kind of news that seems to have been moving the market the entire time.
Some other recent news has been more positive.
--In the third quarter, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year, rather startling rates of increase considering how bad things looked just a year ago.
-- The Conference Board’s consumer confidence report on Monday took everyone by surprise, rising to a level not forecast by even the most optimistic forecasters. Most had expected a downturn in confidence.
--The early reports on Black Friday's shopping have been generally positive. Hard numbers will be released later in the week.
--As of the end of last week, 480 of the S&P 500's companies had reported their results. Per Thomson Reuters, 80% of them exceeded Wall Street’s consensus profit expectations. (Historically, the rate is about 60%.)
--And the earnings recovery is now accompanied by good news on the revenue front. Nearly 60% of companies beat analysts’ revenue expectations for the quarter.
I always feel the need to repeat the fine print: The market can turn on a dime. Sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/27/09)
Last Outlook (11/13/09): 9.0 (positive)
S&P 500 last time (11/13/09): 1093
S&P 500 now: 1091 Change: -0%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1091 Change YTD: +21%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1091 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: Last monthly report showed seventh consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E is not available on the Morningstar site nor several other sites I have checked. Will presume that it has not changed significantly since last time. Neutral. +5
--Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at 0.98, compared to 1.0 last time. Being within 10% of 1.0, the market is “fairly valued” by this indicator. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: Two of the three charts (S&P 500 and Dow) remain in their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. The market’s sideways movement since last time has tightened up the four values, but given the configuration, the technical indicators for these two indexes remain positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: The NASDAQ chart has tightened up enough that the index’s value, its 20-day SMA, and its 50-day SMA are practically identical. That drops this indicator to neutral. +5
--NASDAQ Medium Term Technical Trend: This longer-term indicator remains positive, as the index and the two shorter moving averages all remain well above the 200-day SMA. +10
TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE
Monday, November 16, 2009
Market's Up, So Is Timing Outlook
(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its best format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)
1. Summary
As soon as November started, the market turned upward, and it has gone up on 8 of 11 trading days this month through last Friday. The backwards slide in the second half of October didn’t amount to much after all.
The Timing Outlook returns to a very positive 9.0. This is the 16th consecutive positive reading, essentially coinciding with the market rally that began on March 10 and continues now into its ninth month without so much as a 10% correction along the way. I hope you have been enjoying the ride.
As I write this on Monday morning, the market is rallying today, apparently based on good news from Japan concerning their economy’s growth rate. This is exactly the kind of news that, under my “net news flow” theory, seems to have been moving the market the entire time. The fact that about 80% of companies that have reported earnings so far have beaten their estimates has helped immensely.
That said, the market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on your long stock positions. Excluded from this, perhaps, might be those stocks you hold for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/13/09)
Last Outlook (10/28/09): 6.0 (positive)
S&P 500 last time (11/13/09): 1043
S&P 500 now: 1093 Change: +5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1093 Change YTD: +21%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1093 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: Next report is due Thursday. Last report showed sixth consecutive monthly increase. Positive. +10
1. Summary
As soon as November started, the market turned upward, and it has gone up on 8 of 11 trading days this month through last Friday. The backwards slide in the second half of October didn’t amount to much after all.
The Timing Outlook returns to a very positive 9.0. This is the 16th consecutive positive reading, essentially coinciding with the market rally that began on March 10 and continues now into its ninth month without so much as a 10% correction along the way. I hope you have been enjoying the ride.
As I write this on Monday morning, the market is rallying today, apparently based on good news from Japan concerning their economy’s growth rate. This is exactly the kind of news that, under my “net news flow” theory, seems to have been moving the market the entire time. The fact that about 80% of companies that have reported earnings so far have beaten their estimates has helped immensely.
That said, the market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on your long stock positions. Excluded from this, perhaps, might be those stocks you hold for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/13/09)
Last Outlook (10/28/09): 6.0 (positive)
S&P 500 last time (11/13/09): 1043
S&P 500 now: 1093 Change: +5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1093 Change YTD: +21%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1093 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: Next report is due Thursday. Last report showed sixth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The S&P 500’s P/E rose since last time from 19.3 to 20.6, remaining in neutral territory. As an interesting side note, the P/E’s rise in percentage terms is 7%, compared to the S&P 500’s rise of 5%. This suggests that the market’s rise is mostly based on improving earnings, but also partly based on more positive sentiment toward the market, what some these days are calling “appetite for risk.” Neutral. +5
--Morningstar’s Market Valuation Graph. Since late July, this indicator has been meandering small distances around 1.0. Today, it is exactly 1.0, meaning “fairly valued.” (Historical data: All-time low = 0.55 on 11/20/08 during the last bear market. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: The steady trend up in November has returned all three charts to their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. All the technical indicators are therefore positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: Positive. +10
--NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
Friday, November 6, 2009
"TOP 40 DIVIDEND STOCKS FOR 2010" Update
As I reported a few weeks ago, I have begun work on THE TOP 40 DIVIDEND STOCKS FOR 2010, my annual e-book for investors working on a dividend strategy. My hope this year is to release it in January, or three months sooner than 2009's and five months sooner than 2008's.
I have completed my first pass through all 700 original candidates. To refresh your memory, in the first pass I apply five requirements to each candidate. The five requirements are:
(1) Yield must be > 3.0%. For stocks that have increased their dividend for at least 20 years in a row, the minimum yield is 2.5%. For REITs, the minimum yield is 5.0%, to make up for the increased taxability of distributions by REITs compared to ordinary dividends.
(2) The 3-year total percentage increase in the dividend must be at least 16% (or about 5% annualized). For stocks that have raised their dividends for 20 or more years in a row, the three-year increase must be at least 12% (or about 4% annualized).
(3) The stock must have delivered a positive return in 3 of the past 5 years, including year-to-date in 2009.
(4) The total return for the stock over the past 5 years must be >0%. (For comparison, the S&P 500's return over the same time period has been about 2.6%.)
(5) The stock must have raised its dividend in each of the past 5 years.
During the first pass, I "eased" some of the foregoing requirements. The reason is that I was working with partial 2009 numbers, so I wanted to give stocks every fair opportunity to pass through to the next stage of testing. So, for example, I eased the 3.0% dividend requirement to 2.8% for the first pass. By the end of the year, a stock with a 2.8% yield might have a 3% yield.
Here are the results:
--95 stocks passed the first set of tests without missing any, although as just stated, some of the requirements were "eased" from what they will eventually be. I put these 95 stocks into what I call Group A.
--74 stocks did not pass all of the screens, but they fell just short in a single category. Again, mindful of the fact that I am doing this work prior to the end of 2009, I placed these 74 stocks into Group B...they will get another chance.
So a total of 169 stocks passed their way into the next stage of testing. Another way of looking at this is that more than 500 stocks have been eliminated from further consideration. I love to eliminate stocks. I think it goes back to my horse-race betting days. In handicapping a race, I always tried to eliminate every horse that appeared to have no chance to win the race. (Believe me, in the average horse race, some horses can barely trot, let alone compete.) Once I'd done that, I felt like I was gazing on the 3 or 4 legitimate contenders to win the race. It cut out a lot of further work.
Dividend stocks are the same way. I have now eliminated the halt, the lame, and the other stocks that have no chance of being selected as one of the Top 40. I don't have to do any more analysis on the eliminated stocks. I can focus on the real contenders.
On Monday, I will start to put Group A and Group B through the same 5 tests. This time there will be no "easing." The tests will be applied rigidly to select the stocks that will be allowed to pass to stage-3 testing. That said, I will make selective exceptions for a few stocks, based on unusual factors specific to individual companies. There will be just a few of these. Based on past experience, when I am done with stage-2 testing, about 75 stocks will have survived. To them, I will apply the full Easy-Rate scoring system, let them sort themselves out, and thus whittle the list down to the Top 40.
Sidebar: Of 2009's Top 40 Dividend Stocks, 29 passed through to Group A, and another 7 made it into Group B. That's good news: It means that 36 of 2009's Top 40 stocks "did good" in a year when, as you have probably read, dividend stocks in general got scalped, with many cutting their dividends, skipping a payment, or even eliminating dividends altogether. Of the remaining 4, two did not pass because their dividend yields have become too low. That's also good, because it means their prices went up enough to push their yields down...yields and prices move inversely to each other.
I have completed my first pass through all 700 original candidates. To refresh your memory, in the first pass I apply five requirements to each candidate. The five requirements are:
(1) Yield must be > 3.0%. For stocks that have increased their dividend for at least 20 years in a row, the minimum yield is 2.5%. For REITs, the minimum yield is 5.0%, to make up for the increased taxability of distributions by REITs compared to ordinary dividends.
(2) The 3-year total percentage increase in the dividend must be at least 16% (or about 5% annualized). For stocks that have raised their dividends for 20 or more years in a row, the three-year increase must be at least 12% (or about 4% annualized).
(3) The stock must have delivered a positive return in 3 of the past 5 years, including year-to-date in 2009.
(4) The total return for the stock over the past 5 years must be >0%. (For comparison, the S&P 500's return over the same time period has been about 2.6%.)
(5) The stock must have raised its dividend in each of the past 5 years.
During the first pass, I "eased" some of the foregoing requirements. The reason is that I was working with partial 2009 numbers, so I wanted to give stocks every fair opportunity to pass through to the next stage of testing. So, for example, I eased the 3.0% dividend requirement to 2.8% for the first pass. By the end of the year, a stock with a 2.8% yield might have a 3% yield.
Here are the results:
--95 stocks passed the first set of tests without missing any, although as just stated, some of the requirements were "eased" from what they will eventually be. I put these 95 stocks into what I call Group A.
--74 stocks did not pass all of the screens, but they fell just short in a single category. Again, mindful of the fact that I am doing this work prior to the end of 2009, I placed these 74 stocks into Group B...they will get another chance.
So a total of 169 stocks passed their way into the next stage of testing. Another way of looking at this is that more than 500 stocks have been eliminated from further consideration. I love to eliminate stocks. I think it goes back to my horse-race betting days. In handicapping a race, I always tried to eliminate every horse that appeared to have no chance to win the race. (Believe me, in the average horse race, some horses can barely trot, let alone compete.) Once I'd done that, I felt like I was gazing on the 3 or 4 legitimate contenders to win the race. It cut out a lot of further work.
Dividend stocks are the same way. I have now eliminated the halt, the lame, and the other stocks that have no chance of being selected as one of the Top 40. I don't have to do any more analysis on the eliminated stocks. I can focus on the real contenders.
On Monday, I will start to put Group A and Group B through the same 5 tests. This time there will be no "easing." The tests will be applied rigidly to select the stocks that will be allowed to pass to stage-3 testing. That said, I will make selective exceptions for a few stocks, based on unusual factors specific to individual companies. There will be just a few of these. Based on past experience, when I am done with stage-2 testing, about 75 stocks will have survived. To them, I will apply the full Easy-Rate scoring system, let them sort themselves out, and thus whittle the list down to the Top 40.
Sidebar: Of 2009's Top 40 Dividend Stocks, 29 passed through to Group A, and another 7 made it into Group B. That's good news: It means that 36 of 2009's Top 40 stocks "did good" in a year when, as you have probably read, dividend stocks in general got scalped, with many cutting their dividends, skipping a payment, or even eliminating dividends altogether. Of the remaining 4, two did not pass because their dividend yields have become too low. That's also good, because it means their prices went up enough to push their yields down...yields and prices move inversely to each other.
Wednesday, October 28, 2009
Timing Outlook Special Edition: Getting Shaky?
1. Summary
The markets have sold off on 6 of the last 7 trading days, including the last 4 in a row, so this is a special edition of the Timing Outlook to assess the damage.
While the Timing Outlook is still (by definition) in positive territory, its value is now 6.0, down from 9.0 less than two weeks ago. While this is the 15th consecutive positive reading, it is hard to ignore the sharp declines in both the market and the Timing Outlook. In 7 trading days, the market has lost 5% of its value. In less than 2 weeks, the Timing Outlook has dropped by a third.
We are heavily into earnings season, and while positive earnings surprises have been prevalent, revenue and outlook surprises have been less so. Further, economic data has been sounding less positive. For example, the most recent survey of consumer confidence fell for the second month in a row. Under my “net news flow” theory, I think that market participants are voting with their dollars and saying the news hasn’t been good enough the last week or two. As stated last time, an extended string of bad news on earnings and/or revenues and/or corporate outlooks and/or economic fronts—such as employment—would probably kill the rally.
I am not ready to declare the rally dead yet, but it bears watching. Just as 3-ish weeks of generally rising prices in March heralded the beginning of this extended and sharp rally, 3-ish weeks of generally falling prices might signal that it has come to a close. We’ve had a couple other similar market drops along the way during this rally, such as in early July (when the S&P 500 fell back 7%), and the market recovered from them and resumed its upward action. It remains to be seen whether this recent negative action is just a short-term interruption or will prove to be longer-lasting.
As always, sell-stops or some other form of downside protection is recommended on your long stock positions (excluding, perhaps, those stocks you hold as dividend-producing investments).
