Timing Outlook Rises Slightly, Remains Positive

1. Summary

The Outlook remains in positive territory for a fourth straight reading, jumping up a half-point to 7.5. So March 9 continues to represent a possible end of the 16-month bear market that began in October 2007, as the S&P 500 index has stayed above its March 9 close for 12 weeks. Each individual month during this rally (March, April, and May) has been positive.

In reaction, I have made a series of relatively small purchases in my “Capital Appreciation” portfolio, each backed by a tight sell-stop. From all-cash in mid-March, the portfolio is now 52% invested and 48% cash. Most of the investments have been in SPY, an ETF that tracks the S&P 500.

2. Market Performance Since Last Outlook

New Outlook (5/30/09): 7.5 POSITIVE

Last Outlook (5/14/09): 7.0 (POSITIVE)
S&P 500 last time (5/14/09): 893
S&P 500 now: 919 Change: +3%

S&P 500 at beginning of 2009: 903
S&P 500 now: 919 Change YTD: +2%

S&P 500 at close 3/9/09 (possible end of bear market): 677
S&P 500 now: 919 Change since 3/9/09: +36%

3. Indicators in Detail

· Conference Board Index of Leading Economic Indicators: May’s report (covering April) rose for the first time in 7 months. That raises this indicator from negative to neutral. It would take two more consecutive increases to consider it positive. +5

· Fed Funds Rate: No change. The Fed Funds rate remains at 0.5%. There have been 10 cuts (with no increases) since 8/07 totaling 4.75%. There is nothing more the Fed can do with interest rates to make this indicator “better.” Of course, many Federal programs are injecting money into the economy. +10

· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E moves up again from 16.3 to 16.8. At a value below 17.4, this indicator remains positive. +10

· Morningstar’s Market Valuation Graph is 0.93, up from 0.87 last time. This indicator has steadily risen during the rally that began March 10, and it now passes out of positive into neutral territory. Reminder of how this works: At a value of 1.00, Morningstar figures that, in the aggregate, the actual value of the 2000 stocks it covers equals its calculation of their "fair value." I leave a 10% cushion on either side of that. So a