2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday 10/28/09)
Last Outlook (10/19/09): 9.0 (positive)
S&P 500 last time (10/19/09): 1088
S&P 500 now: 1043 Change: -4%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1043 Change YTD: +16%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1043 Change since 3/9/09: +54%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report last Thursday went up for the sixth consecutive month. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: The S&P 500’s P/E dropped slightly since last time from 19.5 to 19.3, remaining in neutral territory. As a reminder, I use Morningstar as the source for the P/E ratio based on trailing operating earnings, and I use three "bands" by adding and subtracting 10% from the recent-years’ average (19.3) to allow room for normal market volatility and noise. Thus, P/E < 4 =" Positive" 1 =" Neutral"> 21.2 = Negative = 0 points. At 19.3, therefore, this indicator is neutral. +5
--Morningstar’s Market Valuation Graph dropped slightly from 1.03 to 0.99. The graph continues to meander around 1.0 (which would mean the market is “fairly valued” under Morningstar’s system). The value this time stays within the neutral range of 0.90 to 1.10. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: The recent sell-off has pulled the index below both its 20-day and 50-day simple moving averages (SMA), dropping this short-term indicator to ambiguous from positive: 20-day SMA > 50-day SMA > Index. +5
--S&P 500 Medium Term Technical Trend: This indicator, which uses the two longer SMAs (50-day and 200-day) is also rendered ambiguous by the index falling below the 50-day SMA. We have: 50-day SMA > Index > 200-day SMA. +5
--DJIA Short Term Technical Trend: The DJIA shows a little different pattern, as the index is still above the 50-day SMA, although it has dropped below the 20-day SMA. Nevertheless, that makes this chart ambiguous. +5
--DJIA Medium Term Technical Trend: This indicator stays positive, as the index has not fallen below its 50-day SMA. +10
--NASDAQ Short Term Technical Trend: The NASDAQ displays a similar pattern to the S&P 500 chart: The index has fallen below both its 20-day and 50-day SMAs. +5
--NASDAQ Medium Term Technical Trend: Same as S&P 500, ambiguous. +5
TOTAL POINTS: 60 NEW READING: 60 / 10 = 6.0 = POSITIVE
The markets have sold off on 6 of the last 7 trading days, including the last 4 in a row, so this is a special edition of the Timing Outlook to assess the damage.
While the Timing Outlook is still (by definition) in positive territory, its value is now 6.0, down from 9.0 less than two weeks ago. While this is the 15th consecutive positive reading, it is hard to ignore the sharp declines in both the market and the Timing Outlook. In 7 trading days, the market has lost 5% of its value. In less than 2 weeks, the Timing Outlook has dropped by a third.
We are heavily into earnings season, and while positive earnings surprises have been prevalent, revenue and outlook surprises have been less so. Further, economic data has been sounding less positive. For example, the most recent survey of consumer confidence fell for the second month in a row. Under my “net news flow” theory, I think that market participants are voting with their dollars and saying the news hasn’t been good enough the last week or two. As stated last time, an extended string of bad news on earnings and/or revenues and/or corporate outlooks and/or economic fronts—such as employment—would probably kill the rally.
I am not ready to declare the rally dead yet, but it bears watching. Just as 3-ish weeks of generally rising prices in March heralded the beginning of this extended and sharp rally, 3-ish weeks of generally falling prices might signal that it has come to a close. We’ve had a couple other similar market drops along the way during this rally, such as in early July (when the S&P 500 fell back 7%), and the market recovered from them and resumed its upward action. It remains to be seen whether this recent negative action is just a short-term interruption or will prove to be longer-lasting.
As always, sell-stops or some other form of downside protection is recommended on your long stock positions (excluding, perhaps, those stocks you hold as dividend-producing investments).
2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday 10/28/09)
Last Outlook (10/19/09): 9.0 (positive)
S&P 500 last time (10/19/09): 1088
S&P 500 now: 1043 Change: -4%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1043 Change YTD: +16%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1043 Change since 3/9/09: +54%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report last Thursday went up for the sixth consecutive month. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: The S&P 500’s P/E dropped slightly since last time from 19.5 to 19.3, remaining in neutral territory. As a reminder, I use Morningstar as the source for the P/E ratio based on trailing operating earnings, and I use three "bands" by adding and subtracting 10% from the recent-years’ average (19.3) to allow room for normal market volatility and noise. Thus, P/E < 4 =" Positive" 1 =" Neutral"> 21.2 = Negative = 0 points. At 19.3, therefore, this indicator is neutral. +5
--Morningstar’s Market Valuation Graph dropped slightly from 1.03 to 0.99. The graph continues to meander around 1.0 (which would mean the market is “fairly valued” under Morningstar’s system). The value this time stays within the neutral range of 0.90 to 1.10. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: The recent sell-off has pulled the index below both its 20-day and 50-day simple moving averages (SMA), dropping this short-term indicator to ambiguous from positive: 20-day SMA > 50-day SMA > Index. +5
--S&P 500 Medium Term Technical Trend: This indicator, which uses the two longer SMAs (50-day and 200-day) is also rendered ambiguous by the index falling below the 50-day SMA. We have: 50-day SMA > Index > 200-day SMA. +5
--DJIA Short Term Technical Trend: The DJIA shows a little different pattern, as the index is still above the 50-day SMA, although it has dropped below the 20-day SMA. Nevertheless, that makes this chart ambiguous. +5
--DJIA Medium Term Technical Trend: This indicator stays positive, as the index has not fallen below its 50-day SMA. +10
--NASDAQ Short Term Technical Trend: The NASDAQ displays a similar pattern to the S&P 500 chart: The index has fallen below both its 20-day and 50-day SMAs. +5
--NASDAQ Medium Term Technical Trend: Same as S&P 500, ambiguous. +5
TOTAL POINTS: 60 NEW READING: 60 / 10 = 6.0 = POSITIVE
Sunday, October 25, 2009
Topped Out? Number 2 In a Series
This is the second "Topped Out?" article. The idea is to explore whether the market rally has ended. The questions now are, Has the market run-up ended for awhile? Is it time to take profits off the table, to go to cash, or to go short? Should we go into the woods where the bears hang out?
This has been a great rally: The S&P 500 is up 60% since March 9. But it has gone backward in two of the past four weeks, including -1% last week. Hence this second article in the series.
As I have stated many times, this has been a sentiment-driven bull market. While it has been more powerful than most, in many ways it is a garden-variety recession bull. Of the previous nine recessions before the current one, the stock market bottomed out and started back up several months in advance of the end of the recession. That's what happened here, starting in March. Why? Because investors were looking forward with hope to the end of the recession and the return of an expanding economy.
I use the term "net news flow" to explain what stock buyers have been reacting to during this bull market. They have been reacting to signs--indications--that the economy might be pulling out of the recession. Last March, most any piece of economic data that was "less bad" could be interpreted positively, that the downward economic cycle was losing steam and bottoming out--a necessary precondition to the economy turning back upward.
By now, most indicators have slowed their descent significantly, and some have turned upwards. For example, on Thursday the Conference Board reported that its Index of Leading Economic Indicators rose for the sixth straight month. I track several important indicators in my bi-weekly Timing Outlook reports. Those reports have been positive since March, suggesting that the short-term direction of the market would be up.
In the Q2 earnings season in July-August, about 75% of companies reported earnings that were "positive surprises." That means that they exceeded the consensus expectations of "The Street" (that is, the consensus expectations of stock analysts). All of the positive surprises contributed greatly to a positive net news flow that helped the rally along. In most cases, the Q2 reports did not reflect growing revenue or earnings compared to a year ago, or even to the previous quarter. They simply reflected better-than-expected earnings, a low hurdle to clear. Most of the companies cleared it via fast cost-cutting, including layoffs and hiring freezes.
My thought on the market's reaction to the Q2 earnings reports was that investors were giving companies a "free pass" on revenue improvements. You cannot improve earnings forever by cutting costs. My expectation was that investors would not be so lenient the next time around: They would be looking not only for positive earnings surprises, but also for positive revenue surprises and optimistic forward-looking statements.
Lots of people are skeptical about the sustainablitily of the rally. They are uneasy about its sharpness (one of the strongest short rallies in history), unconvinced that it is supported by real economic improvements, dismayed by the seemingly intractable unemployment problem, and disgusted with government involvement via TARP and other bailout programs. They think a correction (a short-term 10% drop) is inevitable, if not an all-out crash if we get a "double-dip" recession.
The Q3 earnings reports started flowing about two weeks ago. So back to the question: How is the net news flow? According to Bloomberg, Q3 earnings are running very positively. By their count, through last Friday, 85% of companies have beaten consensus expectations. Perhaps more importantly, revenues being reported are better than expected, as 65% of companies have beaten consensus expectations for revenues. And a fair number of companies have included positive forward-looking statements on both earnings and revenue.
How to interpret all this? I would say the news flow is slightly positive, maybe a 6 on a scale of 10. Not blowing the doors off, but perhaps good enough to sustain this rally for a while longer.
Frequent readers know that I already have my exit strategy in place for my Capital Appreciation Portfolio. It has three holdings: SPY (the ETF that tracks the S&P 500); QQQQ (the ETF that tracks the NASDAQ); and IBM. The two ETFs are protected by 8% trailing sell-stops that I update each weekend. I have a 10% trailing sell-stop under IBM.
I am comfortable with my sell-stops. If the market turns downward for a prolonged period of time, they will get me out with most of my profits intact. I suggest that readers protect their long positions in a similar fashion. At any rate, it is too soon to declare that the market has topped out. If the market struggles for a couple more weeks, or my stops get triggered, I'll be back with another report.
This has been a great rally: The S&P 500 is up 60% since March 9. But it has gone backward in two of the past four weeks, including -1% last week. Hence this second article in the series.
As I have stated many times, this has been a sentiment-driven bull market. While it has been more powerful than most, in many ways it is a garden-variety recession bull. Of the previous nine recessions before the current one, the stock market bottomed out and started back up several months in advance of the end of the recession. That's what happened here, starting in March. Why? Because investors were looking forward with hope to the end of the recession and the return of an expanding economy.
I use the term "net news flow" to explain what stock buyers have been reacting to during this bull market. They have been reacting to signs--indications--that the economy might be pulling out of the recession. Last March, most any piece of economic data that was "less bad" could be interpreted positively, that the downward economic cycle was losing steam and bottoming out--a necessary precondition to the economy turning back upward.
By now, most indicators have slowed their descent significantly, and some have turned upwards. For example, on Thursday the Conference Board reported that its Index of Leading Economic Indicators rose for the sixth straight month. I track several important indicators in my bi-weekly Timing Outlook reports. Those reports have been positive since March, suggesting that the short-term direction of the market would be up.
In the Q2 earnings season in July-August, about 75% of companies reported earnings that were "positive surprises." That means that they exceeded the consensus expectations of "The Street" (that is, the consensus expectations of stock analysts). All of the positive surprises contributed greatly to a positive net news flow that helped the rally along. In most cases, the Q2 reports did not reflect growing revenue or earnings compared to a year ago, or even to the previous quarter. They simply reflected better-than-expected earnings, a low hurdle to clear. Most of the companies cleared it via fast cost-cutting, including layoffs and hiring freezes.
My thought on the market's reaction to the Q2 earnings reports was that investors were giving companies a "free pass" on revenue improvements. You cannot improve earnings forever by cutting costs. My expectation was that investors would not be so lenient the next time around: They would be looking not only for positive earnings surprises, but also for positive revenue surprises and optimistic forward-looking statements.
Lots of people are skeptical about the sustainablitily of the rally. They are uneasy about its sharpness (one of the strongest short rallies in history), unconvinced that it is supported by real economic improvements, dismayed by the seemingly intractable unemployment problem, and disgusted with government involvement via TARP and other bailout programs. They think a correction (a short-term 10% drop) is inevitable, if not an all-out crash if we get a "double-dip" recession.
The Q3 earnings reports started flowing about two weeks ago. So back to the question: How is the net news flow? According to Bloomberg, Q3 earnings are running very positively. By their count, through last Friday, 85% of companies have beaten consensus expectations. Perhaps more importantly, revenues being reported are better than expected, as 65% of companies have beaten consensus expectations for revenues. And a fair number of companies have included positive forward-looking statements on both earnings and revenue.
How to interpret all this? I would say the news flow is slightly positive, maybe a 6 on a scale of 10. Not blowing the doors off, but perhaps good enough to sustain this rally for a while longer.
Frequent readers know that I already have my exit strategy in place for my Capital Appreciation Portfolio. It has three holdings: SPY (the ETF that tracks the S&P 500); QQQQ (the ETF that tracks the NASDAQ); and IBM. The two ETFs are protected by 8% trailing sell-stops that I update each weekend. I have a 10% trailing sell-stop under IBM.
I am comfortable with my sell-stops. If the market turns downward for a prolonged period of time, they will get me out with most of my profits intact. I suggest that readers protect their long positions in a similar fashion. At any rate, it is too soon to declare that the market has topped out. If the market struggles for a couple more weeks, or my stops get triggered, I'll be back with another report.
Wednesday, October 21, 2009
Poker Strategy vs. Investment Strategy
I enjoy playing poker, and there are many parallels between poker and investing. I play online on PokerStars.com. They have a tab called "Poker Strategy" for new players. I clicked on it, and I was struck by how much of their simple strategies and tactics apply equally to stock investing.
So I decided to translate their "Poker Strategy" into investment insights. While I have freely substituted investment terminology and added a few thoughts of my own, the basic structure of the following and most of its main points come directly from the PokerStars discussion.
Decisions for the New Stock Investor
To invest at a consistently winning level requires both time and effort. In other words, it takes work. To the extent you can, deciding which type of stock investor you want to be before you start will make your decisions easier. By "type of investor," I refer to such choices as investing for growth, investing for dividends, using fundamentals, using technical analysis, and the like. There is nothing wrong with combining disciplines into a hybrid approach, or using different portfolios to pursue different strategies. But getting your basic strategies down--I recommend writing them out--is important.
Make Good Decisions – the Results Will Follow
Even the best investors in the world have losing periods. Don't make the mistake of expecting to win every time you invest. Your goal should be to make decisions to the best of of your ability at all times. If you do, the total return on your investing will take care of itself, and it will improve as you improve the quality of your decions. Many investors make the mistake of judging their ability based on the results of each decision. Your goal should be to make the best possible play every time. The closer you come to this, the better your results will be.
By "decisions," I refer to decisions to buy, hold, sell, or stay away entirely. Selling or staying away are investing's equivalents to folding a hand.
The Mathematics of Poker
Investing is a mathematical game, and it’s a game of incomplete information. That may sound complicated, but it really isn't. On a very basic level, winning investing starts with the selection of which stocks or ETFs to buy or (more importantly) to avoid. This is called "stock selection." If you embark with the best decisions as well as you can determine them, you will increase your odds of overall investing success. In this context, stock selection includes not only identifying excellent companies or ETFs, but also determining favorable prices at which to buy them ("valuation").
Beyond Starting Hands
Stock selection is fundamentally important, but it’s only one piece of the puzzle. Once you have mastered solid guidelines for purchase decisions, the next area you should work on is your play for the rest of the time. I call this "portfolio management." The area that separates better investors from the rest is that the better investors tend to play much better during the remainder of the process, after the starting stock or ETF selections are made. This is especially true concerning the decisions made about when to end the holding period for every stock or ETF purchased. These skills involve risk management, stop-loss techniques, deciding when a trend has played out, recognizing red flags, knowing what to do when a company cuts its dividend, and the like. Even small improvements in an investor's portfolio management can have a tremendous effect on that investor's lifetime success.
Avoiding Tilt
Another meta-skill that should be part of a winning investor's strategy is avoiding tilt. ("Tilt" is a poker term for someone who has gotten emotional--perhaps because of a bad result--and starts making bad decisions, perhaps in an effort to make it all back at once.) Your emotions can work against you, but only if you let them. Emotional play results in poor decisions and lost money. Tilting and steaming can happen to anyone, and sometimes the only cure is a break from the game. That’s okay; the game will still be there tomorrow.
So I decided to translate their "Poker Strategy" into investment insights. While I have freely substituted investment terminology and added a few thoughts of my own, the basic structure of the following and most of its main points come directly from the PokerStars discussion.
Decisions for the New Stock Investor
To invest at a consistently winning level requires both time and effort. In other words, it takes work. To the extent you can, deciding which type of stock investor you want to be before you start will make your decisions easier. By "type of investor," I refer to such choices as investing for growth, investing for dividends, using fundamentals, using technical analysis, and the like. There is nothing wrong with combining disciplines into a hybrid approach, or using different portfolios to pursue different strategies. But getting your basic strategies down--I recommend writing them out--is important.
Make Good Decisions – the Results Will Follow
Even the best investors in the world have losing periods. Don't make the mistake of expecting to win every time you invest. Your goal should be to make decisions to the best of of your ability at all times. If you do, the total return on your investing will take care of itself, and it will improve as you improve the quality of your decions. Many investors make the mistake of judging their ability based on the results of each decision. Your goal should be to make the best possible play every time. The closer you come to this, the better your results will be.
By "decisions," I refer to decisions to buy, hold, sell, or stay away entirely. Selling or staying away are investing's equivalents to folding a hand.
The Mathematics of Poker
Investing is a mathematical game, and it’s a game of incomplete information. That may sound complicated, but it really isn't. On a very basic level, winning investing starts with the selection of which stocks or ETFs to buy or (more importantly) to avoid. This is called "stock selection." If you embark with the best decisions as well as you can determine them, you will increase your odds of overall investing success. In this context, stock selection includes not only identifying excellent companies or ETFs, but also determining favorable prices at which to buy them ("valuation").
Beyond Starting Hands
Stock selection is fundamentally important, but it’s only one piece of the puzzle. Once you have mastered solid guidelines for purchase decisions, the next area you should work on is your play for the rest of the time. I call this "portfolio management." The area that separates better investors from the rest is that the better investors tend to play much better during the remainder of the process, after the starting stock or ETF selections are made. This is especially true concerning the decisions made about when to end the holding period for every stock or ETF purchased. These skills involve risk management, stop-loss techniques, deciding when a trend has played out, recognizing red flags, knowing what to do when a company cuts its dividend, and the like. Even small improvements in an investor's portfolio management can have a tremendous effect on that investor's lifetime success.
Avoiding Tilt
Another meta-skill that should be part of a winning investor's strategy is avoiding tilt. ("Tilt" is a poker term for someone who has gotten emotional--perhaps because of a bad result--and starts making bad decisions, perhaps in an effort to make it all back at once.) Your emotions can work against you, but only if you let them. Emotional play results in poor decisions and lost money. Tilting and steaming can happen to anyone, and sometimes the only cure is a break from the game. That’s okay; the game will still be there tomorrow.
Monday, October 19, 2009
Rally In Eighth Month; Timing Outlook Remains Positive
(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its best format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)
1. Summary
The stock market's rally passed its 7-month anniversary on October 10. It is up 61% since then, making this one of the sharpest rallies on record in terms of speed + magnitude.
The Timing Outlook bounced back up to 9.0, remaining positive. That makes 14 consecutive positive readings, roughly matching the time of the rally. Reminder: The interpretation of the Timing Outlook has been changed to eliminate “neutral.” Any reading of 5.0 or above is “positive,” and any reading below 5.0 is “negative.” (If you missed that change, scroll down to the article below this one.)
Q3 earnings season started a couple of weeks ago, and most companies reporting so far have beaten analysts' earnings estimates. Lots of people, including me, are also watching revenue results and the companies' forward-looking statements about their expectations for Q4 and 2010. Those areas have been mixed so far.
An extended string of bad news during earnings season (earnings missing estimates or poor outlooks), or on other fronts such as employment, would probably kill the rally. That said, such a string of bad news has not materialized since the rally began in March. That in itself seems remarkable and has many pundits questioning how long the rally can go on.
As always, use sell-stops or some other form of downside protection to protect profits already accrued but not realized, and also to protect against losses if the market suddenly reverses course. (This suggestion does not necessarily apply to stock positions held as long-term dividend-producing investments).
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 10/16/09)
Last Outlook (10/5/09): 7.5 (positive)
S&P 500 last time (10/5/09): 1025
S&P 500 now: 1088 Change: +6%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1088 Change YTD: +20%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1088 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed its fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: The S&P 500’s P/E rose since last time from 18.2 to 19.5, or back into neutral territory. As a reminder, I use Morningstar as the source for the P/E ratio based on trailing operating earnings, and I use three "bands" by adding and subtracting 10% from the recent-years’ average (19.3) to allow room for normal market volatility and noise. Therefore, P/E < 4 =" Positive" 1 =" Neutral"> 21.2 = Negative = 0 points. At 19.5, therefore, this indicator is neutral. +5
--Morningstar’s Market Valuation Graph increases from 0.98 to 1.03. The graph has been yo-yo-ing back and forth around 1.0 (which would mean just right, like the littlest bear’s porridge) since late July. That is noteworthy, as the stock market has risen 16% since then while this indicator has remained near 1.0. That means, of course, that even as stock prices have risen, Morningstar's analysts have been increasing their fair value estimates of stocks' worth at about the same pace, which is a positive sign. The currrent reading of 1.03 is within the neutral range of 0.90 to 1.10. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: The market has risen sharply since the last Timing Outlook (up 6%). The effect on the charts has been to bring them back into their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. Positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: Positive. +10
--NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
1. Summary
The stock market's rally passed its 7-month anniversary on October 10. It is up 61% since then, making this one of the sharpest rallies on record in terms of speed + magnitude.
The Timing Outlook bounced back up to 9.0, remaining positive. That makes 14 consecutive positive readings, roughly matching the time of the rally. Reminder: The interpretation of the Timing Outlook has been changed to eliminate “neutral.” Any reading of 5.0 or above is “positive,” and any reading below 5.0 is “negative.” (If you missed that change, scroll down to the article below this one.)
Q3 earnings season started a couple of weeks ago, and most companies reporting so far have beaten analysts' earnings estimates. Lots of people, including me, are also watching revenue results and the companies' forward-looking statements about their expectations for Q4 and 2010. Those areas have been mixed so far.
An extended string of bad news during earnings season (earnings missing estimates or poor outlooks), or on other fronts such as employment, would probably kill the rally. That said, such a string of bad news has not materialized since the rally began in March. That in itself seems remarkable and has many pundits questioning how long the rally can go on.
As always, use sell-stops or some other form of downside protection to protect profits already accrued but not realized, and also to protect against losses if the market suddenly reverses course. (This suggestion does not necessarily apply to stock positions held as long-term dividend-producing investments).
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 10/16/09)
Last Outlook (10/5/09): 7.5 (positive)
S&P 500 last time (10/5/09): 1025
S&P 500 now: 1088 Change: +6%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1088 Change YTD: +20%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1088 Change since 3/9/09: +61%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed its fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: The S&P 500’s P/E rose since last time from 18.2 to 19.5, or back into neutral territory. As a reminder, I use Morningstar as the source for the P/E ratio based on trailing operating earnings, and I use three "bands" by adding and subtracting 10% from the recent-years’ average (19.3) to allow room for normal market volatility and noise. Therefore, P/E < 4 =" Positive" 1 =" Neutral"> 21.2 = Negative = 0 points. At 19.5, therefore, this indicator is neutral. +5
--Morningstar’s Market Valuation Graph increases from 0.98 to 1.03. The graph has been yo-yo-ing back and forth around 1.0 (which would mean just right, like the littlest bear’s porridge) since late July. That is noteworthy, as the stock market has risen 16% since then while this indicator has remained near 1.0. That means, of course, that even as stock prices have risen, Morningstar's analysts have been increasing their fair value estimates of stocks' worth at about the same pace, which is a positive sign. The currrent reading of 1.03 is within the neutral range of 0.90 to 1.10. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: The market has risen sharply since the last Timing Outlook (up 6%). The effect on the charts has been to bring them back into their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. Positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: Positive. +10
--NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
Tuesday, October 13, 2009
Changing the Interpretation of the Timing Outlook
I am making a small change to the interpretation of the Timing Outlook.
First, a little history. The Timing Outlook (TO) was invented during the writing of Sensible Stock Investing. Originally, the TO had eight indicators. Four of them came from another investment Web site and were used by permission. Those four were all trend indicators. From the beginning, the TO was calculated by assigning each indicator a score of 0, 5, or 10, and then calculating a simple average to get a single number between 0 and 10.
In mid-2008, the other site discontinued its indicators. So I home-brewed six trend indicators of my own, replaced the four missing ones for a total of ten indicators, and created the Timing Outlook that is in use today.
I began publishing the TO in this Newsletter in 2007. At a reader's suggestion, I began writing more detailed articles--showing the individual indicators and adding commentary--in 2008. These days, I publish a new TO article each time I recalculate it, generally every other week.
From the beginning, the TO was not meant to be a single, exclusive timing device. Rather, it was part of the Sensible Stock Investor's toolkit. The idea was to increase the likelihood of successful investment decisions. I wanted something to improve the probability that decisions to buy, hold, or sell would get off to a good start.
As described in the book, the interpretation of the Timing Outlook was in three "zones":
--0-4 was considered negative;
--4-7 was considered neutral; and
--7-10 was considered positive.
Recently I went back to evaluate how helpful or accurate the Timing Outlook has been since I began calculating it regularly in 2006. In a nutshell, it does seem to provide an edge, although of course it is not correct all of the time. But it has been correct in predicting the direction of the market two weeks out 58% of the time; 59% for the market's level one month later; and 68% for three months later. One thing I discovered in doing this review is that using a 3-period simple moving average (SMA) of the Timing Outlook improves those percentages slightly. Another point of interest is that, not surprisingly, it does better in markets that are trending as distinguished from up-and-down markets.
That information provides the background for the change I am making.
After examining the data, I have decided that three zones are too granular. So the new simplified interpretation will be just whether or not the Timing Outlook is 5 or more:
--0-4.9 will be considered negative; and
--5-10 will be considered positive.
In this context, "positive" means that the Timing Outlook is suggesting that the market is more likely to move higher in the short term, and "negative" suggests that the market is more likely to move lower. The ambiguous "neutral" category has been eliminated.
First, a little history. The Timing Outlook (TO) was invented during the writing of Sensible Stock Investing. Originally, the TO had eight indicators. Four of them came from another investment Web site and were used by permission. Those four were all trend indicators. From the beginning, the TO was calculated by assigning each indicator a score of 0, 5, or 10, and then calculating a simple average to get a single number between 0 and 10.
In mid-2008, the other site discontinued its indicators. So I home-brewed six trend indicators of my own, replaced the four missing ones for a total of ten indicators, and created the Timing Outlook that is in use today.
I began publishing the TO in this Newsletter in 2007. At a reader's suggestion, I began writing more detailed articles--showing the individual indicators and adding commentary--in 2008. These days, I publish a new TO article each time I recalculate it, generally every other week.
From the beginning, the TO was not meant to be a single, exclusive timing device. Rather, it was part of the Sensible Stock Investor's toolkit. The idea was to increase the likelihood of successful investment decisions. I wanted something to improve the probability that decisions to buy, hold, or sell would get off to a good start.
As described in the book, the interpretation of the Timing Outlook was in three "zones":
--0-4 was considered negative;
--4-7 was considered neutral; and
--7-10 was considered positive.
Recently I went back to evaluate how helpful or accurate the Timing Outlook has been since I began calculating it regularly in 2006. In a nutshell, it does seem to provide an edge, although of course it is not correct all of the time. But it has been correct in predicting the direction of the market two weeks out 58% of the time; 59% for the market's level one month later; and 68% for three months later. One thing I discovered in doing this review is that using a 3-period simple moving average (SMA) of the Timing Outlook improves those percentages slightly. Another point of interest is that, not surprisingly, it does better in markets that are trending as distinguished from up-and-down markets.
That information provides the background for the change I am making.
After examining the data, I have decided that three zones are too granular. So the new simplified interpretation will be just whether or not the Timing Outlook is 5 or more:
--0-4.9 will be considered negative; and
--5-10 will be considered positive.
In this context, "positive" means that the Timing Outlook is suggesting that the market is more likely to move higher in the short term, and "negative" suggests that the market is more likely to move lower. The ambiguous "neutral" category has been eliminated.
Friday, October 9, 2009
Starting on "TOP 40 DIVIDEND STOCKS FOR 2010"
In the past two weeks, I have begun work on THE TOP 40 DIVIDEND STOCKS FOR 2010, my annual e-book for investors working on a dividend strategy. My hope this year is to release it in January, or three months sooner than 2009's March release and five months ahead of 2008's May release.
It seems like the earlier in the year it comes out, the more helpful it will be. The trade-off is that I will do most of the research without full-year data for 2009, but overall I think it's a good compromise to get it out sooner.
I haven't decided on the sub-title for the new edition. I want to strike the perfect balance between boring and hyperbolic. Many people think that dividend stocks are boring--unaware, I guess, that over long periods, dividend stocks have delivered the best total returns of any category of stocks by several percent. On the other hand, I don't want to insult people's intelligence with ridiculous claims like "How to Turn $5,000 into a Million with Dividend Stocks."
Here were the subtitles I used in the first two editions:
2008: How (And Why) to Build a Cash Machine of Dividend Stocks
2009: Dividend Investing for the Long Haul
If you have an idea for a great sub-title, drop me a line. If I use your suggestion, I'll send you a free copy of the e-book when it comes out.
That's not my main reason for writing this post. I want to tell you about something I've noticed as I apply an initial series of qualifying tests to the nearly 700 candidates for the Top 40. Three of the first-level tests are:
--Stock must have shown positive total returns in 3 of the last 5 years.
--Stock must have delivered total returns greater than 0% over the past 5 years.
--Stock must have raised its dividend in each of the past 5 years.
I'm about halfway through the list now. What I've noticed is the strong correlation among these three tests in many stocks that are failing the first round of hurdles. Usually, a stock that fails one of them fails all three. I guess it's no surprise that the first two are correlated. After all, a stock that has delivered negative returns in 3 out of 5 years would have difficulty delivering a total return above zero without an extraordinary year out in the other two.
But the interesting part is the correlation with the last hurdle: Must have raised its dividend for the past 5 years. That means there is a connection between the stock's total return (which includes price increases) and its dividend. If a stock did not raise its dividend in each of the past 5 years, that means it either cut it or froze it.
I'm not sure which comes first, I see this as a chicken-and-egg situation. That is, does a stock's price fall because it freezes or cuts its dividend, or does a cut or frozen dividend merely reflect lousy financial performance across the company. I have read studies that suggest it is the first, and I have written articles suggesting that a dividend cut or freeze can be an early warning sign of other bad news about to emanate from a company.
Whether there is a cause and effect, though, the lesson for the dividend investor is clear: A dividend cut or freeze is a big fat warning signal about the viability of the stock itself as an investment. That's why you won't see any stocks with recent cuts or freezes among next year's Top 40.
It seems like the earlier in the year it comes out, the more helpful it will be. The trade-off is that I will do most of the research without full-year data for 2009, but overall I think it's a good compromise to get it out sooner.
I haven't decided on the sub-title for the new edition. I want to strike the perfect balance between boring and hyperbolic. Many people think that dividend stocks are boring--unaware, I guess, that over long periods, dividend stocks have delivered the best total returns of any category of stocks by several percent. On the other hand, I don't want to insult people's intelligence with ridiculous claims like "How to Turn $5,000 into a Million with Dividend Stocks."
Here were the subtitles I used in the first two editions:
2008: How (And Why) to Build a Cash Machine of Dividend Stocks
2009: Dividend Investing for the Long Haul
If you have an idea for a great sub-title, drop me a line. If I use your suggestion, I'll send you a free copy of the e-book when it comes out.
That's not my main reason for writing this post. I want to tell you about something I've noticed as I apply an initial series of qualifying tests to the nearly 700 candidates for the Top 40. Three of the first-level tests are:
--Stock must have shown positive total returns in 3 of the last 5 years.
--Stock must have delivered total returns greater than 0% over the past 5 years.
--Stock must have raised its dividend in each of the past 5 years.
I'm about halfway through the list now. What I've noticed is the strong correlation among these three tests in many stocks that are failing the first round of hurdles. Usually, a stock that fails one of them fails all three. I guess it's no surprise that the first two are correlated. After all, a stock that has delivered negative returns in 3 out of 5 years would have difficulty delivering a total return above zero without an extraordinary year out in the other two.
But the interesting part is the correlation with the last hurdle: Must have raised its dividend for the past 5 years. That means there is a connection between the stock's total return (which includes price increases) and its dividend. If a stock did not raise its dividend in each of the past 5 years, that means it either cut it or froze it.
I'm not sure which comes first, I see this as a chicken-and-egg situation. That is, does a stock's price fall because it freezes or cuts its dividend, or does a cut or frozen dividend merely reflect lousy financial performance across the company. I have read studies that suggest it is the first, and I have written articles suggesting that a dividend cut or freeze can be an early warning sign of other bad news about to emanate from a company.
Whether there is a cause and effect, though, the lesson for the dividend investor is clear: A dividend cut or freeze is a big fat warning signal about the viability of the stock itself as an investment. That's why you won't see any stocks with recent cuts or freezes among next year's Top 40.
Monday, October 5, 2009
Timing Outlook Still Positive Despite Market Drop
1. Summary
The Timing Outlook drops from 9.0 to 7.5, still “positive” but less strongly so. That makes 12 of the last 13 readings positive, roughly matching the time of the rally. The “September swoon” never happened: the market rose 3% in September.
But October got off to a crummy start, capped by the bad employment news last week. Earnings season kicks off this week, which always brings a ton of news for investors to react to. Personally, I’ll be watching not only for earnings “surprises,” but also for revenue growth (which has been weak throughout the rally), companies’ forward-looking statements, and updated employment statistics.
The market is not technically overvalued, but it won't matter if companies' outlooks are not positive and/or the employment picture stays dismal. Either would would probably kill the rally. I suppose it is possible that a high percentage of positive revenue and earnings surprises for the past quarter could by themselves extend the rally, but I doubt it.
As always, sell-stops or some other form of hedging are recommended on your long stock positions.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 10/2/09)
New Outlook (10/5/09): 7.5 (positive)
Last Outlook (9/21/09): 9.0 (positive)
S&P 500 last time (9/21/09): 1068
S&P 500 now: 1025 Change: -4%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1025 Change YTD: +14%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1025 Change since 3/9/09: +51%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed its fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E fell back from 18.9 last time to 18.2. This is within the neutral range of 17.4 to 19.3, and the drop halted (at least temporarily) what had become a steady march toward “overvalued” territory. Neutral. +5
--Morningstar’s Market Valuation Graph drops to 0.98 from 1.04. This is within the neutral range of 0.90 to 1.10, and as above, the decline interrupted a march toward “overvalued.” (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: With the drop the last couple of weeks in the stock markets, all three charts have lost their ultra-positive quality. The actual index value in each case has dropped below its 20-day simple moving average (SMA) but is still above its 50-day SMA. So on each chart, the lineup is this: 20-day SMA > Index > 50-day SMA > 200-day SMA. For this short-term indicator, the chart drops from positive to ambiguous, as the index value is between the 20-day and 50-day SMAs rather than above them. +5
--S&P 500 Medium Term Technical Trend: This remains positive, as the index remains above the 50-day SMA, which remains above the 200-day SMA. +10
--DJIA Short Term Technical Trend: Same as S&P’s short-term trend: Ambiguous. +5
--DJIA Medium Term Technical Trend: Same as S&P’s medium-term trend: Positive. +10
--NASDAQ Short Term Technical Trend: Same as the other two: Ambiguous. +5
--NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10
TOTAL POINTS: 75 NEW READING: 75 / 10 = 7.5 = POSITIVE
The Timing Outlook drops from 9.0 to 7.5, still “positive” but less strongly so. That makes 12 of the last 13 readings positive, roughly matching the time of the rally. The “September swoon” never happened: the market rose 3% in September.
But October got off to a crummy start, capped by the bad employment news last week. Earnings season kicks off this week, which always brings a ton of news for investors to react to. Personally, I’ll be watching not only for earnings “surprises,” but also for revenue growth (which has been weak throughout the rally), companies’ forward-looking statements, and updated employment statistics.
The market is not technically overvalued, but it won't matter if companies' outlooks are not positive and/or the employment picture stays dismal. Either would would probably kill the rally. I suppose it is possible that a high percentage of positive revenue and earnings surprises for the past quarter could by themselves extend the rally, but I doubt it.
As always, sell-stops or some other form of hedging are recommended on your long stock positions.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 10/2/09)
New Outlook (10/5/09): 7.5 (positive)
Last Outlook (9/21/09): 9.0 (positive)
S&P 500 last time (9/21/09): 1068
S&P 500 now: 1025 Change: -4%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1025 Change YTD: +14%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1025 Change since 3/9/09: +51%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed its fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E fell back from 18.9 last time to 18.2. This is within the neutral range of 17.4 to 19.3, and the drop halted (at least temporarily) what had become a steady march toward “overvalued” territory. Neutral. +5
--Morningstar’s Market Valuation Graph drops to 0.98 from 1.04. This is within the neutral range of 0.90 to 1.10, and as above, the decline interrupted a march toward “overvalued.” (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5
--S&P 500 Short Term Technical Trend: With the drop the last couple of weeks in the stock markets, all three charts have lost their ultra-positive quality. The actual index value in each case has dropped below its 20-day simple moving average (SMA) but is still above its 50-day SMA. So on each chart, the lineup is this: 20-day SMA > Index > 50-day SMA > 200-day SMA. For this short-term indicator, the chart drops from positive to ambiguous, as the index value is between the 20-day and 50-day SMAs rather than above them. +5
--S&P 500 Medium Term Technical Trend: This remains positive, as the index remains above the 50-day SMA, which remains above the 200-day SMA. +10
--DJIA Short Term Technical Trend: Same as S&P’s short-term trend: Ambiguous. +5
--DJIA Medium Term Technical Trend: Same as S&P’s medium-term trend: Positive. +10
--NASDAQ Short Term Technical Trend: Same as the other two: Ambiguous. +5
--NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10
TOTAL POINTS: 75 NEW READING: 75 / 10 = 7.5 = POSITIVE
Friday, October 2, 2009
A Bad News Week
(Note to subscribers: The e-mail subscription version you receive omits formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its best format, just click on the title above--it is a link that will take you directly to this article in my Newsletter.)
I have been saying for some time that the continuation of the rally will be strongly influenced by the "net news flow." That is a subjective concept, as obviously reasonable minds can differ over whether a day's or a week's flow of news was on balance positive, negative, or so-so.
Not this week. The news was almost unrelentingly negative:
I have been saying for some time that the continuation of the rally will be strongly influenced by the "net news flow." That is a subjective concept, as obviously reasonable minds can differ over whether a day's or a week's flow of news was on balance positive, negative, or so-so.
Not this week. The news was almost unrelentingly negative:
- Robert Shiller, of the widely followed Case-Shiller home price index fame, stated that he believes home prices will move sideways for five years.
- Mortgage loan delinquencies increased to 5.4% in Q2.
- Initial unemployment claims increased to 551,000 in the latest reporting week.
- The ISM Manufacturing Survey fell after several months of increases. Its employment component worsened slightly to 46.2 (a reading under 50 signals contraction).
- Consumer confidence fell in September.
- Today's Labor Department report was dismal. The nation's job losses accelerated in September, driving the unemployment rate to a 26-year high of 9.8%. Nonfarm payrolls fell by a greater-than-expected 263,000 in September, the 21st consecutive month of job losses. Since the recession began in December 2007, 7.2 million jobs have been lost and the unemployment rate has doubled. The number of unemployed people rose by 214,000 to 15.1 million. And of those, 5.4 million have been out of work longer than six months, accounting for a record 36% of the jobless. More than a half a million people dropped out of the labor force, and the employment participation rate fell to 65%, the lowest in 23 years. The average duration of unemployment rose above 26 weeks, a record high. An alternative gauge of unemployment, which includes discouraged workers and those with part-time employment, rose to 17% -- the highest in the 15-year history of the data. Total hours worked in the economy fell by 0.5%. The average workweek dropped back to an all-time low of 33 hours.
There is no way to depict this week's net news flow as anything other than disastrous. I don't "rate" every week's news flow, but I don't think there's been a week this bad since the rally started in March.
The S&P 500 fell this week from 1044 to 1025, or about 2%. And that illustrates the relationship between news flow and the market: The market is sentiment-driven, and sentiment is driven by news and the interpretation of the news. Bad news week = bad market week.
No time for panic yet (actually, there's never any need to panic, just follow cool portfolio management practices). The market is down just 4% from its most recent high, and it is still up 52% from its March low. Next week begins the earnings season for Q3, during which official earnings reports and their accompanying verbiage will provide much of the news flow.
In the last earnings season, about 75% of companies reported earnings that "surprised to the upside," meaning they exceeded analyst's expectations. That created a fairly steady positive news flow for weeks that helped the rally along tremendously. This time, it may be more difficult for companies to impress the market, given that most of last quarter’s positive surprises were due to severe cost-cutting, not revenue growth. Eyes will be on revenue growth as well as profits this time around.
To me, the two most important potential threats to the rally are consumer spending and unemployment. Both speak directly to revenue growth as somewhere between 65% and 70% of the U.S. economy consists of consumer spending. Most data suggest that the "average consumer" has become more conservative in day-to-day spending. This is demonstrated by lagging store sales, deleveraging of personal credit, and higher savings rates. There's no telling how long these trends will last, but common sense suggests they are closely tied to the job market--whether people have jobs and how secure they feel their job is. We're somewhere around the tipping point now: The recession is probably close to being technically over, but that is not yet reflected in the job market. If this becomes a "jobless recovery," or if there is a "double dip" recession as some are predicting, the stock market rally will probably fizzle out.
Wednesday, September 30, 2009
Will There Be a Correction?
I posted the following as a comment to an article that I read on another Web site. I think the comment stands on its own (you don't have to read the original article). So I thought I would post it here as a little article, because it contains some information that gives insight into my philosophy.
----------
Let's get back to the point of the article:"The debate centers around two chief concerns: Have stocks jumped ahead of the economic recovery? And if so, Are they setting up for a big correction? "
The answer to the first question is easy: Of course stocks got ahead of the economy. They "always" do. That's the job of the market, to discount the future and set stock prices accordingly. Nine of the last 10 recessions (including this one) have seen significant market rallies during the recession.
The second question is harder. Will there be a "big correction"? I think that depends on whether the economy catches up to the market's expectations. More specifically, will corporate earnings rise enough to justify the prices that investors have placed on their stocks?Everybody has their own favorite indicator or three. Shipping statistics; the ISM; the LEI (either the Conference Board's version or ECRI's version); insider buying and selling; GDP (original and revised); labor and employment statistics; etc. There are scores of them.
All are subject to some degree of manipulation and error in methodology, and most everyone in the "efficient market" brings an unfortunate amount of preconceived spin to interpreting them.
Here's the true answer: We don't know. Last quarter was filled with upside earnings surprises (not to be confused with earnings that actually increased...they didn't). Why were genetically over-optimistic analysts surprised at the relative (not absolute) strength of corporate earnings? Because they apparently underestimated the speed and effectiveness of corporate cost-cutting in Q4 2008 and Q1-2 2009.
Q3 is ending. A new earnings season is upon us. We don't have to look at our favorite indicators any more. We'll have actual earnings to look at, plus the usual press releases, forward-looking statements, and the like.
Here's my guess, based on three factors: (1) If earnings again surprise to the upside, that will create "wanna own" pressure that will push against a correction. (2) If the forward-looking statements and guidance sound positive, that will have the same effect. (3) If revenues (which did NOT surprise to the upside last time) show signs of recovery, that will create the same pressure.
Of course, the opposite of any of those will create the opposite pressure, namely the pressure to sell and the liklihood of a correction. A big one? Maybe.
Me, I've got my exit strategy in place (sell stops). I won't try to predict, just wait for the turn, if there is one.
----------
Let's get back to the point of the article:"The debate centers around two chief concerns: Have stocks jumped ahead of the economic recovery? And if so, Are they setting up for a big correction? "
The answer to the first question is easy: Of course stocks got ahead of the economy. They "always" do. That's the job of the market, to discount the future and set stock prices accordingly. Nine of the last 10 recessions (including this one) have seen significant market rallies during the recession.
The second question is harder. Will there be a "big correction"? I think that depends on whether the economy catches up to the market's expectations. More specifically, will corporate earnings rise enough to justify the prices that investors have placed on their stocks?Everybody has their own favorite indicator or three. Shipping statistics; the ISM; the LEI (either the Conference Board's version or ECRI's version); insider buying and selling; GDP (original and revised); labor and employment statistics; etc. There are scores of them.
All are subject to some degree of manipulation and error in methodology, and most everyone in the "efficient market" brings an unfortunate amount of preconceived spin to interpreting them.
Here's the true answer: We don't know. Last quarter was filled with upside earnings surprises (not to be confused with earnings that actually increased...they didn't). Why were genetically over-optimistic analysts surprised at the relative (not absolute) strength of corporate earnings? Because they apparently underestimated the speed and effectiveness of corporate cost-cutting in Q4 2008 and Q1-2 2009.
Q3 is ending. A new earnings season is upon us. We don't have to look at our favorite indicators any more. We'll have actual earnings to look at, plus the usual press releases, forward-looking statements, and the like.
Here's my guess, based on three factors: (1) If earnings again surprise to the upside, that will create "wanna own" pressure that will push against a correction. (2) If the forward-looking statements and guidance sound positive, that will have the same effect. (3) If revenues (which did NOT surprise to the upside last time) show signs of recovery, that will create the same pressure.
Of course, the opposite of any of those will create the opposite pressure, namely the pressure to sell and the liklihood of a correction. A big one? Maybe.
Me, I've got my exit strategy in place (sell stops). I won't try to predict, just wait for the turn, if there is one.
Monday, September 28, 2009
Two Ways to Invest in Stocks: For Capital Appreciation, and for Dividends
(Note to subscribers: The e-mail subscription version you receive omits formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its best format, just click on the title above--it is a link that will take you directly to this article in my Newsletter.)
I received a reader inquiry that raises an interesting question about investment goals. I want to make one thing completely clear. I consider investing for capital appreciation and investing for dividends to be two very different goals. Therefore, I believe that they require different strategies and different techniques for accomplishing those strategies.
In a nutshell, investing for capital appreciation is "buy low, sell high." It is what I have been talking about in my posts about the market rally, the bear market that preceded the rally, the Timing Outlook, and so on. On the Sensible Stocks.com Web site, it is the main subject in the second column of the site map, the FAQ about stock investing, and many of the free articles. Investing for capital appreciation is mainly what my first book, Sensible Stock Investing, is about. The Capital Gains Portfolio tracked on my Web site is about investing for capital appreciation.
Investing for dividends, on the other hand, is about the accumulation of wealth by investing in stocks with healthy, reliable, and growing dividends. The dividends can be re-invested to accelerate the wealth accumulation process, or they can be taken out immediately and used as current income. Some resources on the Sensible Stocks.com Web site aimed at dividend investors are the third column of the site map, the FAQ about dividend investing, many of the free articles, and of course my e-book The Top 40 Dividend Stocks for 2009: Dividend Investing for the Long Haul. There is a Dividend Portfolio tracked on the Web site, and the tailor-made strategy governing that portfolio is discussed there too.
In my opinion, it is a good idea to be clear about what your goals are in investing in stocks. There is nothing wrong with having both goals--I do it myself, as reflected in the two portfolios. But I encourage you to segregate your portfolios for the two fundamental goals--capital appreciation and dividends--and to develop separate strategy or policy statements for each of them.
There are many commonalities across both goals, of course: Selecting excellent companies, buying them at advantageous values, and managing your portfolio well are best practices that apply to either strategy.
But there are important differences:
--The types of stocks one buys for capital appreciation or for dividends may have very different characteristics. For example, so-called "growth" stocks will predominate in a portfolio aimed at capital gains, while the dividend yield is a hugely important consideration in stocks for a dividend portfolio. (Dividend yield may be irrelevant in a "growth" stock.)
--The ways one controls risk after purchase will probably be different. In a capital gains strategy, stop-loss orders can be an important way to protect profits and curtail losing positions. In a dividend portfolio, on the other hand, stop-loss orders may not be used at all.
--It's always a good idea to "keep your eye on the ball." But the ball is different in the two strategies. In capital-gains investing, the ball is growth through price increases. In dividend investing, the ball is ever-increasing dividend streams. It probably would be going too far to say that the dividend investor stops caring about the prices of his or her stocks, but those prices truly take on less relevance. In fact, the dividend investor often welcomes price dips: It provides the opportunity to gather more shares for the same amount of money, which leads directly to more dividends based on the larger number of shares purchased.
I hope this has been clarifying. I know the distinction between investing for capital appreciation and investing for dividends can be confusing, especially since I deal with both on my Web site and in this Newsletter. If anybody has further questions, please e-mail them to me. Thanks to the reader who brought this to my attention.
I received a reader inquiry that raises an interesting question about investment goals. I want to make one thing completely clear. I consider investing for capital appreciation and investing for dividends to be two very different goals. Therefore, I believe that they require different strategies and different techniques for accomplishing those strategies.
In a nutshell, investing for capital appreciation is "buy low, sell high." It is what I have been talking about in my posts about the market rally, the bear market that preceded the rally, the Timing Outlook, and so on. On the Sensible Stocks.com Web site, it is the main subject in the second column of the site map, the FAQ about stock investing, and many of the free articles. Investing for capital appreciation is mainly what my first book, Sensible Stock Investing, is about. The Capital Gains Portfolio tracked on my Web site is about investing for capital appreciation.
Investing for dividends, on the other hand, is about the accumulation of wealth by investing in stocks with healthy, reliable, and growing dividends. The dividends can be re-invested to accelerate the wealth accumulation process, or they can be taken out immediately and used as current income. Some resources on the Sensible Stocks.com Web site aimed at dividend investors are the third column of the site map, the FAQ about dividend investing, many of the free articles, and of course my e-book The Top 40 Dividend Stocks for 2009: Dividend Investing for the Long Haul. There is a Dividend Portfolio tracked on the Web site, and the tailor-made strategy governing that portfolio is discussed there too.
In my opinion, it is a good idea to be clear about what your goals are in investing in stocks. There is nothing wrong with having both goals--I do it myself, as reflected in the two portfolios. But I encourage you to segregate your portfolios for the two fundamental goals--capital appreciation and dividends--and to develop separate strategy or policy statements for each of them.
There are many commonalities across both goals, of course: Selecting excellent companies, buying them at advantageous values, and managing your portfolio well are best practices that apply to either strategy.
But there are important differences:
--The types of stocks one buys for capital appreciation or for dividends may have very different characteristics. For example, so-called "growth" stocks will predominate in a portfolio aimed at capital gains, while the dividend yield is a hugely important consideration in stocks for a dividend portfolio. (Dividend yield may be irrelevant in a "growth" stock.)
--The ways one controls risk after purchase will probably be different. In a capital gains strategy, stop-loss orders can be an important way to protect profits and curtail losing positions. In a dividend portfolio, on the other hand, stop-loss orders may not be used at all.
--It's always a good idea to "keep your eye on the ball." But the ball is different in the two strategies. In capital-gains investing, the ball is growth through price increases. In dividend investing, the ball is ever-increasing dividend streams. It probably would be going too far to say that the dividend investor stops caring about the prices of his or her stocks, but those prices truly take on less relevance. In fact, the dividend investor often welcomes price dips: It provides the opportunity to gather more shares for the same amount of money, which leads directly to more dividends based on the larger number of shares purchased.
I hope this has been clarifying. I know the distinction between investing for capital appreciation and investing for dividends can be confusing, especially since I deal with both on my Web site and in this Newsletter. If anybody has further questions, please e-mail them to me. Thanks to the reader who brought this to my attention.
Saturday, September 26, 2009
Topped Out?
As the market was plunging from October, 2007 until March, 2009, I ran occasional articles, usually titled Are We There Yet? The question, of course, was whether the bear market was over--was it safe to come out of the woods and invest cash in the stock market again? A couple of these articles correctly identified false starts late last year as failing to demonstrate the end of the bear market. Finally, the bear market ended on March 9, 2009, replaced by a direct reversal and a strong bull market.
Now that bull market has lasted for more than six months and raised the S&P 500 by more than 50%. Some people are getting nervous about it. Is it sustainable? Therefore, I am going to write occasional articles asking the old question in reverse: Has the market topped out? Is it time to take some profits off the table, or to go completely back into the woods where the bears hang out? This is the first of those articles.
Frequent readers know that I already have my exit strategy in place for my public Capital Appreciation Portfolio. There are three holdings there: SPY (the ETF that tracks the S&P 500); QQQQ (the ETF that tracks the NASDAQ); and IBM, the only individual company. The first two holdings--SPY and QQQQ--are protected by 8% trailing sell-stops. I update the stops each weekend, sometimes in the middle of the week if the market makes a significant one-day jump. I have a 10% trailing sell-stop under IBM.
That's my approach to controlling risk. Others may be protecting their profits with hedging strategies, or by using sell-stops placed at different values...5%, 10%, the 20-day simple moving average (SMA), the 50-day SMA, or "support" lines they have drawn on a chart. There are an infinite number of ways to select the level of a sell-stop.
However you are protecting your profits, these occasional Topped Out? articles will be asking a different question: Are we back in a bear market? I will let that term be vaguely defined for now. Let's just say that I am asking whether we have entered a period where the market is likely to decline by 20% or more. That matches the rule-of-thumb definition of a bear market.
Of course, by definition, no one knows the future. So these articles will necessarily consist of conjecture. But I will base my conjecture on facts and sound reasoning to the best of my ability.
I have stated many times that this has been a sentiment-driven bull market. While it has been more powerful than most, in many ways it is a garden-variety recession bull. Of the previous nine recessions before the current one, the stock market has bottomed out and started back up several months in advance of the end of the recession. That's what has happened here since March. Why does that happen? Stock investors look forward--the stock market is a leading indicator of the economy. So it often starts back up while the economy is still mired in recession, indeed while many elements of the recession are still getting worse.
But the market does not do that based on simple hope. I have coined the term "net news flow" to explain what positive-minded stock buyers have been reacting to during this bull market. They have been reacting to the so-called "green shoots"...signs that the economy might be pulling out of the recession. Early on (say last March), most any sign that could be interpreted positively was a data point that was simply "less bad" than before. The perceived meaning of this was that the downward cycle of various indicators was slowing down and bottoming out--a necessary precondition to the indicators actually turning back upward.
Currently, most indicators have slowed their descent significantly, some have clearly reached a trough, and some have turned upwards. For example the Conference Board's Index of Leading Economic Indicators has risen for four straight months. I track a few important indicators in my bi-weekly Timing Outlook reports.
One specific topic to end with: In the last earnings season, a majority of companies reported earnings that were "positive surprises," meaning they exceeded the consensus expectations of stock analysts. All of these positive surprises contributed greatly to the positive net news flow that helped the market along. In most cases, the quarterly reports did not reflect growing revenue or earnings compared to a year ago. They simply reflected better-than-expected earnings, which in most cases were well down from a year before. Most of those positive surprises were based on companies' fast cost-cutting, which meant layoffs and hiring freezes. That's why we have the high unemployment rate that we do right now.
However, it did not go unnoticed that, while earnings surprised positively, revenue often did not. Not only that, many companies' projections for revenue going forward were not encouraging. So here's my thought: Last earnings season was a "free pass" on the revenue front in terms of how forgiving the stock market was in interpreting the news. The market forgave revenue misses and rewarded earnings hits.
We have a new earnings season coming up in a couple of weeks. If many companies do not show sequential revenue jumps (that is, quarter-over-quarter), and/or do not project positive revenue expectations going forward, then positive earnings surprises will not be enough to count as "good news" this time around. This will not help the net news flow, will not add to positive investor sentiment, and may herald a new bear market.
Now that bull market has lasted for more than six months and raised the S&P 500 by more than 50%. Some people are getting nervous about it. Is it sustainable? Therefore, I am going to write occasional articles asking the old question in reverse: Has the market topped out? Is it time to take some profits off the table, or to go completely back into the woods where the bears hang out? This is the first of those articles.
Frequent readers know that I already have my exit strategy in place for my public Capital Appreciation Portfolio. There are three holdings there: SPY (the ETF that tracks the S&P 500); QQQQ (the ETF that tracks the NASDAQ); and IBM, the only individual company. The first two holdings--SPY and QQQQ--are protected by 8% trailing sell-stops. I update the stops each weekend, sometimes in the middle of the week if the market makes a significant one-day jump. I have a 10% trailing sell-stop under IBM.
That's my approach to controlling risk. Others may be protecting their profits with hedging strategies, or by using sell-stops placed at different values...5%, 10%, the 20-day simple moving average (SMA), the 50-day SMA, or "support" lines they have drawn on a chart. There are an infinite number of ways to select the level of a sell-stop.
However you are protecting your profits, these occasional Topped Out? articles will be asking a different question: Are we back in a bear market? I will let that term be vaguely defined for now. Let's just say that I am asking whether we have entered a period where the market is likely to decline by 20% or more. That matches the rule-of-thumb definition of a bear market.
Of course, by definition, no one knows the future. So these articles will necessarily consist of conjecture. But I will base my conjecture on facts and sound reasoning to the best of my ability.
I have stated many times that this has been a sentiment-driven bull market. While it has been more powerful than most, in many ways it is a garden-variety recession bull. Of the previous nine recessions before the current one, the stock market has bottomed out and started back up several months in advance of the end of the recession. That's what has happened here since March. Why does that happen? Stock investors look forward--the stock market is a leading indicator of the economy. So it often starts back up while the economy is still mired in recession, indeed while many elements of the recession are still getting worse.
But the market does not do that based on simple hope. I have coined the term "net news flow" to explain what positive-minded stock buyers have been reacting to during this bull market. They have been reacting to the so-called "green shoots"...signs that the economy might be pulling out of the recession. Early on (say last March), most any sign that could be interpreted positively was a data point that was simply "less bad" than before. The perceived meaning of this was that the downward cycle of various indicators was slowing down and bottoming out--a necessary precondition to the indicators actually turning back upward.
Currently, most indicators have slowed their descent significantly, some have clearly reached a trough, and some have turned upwards. For example the Conference Board's Index of Leading Economic Indicators has risen for four straight months. I track a few important indicators in my bi-weekly Timing Outlook reports.
One specific topic to end with: In the last earnings season, a majority of companies reported earnings that were "positive surprises," meaning they exceeded the consensus expectations of stock analysts. All of these positive surprises contributed greatly to the positive net news flow that helped the market along. In most cases, the quarterly reports did not reflect growing revenue or earnings compared to a year ago. They simply reflected better-than-expected earnings, which in most cases were well down from a year before. Most of those positive surprises were based on companies' fast cost-cutting, which meant layoffs and hiring freezes. That's why we have the high unemployment rate that we do right now.
However, it did not go unnoticed that, while earnings surprised positively, revenue often did not. Not only that, many companies' projections for revenue going forward were not encouraging. So here's my thought: Last earnings season was a "free pass" on the revenue front in terms of how forgiving the stock market was in interpreting the news. The market forgave revenue misses and rewarded earnings hits.
We have a new earnings season coming up in a couple of weeks. If many companies do not show sequential revenue jumps (that is, quarter-over-quarter), and/or do not project positive revenue expectations going forward, then positive earnings surprises will not be enough to count as "good news" this time around. This will not help the net news flow, will not add to positive investor sentiment, and may herald a new bear market.
Monday, September 21, 2009
Timing Outlook: Still Positive
1. Summary
The Timing Outlook remains 9.0, or “positive.” That makes 11 of the last 12 readings positive, with a single “neutral” interruption a couple months ago.
The S&P 500 index has stayed above its March 9 close for 28 consecutive weeks, gaining a near-unbelievable 58% in that time. The “September swoon” has not happened, nor has it been a volatile month to this point. Staistically over many years, September has averaged out as the worst month for stocks, but with 9 days to go in this September, it's been a good month this year.
How much longer can the rally last? There may be a couple of clouds on the horizon: First, the market is pushing toward overvalued territory, and some are saying it is already overvalued, with a few calling it a "bubble" (a view that I do not share). With a new earnings season due to begin in a couple of weeks, we will get more insight into that soon.
Second, the entire rally has been a "recession rally," meaning that it has come in the middle of a recession and has been based on expectations that the recession will be coming to an end. These expectations, in turn, spring up from what I call a "net news flow" that is positive, in the sense that the news, on average, shows fundamental economic indicators either getting worse at a declining rate, or bottoming out, or actually improving. For the rally to continue, the positive net news flow must continue, meaning that the economy must actually be improving. "Less bad" news will no longer be good enough, at some point.
Be vigilant for signs of a reversal. As always, use trailing sell-stops or some other form of hedging on your long stock positions. (I am using trailing sell-stops of 8% or 10% below current price on all holdings.) Meanwhile, enjoy the ride for as long as it lasts.
2. Market Performance Since Last Outlook
Note: Numbers labelled "now" are as of close Friday 9/18/09
Last Outlook (9/7/09): 9.0 (positive)
S&P 500 last time (9/7/09): 1016
S&P 500 now: 1068 Change: +5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1068 Change YTD: +18%
S&P 500 at close 3/9/09: 677 (what we can now call the end of the bear market)
S&P 500 now: 1068 Change since 3/9/09: +58%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report issued today showed
fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Positive. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E has risen again, from 18.1 to 18.9. At a value above 17.4 but below 19.3, this indicator is considered neutral. Note that it is approaching “overvalued” territory. +5
--Morningstar’s Market Valuation Graph rises from 0.98 to 1.04. While this is well within the neutral range of 0.90 to 1.10, it too may be heading to “overvalued” territory (above 1.10). (Historical data: Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) +5
--S&P 500 Short Term Technical Trend: All three charts (S&P 500, DJIA, and NASDAQ) are as positive as you can get in relation to all three simple moving averages (SMA) we use. On each chart, the lineup is this: Index > 20-day SMA > 50-day SMA > 200-day SMA. That makes all the trends positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: Positive. +10
--NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
The Timing Outlook remains 9.0, or “positive.” That makes 11 of the last 12 readings positive, with a single “neutral” interruption a couple months ago.
The S&P 500 index has stayed above its March 9 close for 28 consecutive weeks, gaining a near-unbelievable 58% in that time. The “September swoon” has not happened, nor has it been a volatile month to this point. Staistically over many years, September has averaged out as the worst month for stocks, but with 9 days to go in this September, it's been a good month this year.
How much longer can the rally last? There may be a couple of clouds on the horizon: First, the market is pushing toward overvalued territory, and some are saying it is already overvalued, with a few calling it a "bubble" (a view that I do not share). With a new earnings season due to begin in a couple of weeks, we will get more insight into that soon.
Second, the entire rally has been a "recession rally," meaning that it has come in the middle of a recession and has been based on expectations that the recession will be coming to an end. These expectations, in turn, spring up from what I call a "net news flow" that is positive, in the sense that the news, on average, shows fundamental economic indicators either getting worse at a declining rate, or bottoming out, or actually improving. For the rally to continue, the positive net news flow must continue, meaning that the economy must actually be improving. "Less bad" news will no longer be good enough, at some point.
Be vigilant for signs of a reversal. As always, use trailing sell-stops or some other form of hedging on your long stock positions. (I am using trailing sell-stops of 8% or 10% below current price on all holdings.) Meanwhile, enjoy the ride for as long as it lasts.
2. Market Performance Since Last Outlook
Note: Numbers labelled "now" are as of close Friday 9/18/09
Last Outlook (9/7/09): 9.0 (positive)
S&P 500 last time (9/7/09): 1016
S&P 500 now: 1068 Change: +5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1068 Change YTD: +18%
S&P 500 at close 3/9/09: 677 (what we can now call the end of the bear market)
S&P 500 now: 1068 Change since 3/9/09: +58%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report issued today showed
fifth consecutive monthly increase. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Positive. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E has risen again, from 18.1 to 18.9. At a value above 17.4 but below 19.3, this indicator is considered neutral. Note that it is approaching “overvalued” territory. +5
--Morningstar’s Market Valuation Graph rises from 0.98 to 1.04. While this is well within the neutral range of 0.90 to 1.10, it too may be heading to “overvalued” territory (above 1.10). (Historical data: Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) +5
--S&P 500 Short Term Technical Trend: All three charts (S&P 500, DJIA, and NASDAQ) are as positive as you can get in relation to all three simple moving averages (SMA) we use. On each chart, the lineup is this: Index > 20-day SMA > 50-day SMA > 200-day SMA. That makes all the trends positive. +10
--S&P 500 Medium Term Technical Trend: Positive. +10
--DJIA Short Term Technical Trend: Positive. +10
--DJIA Medium Term Technical Trend: Positive. +10
--NASDAQ Short Term Technical Trend: Positive. +10
--NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
Monday, September 7, 2009
Additions to Mission and Values
I'll bet you have never read the Mission and Values statement on SensibleStocks.com. Most people don't. Many have been jaded by generic mission statements that abound in corporate life, and others may think it is just hype or self-serving claptrap.
I actually take the statement of Mission and Values very seriously. I drafted it carefully and have revised it several times. I use it to guide me. It truly reflects what I want to accomplish with SensibleStocks.com.
Inherent in all investing is the gathering, analysis, interpretation, and use of information. I ran across something yesterday that made me realize that I had not explicitly and clearly stated my philosophy about information. So I have now done so.
These are the sections affected. The numbers in parentheses are the numbered statements in the Mission and Values themselves. The text marked in color is what I have added. (Note to subscribers: Such features as boldface and color do not show up on the subscription version of this Newsletter that you receive. I don't know why. You can see the fully formatted version by clicking on the title at the top of this page.)
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(2) Gaining an edge. Peter Lynch was correct when he said, “the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.” SensibleStocks.com will help the individual exploit these advantages and create an edge where it can. The edge does not usually come from having more (or "inside") information, but from how information is interpreted and utilized.
(3) Fact-based. SensibleStocks.com is non-ideological. There is no "correct" style of investing. All information and strategies are fact-based and targeted at raising the odds of success. We try out diverse viewpoints and go where the facts lead us. Furthermore, we strive to present all information in an accurate, meaningful, understandable, and insightful way.
(5) Transparent. All information provided or published on Sensible Stocks.com is identified as to source. No secret formulas or proprietary algorithms are used. Everything can be checked out by the user. We aim to simplify concepts wherever possible. Source data is gleaned from multiple free public providers believed to be reliable. That data is then analyzed, integrated, and interpreted to provide meaningful, educational, and actionable information for self-directed individual investors.
----------
I had another motivation in clarifying my thinking about information and making these changes. I believe that in the age of the Internet, the trustworthiness of information has reached an all-time low, while the ease of its dissemination has reached an all-time high. For example, you have undoubtedly been exposed to political e-mails that fly around the Internet. Some of them are useful and thoughtful, and they can help hone one's thinking on important political subjects. Others are meant to be, and are, funny, and we can all stand to laugh at ourselves once in a while.
But many of them are little more than rants. They are based on faulty, falsified, and selective information used to support a pre-chosen viewpoint. They state opinion as fact. They conform to no editorial standards whatsoever. They seem designed to incite, anger, create fear, and mislead. Sometimes they refer to a source, and if you check out the source, you discover that it has been mis-represented or outight falsified. And nobody seems embarrassed to pass this misleading stuff around, nor moved to correct it for the benefit of their many recipients if the errors are pointed out. Frankly, I am distressed by how prevalent this practice has become. I have taken to deleting practically all incoming e-mails whose titles sound political. It is upsetting to think that otherwise intelligent Americans will use lies, smears, distortions, and name-calling to influence other Americans on important subjects.
Similar problems exist in financial and investing information. In the course of my work, I consult many sources, including blogs, articles, and reader commentaries. I check out or just reject anything that does not pass a basic smell test, or that seems to be opinion masquerading as fact. False financial information can cost you big bucks. It is important to make investment decisions based on information that is both accurate and interpreted intelligently. Unfortunately, there is lot out there that does not meet these fundamental requirements.
So I have made the changes outlined above both to reinforce my own practices, and also to reassure users of SensibleStocks.com that the facts and information provided on this site are, to the best of my knowledge and ability, accurate and interpreted intelligently. The site truly is dedicated to the success of the individual investor. That mission would be violated by the use of false data or stupid analysis.
If you would like to read the full Mission and Values statement (it is not very long), click here.
I actually take the statement of Mission and Values very seriously. I drafted it carefully and have revised it several times. I use it to guide me. It truly reflects what I want to accomplish with SensibleStocks.com.
Inherent in all investing is the gathering, analysis, interpretation, and use of information. I ran across something yesterday that made me realize that I had not explicitly and clearly stated my philosophy about information. So I have now done so.
These are the sections affected. The numbers in parentheses are the numbered statements in the Mission and Values themselves. The text marked in color is what I have added. (Note to subscribers: Such features as boldface and color do not show up on the subscription version of this Newsletter that you receive. I don't know why. You can see the fully formatted version by clicking on the title at the top of this page.)
----------
(2) Gaining an edge. Peter Lynch was correct when he said, “the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.” SensibleStocks.com will help the individual exploit these advantages and create an edge where it can. The edge does not usually come from having more (or "inside") information, but from how information is interpreted and utilized.
(3) Fact-based. SensibleStocks.com is non-ideological. There is no "correct" style of investing. All information and strategies are fact-based and targeted at raising the odds of success. We try out diverse viewpoints and go where the facts lead us. Furthermore, we strive to present all information in an accurate, meaningful, understandable, and insightful way.
(5) Transparent. All information provided or published on Sensible Stocks.com is identified as to source. No secret formulas or proprietary algorithms are used. Everything can be checked out by the user. We aim to simplify concepts wherever possible. Source data is gleaned from multiple free public providers believed to be reliable. That data is then analyzed, integrated, and interpreted to provide meaningful, educational, and actionable information for self-directed individual investors.
----------
I had another motivation in clarifying my thinking about information and making these changes. I believe that in the age of the Internet, the trustworthiness of information has reached an all-time low, while the ease of its dissemination has reached an all-time high. For example, you have undoubtedly been exposed to political e-mails that fly around the Internet. Some of them are useful and thoughtful, and they can help hone one's thinking on important political subjects. Others are meant to be, and are, funny, and we can all stand to laugh at ourselves once in a while.
But many of them are little more than rants. They are based on faulty, falsified, and selective information used to support a pre-chosen viewpoint. They state opinion as fact. They conform to no editorial standards whatsoever. They seem designed to incite, anger, create fear, and mislead. Sometimes they refer to a source, and if you check out the source, you discover that it has been mis-represented or outight falsified. And nobody seems embarrassed to pass this misleading stuff around, nor moved to correct it for the benefit of their many recipients if the errors are pointed out. Frankly, I am distressed by how prevalent this practice has become. I have taken to deleting practically all incoming e-mails whose titles sound political. It is upsetting to think that otherwise intelligent Americans will use lies, smears, distortions, and name-calling to influence other Americans on important subjects.
Similar problems exist in financial and investing information. In the course of my work, I consult many sources, including blogs, articles, and reader commentaries. I check out or just reject anything that does not pass a basic smell test, or that seems to be opinion masquerading as fact. False financial information can cost you big bucks. It is important to make investment decisions based on information that is both accurate and interpreted intelligently. Unfortunately, there is lot out there that does not meet these fundamental requirements.
So I have made the changes outlined above both to reinforce my own practices, and also to reassure users of SensibleStocks.com that the facts and information provided on this site are, to the best of my knowledge and ability, accurate and interpreted intelligently. The site truly is dedicated to the success of the individual investor. That mission would be violated by the use of false data or stupid analysis.
If you would like to read the full Mission and Values statement (it is not very long), click here.
Timing Outlook Remains Positive as September Kicks Off
1. Summary
The Timing Outlook remains at 9.0, or “positive.” That makes 10 of the last 11 readings positive, with a single “neutral” interruption a few weeks ago. The S&P 500 index has stayed above its March 9 close for 26 consecutive weeks.
The interesting question is now becoming how much longer the rally will last. September is historically the worst month for stocks. Statistically, September has the lowest average return of any month. I have not read a convincing theory on why this should be so, but it can become a self-fulfilling prophecy: Last Tuesday was September 1, and sure enough the market fell 2%. And because of the late Labor Day, I’m sure many consider tomorrow (Tuesday September 8) as the real beginning of September. I would not be surprised to see another market drop tomorrow as traders return from vacation and September “starts over.” I also would not be surprised if September turns out to be a volatile month.
2. Market Performance Since Last Outlook
New Outlook (9/7/09): 9.0 = positive
Last Outlook (8/27/09): 9.0 = positive
S&P 500 last time (8/27/09): 1031
S&P 500 now: 1016 Change: -1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1016 Change YTD: +13%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1016 Change since 3/9/09: +50%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No change. Last report issued August 20 increased for the fourth straight month. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E remained the same as last time at 18.1. At a value above 17.4 but below 19.3, this indicator is considered neutral. +5
--Morningstar’s Market Valuation Graph drops slightly from 1.00 to 0.98, well within the neutral range of 0.90 to 1.10. Morningstar calculates fair values for the ~2000 stocks they cover, then compares their actual prices to the fair value estimates. A reading of 1.00 means the market is fairly valued by this method. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) Neutral. +5
--S&P 500 Short Term Technical Trend: The S&P 500’s chart returns to positive after a substantial market drop last Tuesday put the index below its own 20-day simple moving average (SMA). Gains later in the week moved the index back above. We now have index > 20-day SMA > 50-day SMA. Positive. +10
--S&P 500 Medium Term Technical Trend: This indicator considers the index and the two longer SMAs. We have index > 50-day SMA > 200-day SMA. Positive. +10
--DJIA Short Term Technical Trend: Same story as with the S&P 500 chart. Positive. +10
--DJIA Medium Term Technical Trend: Same story. +10
--NASDAQ Short Term Technical Trend: Same as S&P 500 and DJIA. Positive. +10
--NASDAQ Medium Term Technical Trend: Same story. Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
The SensibleStocks.com Timing Outlook is a tool to help you make better buy, hold, and sell decisions. Its mission and design is to suggest the likely direction of the market over short time periods (2-4 weeks). Find out more about how it works by clicking here. Track my Capital Appreciation Portfolio by clicking here.
Although it is September, it is not too late to benefit from THE TOP 40 DIVIDEND STOCKS FOR 2009: Dividend Investing for the Long Haul. Most of the stocks in the list have already raised their dividends in 2009, proving their mettle. The e-book contains valuable information on how to start, maintain, and upgrade a dividend portfolio. Find out more about it by clicking here. If you are new to dividend investing, learn how to get started by reading this free FAQ. Track my Dividend Portfolio by clicking here.
The Timing Outlook remains at 9.0, or “positive.” That makes 10 of the last 11 readings positive, with a single “neutral” interruption a few weeks ago. The S&P 500 index has stayed above its March 9 close for 26 consecutive weeks.
The interesting question is now becoming how much longer the rally will last. September is historically the worst month for stocks. Statistically, September has the lowest average return of any month. I have not read a convincing theory on why this should be so, but it can become a self-fulfilling prophecy: Last Tuesday was September 1, and sure enough the market fell 2%. And because of the late Labor Day, I’m sure many consider tomorrow (Tuesday September 8) as the real beginning of September. I would not be surprised to see another market drop tomorrow as traders return from vacation and September “starts over.” I also would not be surprised if September turns out to be a volatile month.
2. Market Performance Since Last Outlook
New Outlook (9/7/09): 9.0 = positive
Last Outlook (8/27/09): 9.0 = positive
S&P 500 last time (8/27/09): 1031
S&P 500 now: 1016 Change: -1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1016 Change YTD: +13%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1016 Change since 3/9/09: +50%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: No change. Last report issued August 20 increased for the fourth straight month. Positive. +10
--Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E remained the same as last time at 18.1. At a value above 17.4 but below 19.3, this indicator is considered neutral. +5
--Morningstar’s Market Valuation Graph drops slightly from 1.00 to 0.98, well within the neutral range of 0.90 to 1.10. Morningstar calculates fair values for the ~2000 stocks they cover, then compares their actual prices to the fair value estimates. A reading of 1.00 means the market is fairly valued by this method. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) Neutral. +5
--S&P 500 Short Term Technical Trend: The S&P 500’s chart returns to positive after a substantial market drop last Tuesday put the index below its own 20-day simple moving average (SMA). Gains later in the week moved the index back above. We now have index > 20-day SMA > 50-day SMA. Positive. +10
--S&P 500 Medium Term Technical Trend: This indicator considers the index and the two longer SMAs. We have index > 50-day SMA > 200-day SMA. Positive. +10
--DJIA Short Term Technical Trend: Same story as with the S&P 500 chart. Positive. +10
--DJIA Medium Term Technical Trend: Same story. +10
--NASDAQ Short Term Technical Trend: Same as S&P 500 and DJIA. Positive. +10
--NASDAQ Medium Term Technical Trend: Same story. Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
The SensibleStocks.com Timing Outlook is a tool to help you make better buy, hold, and sell decisions. Its mission and design is to suggest the likely direction of the market over short time periods (2-4 weeks). Find out more about how it works by clicking here. Track my Capital Appreciation Portfolio by clicking here.
Although it is September, it is not too late to benefit from THE TOP 40 DIVIDEND STOCKS FOR 2009: Dividend Investing for the Long Haul. Most of the stocks in the list have already raised their dividends in 2009, proving their mettle. The e-book contains valuable information on how to start, maintain, and upgrade a dividend portfolio. Find out more about it by clicking here. If you are new to dividend investing, learn how to get started by reading this free FAQ. Track my Dividend Portfolio by clicking here.
Tuesday, September 1, 2009
Timing Outlook Still Positive, But Barely So
Special note:
Because of today's large market pullback, all three of the short-term technical indicators in the Timing Outlook fell to neutral from positive. Specifically, each of the three indexes (S&P 500, Dow Jones Industrial Average, and NASDAQ) fell below its 20-day simple moving average (SMA). In terms of calculating the Timing Outlook, all three therefore fell from +10 to +5.
That takes the total of all indicators down from a score of 90 to 75. The Timing Outlook thus registers 75/10 = 7.5. That is still a positive value (since it is above 7), but I thought I would post this special note for those who were wondering, especially since each index closed near its low for the day.
Each index is still above its 50-day and 200-day SMAs. However, another large drop or two could take the index below its 50-day SMA, which would turn all three short-term indicators negative, and bring the overall Timing Outlook itself down to neutral.
For now, I am doing nothing in reaction to today's pullback. I have 8% sell-stops in place, although they now sit about 4% below the current prices of SPY, QQQQ, and IBM, the three ETFs and stocks that I own in my Capital Appreciation Portfolio.
Because of today's large market pullback, all three of the short-term technical indicators in the Timing Outlook fell to neutral from positive. Specifically, each of the three indexes (S&P 500, Dow Jones Industrial Average, and NASDAQ) fell below its 20-day simple moving average (SMA). In terms of calculating the Timing Outlook, all three therefore fell from +10 to +5.
That takes the total of all indicators down from a score of 90 to 75. The Timing Outlook thus registers 75/10 = 7.5. That is still a positive value (since it is above 7), but I thought I would post this special note for those who were wondering, especially since each index closed near its low for the day.
Each index is still above its 50-day and 200-day SMAs. However, another large drop or two could take the index below its 50-day SMA, which would turn all three short-term indicators negative, and bring the overall Timing Outlook itself down to neutral.
For now, I am doing nothing in reaction to today's pullback. I have 8% sell-stops in place, although they now sit about 4% below the current prices of SPY, QQQQ, and IBM, the three ETFs and stocks that I own in my Capital Appreciation Portfolio.
Monday, August 31, 2009
Why This Rally Has Been Sustained
This is the fourth in a series of articles that have explored the nature of the current bull market rally. The previous articles were:
-- "What Kind of a Rally Is This?" (August 17)
-- "Is This Rally Sustainable?" (June 3)
-- "Are We There Yet?" (April 20)
The rally--many would flat-out call it a bull market, including me--has now reached almost six months in length. After a rocket start, the rate of ascent has slowed, but overall the rally has been remarkably consistent: +9% in March, +9% in April, +5% in May, flat in June, +8% in July, and +3% in August. The overall gain has been 51% since the S&P 500's close at 677 on March 9. If you define “correction” as a 10% pullback, there has been no correction along the way.
There are those who contend that the rally is somehow invalid, or contrived, because the rally is unsupported by fundamentals. In contrast, I believe that this rally has been fully supported by fundamentals, although I suspect many will disagree with how I define “fundamentals.” Here is my reasoning in three easy steps:
First, too many investors, while recognizing that both the stock market and the economy run in cycles, believe that the cycles must be concurrent. That is, they think that the stock market’s value and economic fundamental values must always be directly proportionate, that they go up and down together. But that is not reality. There are often significantly long stretches when the market’s cycle and the economic cycle are out of phase. That has been consistently true in recessions. In eight of the last nine recessions, the stock market has anticipated the end of the recession by an average of about six months. The market displays its anticipation by going up while the economy is still going down. In April, after watching the market go up for more than three weeks, I postulated that would happen again. It has, making it now nine out of the last ten recessions that the market has made a significant increase during the recession.
Second, it follows that it is reasonable to define fundamental economic metrics as “improving” if they are getting worse at a slowing rate. Such fundamental economic measures as the GDP, employment rate, consumer confidence, the Conference Board’s LEI (Index of Leading Economic Indicators), reports from ISM (Institute for Supply Management), housing prices, credit availability, and the like, do not have to be actually going up to be “improving.” They may still be dropping toward their eventual trough—the economy may still be contracting—but the important observation is that the rate of contraction is slowing. If that is happening, then you can reasonably infer that the recession is in fact reaching its late stages. By definition from the National Bureau of Economic Research (NBER), which has quasi-official status in such matters, a recession ends when the economy stops contracting.
Third, what I call the “net news flow” has been kicking out many data points for months now that economic fundamentals were in fact getting worse at a slowing rate. In the past couple of months, a few of the fundamental economic measures have reached individual inflection points and actually started to rise. For example, the LEI have been going up for four months. More recently, housing prices (as measured by the Case-Shiller Index) have stopped falling and have risen in some metropolitan areas. Of course, the news is often lumpy and seemingly contradictory. That’s life and is why I call it “net news flow.” The point is that the “average” of all the economic news, taken as a whole, has been going in the right direction since this rally started.
That is why I believe that this rally has been fully supported by economic fundamentals. As you can guess, I disagree with the critics of “green shoots.” The market runs on investor sentiment. It is the green shoots that have fueled this rally, giving hope to investors who have bid up stock prices in the belief that the economy first pulled back from the abyss and will begin growing soon.
I invested based on this reasoning. I maintain a publicly published Capital Gains Portfolio, a demonstration portfolio for purchasers of my book, Sensible Stock Investing, that is also available for free viewing by the curious. The portfolio was entirely in cash for many months before this rally began. But in April, I began cautiously buying into the rally, mostly through a series of purchases of SPY (SPDRS, an ETF that tracks the S&P 500). Last week, I made my final purchase. The portfolio is now 100% invested.
In addition to the cautious, gradual re-entry into the market, I’ve helped manage risk by using tight 8% trailing sell-stops. None of the stops has been hit. All positions are in positive territory. Because of the gradual investments, the portfolio’s performance this year is a bit behind the S&P 500’s. That’s OK. Because the portfolio was in cash for so long, it did not suffer as much from the crash that preceded the rally, so overall the portfolio is way ahead of the S&P 500 benchmark index since its inception. Risk management is very important; it helps you avoid severe consequences of being wrong.
Where is the market going from here? I haven’t given that much thought, to be honest. Now that I am fully invested (no new money goes into the portfolio other than dividends it generates), I have no more decisions to make for a while. My exit strategy is already in place via the sell-stops. From time to time, I may play with the stops (tighten them, loosen them, or use a moving average rather than a flat percentage to set them), but I do not need to anticipate the market’s next major move. Past readers of my articles may recall that I believe in “waiting for the turn” anyway. When the market does turn down, my sell-stops will get me out of there.
That said, I think that strong arguments can be made for at least three scenarios:
--The market will make a correction (that is, contract by more than 10%), then resume its expansion if the news warrants it;
--The rally will continue for some more time, without a correction, anywhere from a few weeks to many months, depending on the news flow; and
--The rally will end and the market will reverse and begin to contract. This is what I think will happen if the net news flow turns clearly negative. So if, as many believe, we are in for a double-dip recession, signs of that will show up in the news flow, and the market (again leading the economy) will anticipate that and go backwards.
-- "What Kind of a Rally Is This?" (August 17)
-- "Is This Rally Sustainable?" (June 3)
-- "Are We There Yet?" (April 20)
The rally--many would flat-out call it a bull market, including me--has now reached almost six months in length. After a rocket start, the rate of ascent has slowed, but overall the rally has been remarkably consistent: +9% in March, +9% in April, +5% in May, flat in June, +8% in July, and +3% in August. The overall gain has been 51% since the S&P 500's close at 677 on March 9. If you define “correction” as a 10% pullback, there has been no correction along the way.
There are those who contend that the rally is somehow invalid, or contrived, because the rally is unsupported by fundamentals. In contrast, I believe that this rally has been fully supported by fundamentals, although I suspect many will disagree with how I define “fundamentals.” Here is my reasoning in three easy steps:
First, too many investors, while recognizing that both the stock market and the economy run in cycles, believe that the cycles must be concurrent. That is, they think that the stock market’s value and economic fundamental values must always be directly proportionate, that they go up and down together. But that is not reality. There are often significantly long stretches when the market’s cycle and the economic cycle are out of phase. That has been consistently true in recessions. In eight of the last nine recessions, the stock market has anticipated the end of the recession by an average of about six months. The market displays its anticipation by going up while the economy is still going down. In April, after watching the market go up for more than three weeks, I postulated that would happen again. It has, making it now nine out of the last ten recessions that the market has made a significant increase during the recession.
Second, it follows that it is reasonable to define fundamental economic metrics as “improving” if they are getting worse at a slowing rate. Such fundamental economic measures as the GDP, employment rate, consumer confidence, the Conference Board’s LEI (Index of Leading Economic Indicators), reports from ISM (Institute for Supply Management), housing prices, credit availability, and the like, do not have to be actually going up to be “improving.” They may still be dropping toward their eventual trough—the economy may still be contracting—but the important observation is that the rate of contraction is slowing. If that is happening, then you can reasonably infer that the recession is in fact reaching its late stages. By definition from the National Bureau of Economic Research (NBER), which has quasi-official status in such matters, a recession ends when the economy stops contracting.
Third, what I call the “net news flow” has been kicking out many data points for months now that economic fundamentals were in fact getting worse at a slowing rate. In the past couple of months, a few of the fundamental economic measures have reached individual inflection points and actually started to rise. For example, the LEI have been going up for four months. More recently, housing prices (as measured by the Case-Shiller Index) have stopped falling and have risen in some metropolitan areas. Of course, the news is often lumpy and seemingly contradictory. That’s life and is why I call it “net news flow.” The point is that the “average” of all the economic news, taken as a whole, has been going in the right direction since this rally started.
That is why I believe that this rally has been fully supported by economic fundamentals. As you can guess, I disagree with the critics of “green shoots.” The market runs on investor sentiment. It is the green shoots that have fueled this rally, giving hope to investors who have bid up stock prices in the belief that the economy first pulled back from the abyss and will begin growing soon.
I invested based on this reasoning. I maintain a publicly published Capital Gains Portfolio, a demonstration portfolio for purchasers of my book, Sensible Stock Investing, that is also available for free viewing by the curious. The portfolio was entirely in cash for many months before this rally began. But in April, I began cautiously buying into the rally, mostly through a series of purchases of SPY (SPDRS, an ETF that tracks the S&P 500). Last week, I made my final purchase. The portfolio is now 100% invested.
In addition to the cautious, gradual re-entry into the market, I’ve helped manage risk by using tight 8% trailing sell-stops. None of the stops has been hit. All positions are in positive territory. Because of the gradual investments, the portfolio’s performance this year is a bit behind the S&P 500’s. That’s OK. Because the portfolio was in cash for so long, it did not suffer as much from the crash that preceded the rally, so overall the portfolio is way ahead of the S&P 500 benchmark index since its inception. Risk management is very important; it helps you avoid severe consequences of being wrong.
Where is the market going from here? I haven’t given that much thought, to be honest. Now that I am fully invested (no new money goes into the portfolio other than dividends it generates), I have no more decisions to make for a while. My exit strategy is already in place via the sell-stops. From time to time, I may play with the stops (tighten them, loosen them, or use a moving average rather than a flat percentage to set them), but I do not need to anticipate the market’s next major move. Past readers of my articles may recall that I believe in “waiting for the turn” anyway. When the market does turn down, my sell-stops will get me out of there.
That said, I think that strong arguments can be made for at least three scenarios:
--The market will make a correction (that is, contract by more than 10%), then resume its expansion if the news warrants it;
--The rally will continue for some more time, without a correction, anywhere from a few weeks to many months, depending on the news flow; and
--The rally will end and the market will reverse and begin to contract. This is what I think will happen if the net news flow turns clearly negative. So if, as many believe, we are in for a double-dip recession, signs of that will show up in the news flow, and the market (again leading the economy) will anticipate that and go backwards.
Thursday, August 27, 2009
Timing Outlook Stays Positive
1. Summary
Today's Timing Outlook reading is 9.0, or “positive,” down from 9.5 last time. That makes 9 of the last 10 readings positive, with just one “neutral” interruption a few weeks ago. The only significant change from last time is that the P/E valuation of the S&P 500 has climbed into neutral territory from positive. That is a natural outcome of the stock market's rally. The other valuation indicator that I use--Morningstar's Market Valuation Graph--did the same thing a few weeks ago.
The S&P 500 index has now stayed above its March 9 close for 24 consecutive weeks--not only stayed above it, but climbed 52% above it. As mentioned last time, it is pretty safe to say that March 9 marked the end of the 16-month bear market phase that began in October, 2007.
That said, this could still be a “bear market rally,” meaning a bull market phase embedded within a much longer bear market. But at a duration of five+ months and a magnitude of 52% gain without a significant retreat (the biggest fallback was about 8% in June-July), this rally has proved itself to be sustained and investable.
As I have said repeatedly, I have been buying into this rally since April 2, making purchases with 5% chunks of my “stock money.” After multiple purchases, my Capital Gains Portfolio is essentially fully invested. It had been 100% in cash for many months prior to April 2. I am protecting my profits with 8% trailing sell-stops. Most of the purchases have been of SPY (the ETF that tracks the S&P 500 index), with a few purchases of QQQQ (the ETF that tracks the Nasdaq 100) and IBM.
2. Market Performance Since Last Outlook
New Outlook (8/27/09): 9.0 (POSITIVE)
Last Outlook (8/12/09): 9.5 (POSITIVE)
S&P 500 last time (8/12/09): 1006
S&P 500 now: 1031 Change: +2%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1031 Change YTD: +14%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1031 Change since 3/9/09: +52%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report issued August 20 increased for the fourth straight month. Positive. +10
--Fed Funds Rate: No change since last time. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E rose from 17.0 to 18.1. At a value above 17.4 but below 19.3, this indicator weakens from positive to neutral. +5
--Morningstar’s Market Valuation Graph is 1.00 for the third time in a row. This means that Morningstar feels that the ~2000 stocks they cover, taken as a whole, are fairly valued. That makes this indicator neutral. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) +5
--S&P 500 Short Term Technical Trend: The S&P 500’s chart remains positive. The index and its three key simple moving averages (SMA) line up in the most positive way. For this indicator, we look at the two shorter SMAs: index > 20-day SMA > 50-day SMA. That’s the most bullish arrangement you can have. +10
--S&P 500 Medium Term Technical Trend: Same story. This indicator considers the index and the two longer SMAs. We have index > 50-day SMA > 200-day SMA. Also, as noted last time, the 200-day SMA has bottomed out and is now itself in an upward trend. +10
--DJIA Short Term Technical Trend: Same story as with the S&P 500 chart. Positive. +10
--DJIA Medium Term Technical Trend: Same story. +10
--NASDAQ Short Term Technical Trend: Same as S&P 500 and DJIA. Positive. +10
--NASDAQ Medium Term Technical Trend: Same story. Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
-->The SensibleStocks.com Timing Outlook is a tool to help you make better buy, hold, and sell decisions. Its mission and design is to suggest the likely direction of the market over short time periods (2-4 weeks). Find out more about how it works by clicking here. Track my Capital Appreciation Portfolio by clicking here.
-->Although it is August, it is not too late to benefit from THE TOP 40 DIVIDEND STOCKS FOR 2009: Dividend Investing for the Long Haul. Most of the stocks in the list have raised their dividends in 2009. The e-book, which also contains complete information on how to start, maintain, and upgrade a dividend portfolio, is available from my Web site. Find out more about it by clicking here. If you are new to dividend investing, learn how to get started by reading this free FAQ. Track my Dividend Portfolio by clicking here.
Today's Timing Outlook reading is 9.0, or “positive,” down from 9.5 last time. That makes 9 of the last 10 readings positive, with just one “neutral” interruption a few weeks ago. The only significant change from last time is that the P/E valuation of the S&P 500 has climbed into neutral territory from positive. That is a natural outcome of the stock market's rally. The other valuation indicator that I use--Morningstar's Market Valuation Graph--did the same thing a few weeks ago.
The S&P 500 index has now stayed above its March 9 close for 24 consecutive weeks--not only stayed above it, but climbed 52% above it. As mentioned last time, it is pretty safe to say that March 9 marked the end of the 16-month bear market phase that began in October, 2007.
That said, this could still be a “bear market rally,” meaning a bull market phase embedded within a much longer bear market. But at a duration of five+ months and a magnitude of 52% gain without a significant retreat (the biggest fallback was about 8% in June-July), this rally has proved itself to be sustained and investable.
As I have said repeatedly, I have been buying into this rally since April 2, making purchases with 5% chunks of my “stock money.” After multiple purchases, my Capital Gains Portfolio is essentially fully invested. It had been 100% in cash for many months prior to April 2. I am protecting my profits with 8% trailing sell-stops. Most of the purchases have been of SPY (the ETF that tracks the S&P 500 index), with a few purchases of QQQQ (the ETF that tracks the Nasdaq 100) and IBM.
2. Market Performance Since Last Outlook
New Outlook (8/27/09): 9.0 (POSITIVE)
Last Outlook (8/12/09): 9.5 (POSITIVE)
S&P 500 last time (8/12/09): 1006
S&P 500 now: 1031 Change: +2%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1031 Change YTD: +14%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1031 Change since 3/9/09: +52%
3. Indicators in Detail
--Conference Board Index of Leading Economic Indicators: New report issued August 20 increased for the fourth straight month. Positive. +10
--Fed Funds Rate: No change since last time. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
--S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E rose from 17.0 to 18.1. At a value above 17.4 but below 19.3, this indicator weakens from positive to neutral. +5
--Morningstar’s Market Valuation Graph is 1.00 for the third time in a row. This means that Morningstar feels that the ~2000 stocks they cover, taken as a whole, are fairly valued. That makes this indicator neutral. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) +5
--S&P 500 Short Term Technical Trend: The S&P 500’s chart remains positive. The index and its three key simple moving averages (SMA) line up in the most positive way. For this indicator, we look at the two shorter SMAs: index > 20-day SMA > 50-day SMA. That’s the most bullish arrangement you can have. +10
--S&P 500 Medium Term Technical Trend: Same story. This indicator considers the index and the two longer SMAs. We have index > 50-day SMA > 200-day SMA. Also, as noted last time, the 200-day SMA has bottomed out and is now itself in an upward trend. +10
--DJIA Short Term Technical Trend: Same story as with the S&P 500 chart. Positive. +10
--DJIA Medium Term Technical Trend: Same story. +10
--NASDAQ Short Term Technical Trend: Same as S&P 500 and DJIA. Positive. +10
--NASDAQ Medium Term Technical Trend: Same story. Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
-->The SensibleStocks.com Timing Outlook is a tool to help you make better buy, hold, and sell decisions. Its mission and design is to suggest the likely direction of the market over short time periods (2-4 weeks). Find out more about how it works by clicking here. Track my Capital Appreciation Portfolio by clicking here.
-->Although it is August, it is not too late to benefit from THE TOP 40 DIVIDEND STOCKS FOR 2009: Dividend Investing for the Long Haul. Most of the stocks in the list have raised their dividends in 2009. The e-book, which also contains complete information on how to start, maintain, and upgrade a dividend portfolio, is available from my Web site. Find out more about it by clicking here. If you are new to dividend investing, learn how to get started by reading this free FAQ. Track my Dividend Portfolio by clicking here.
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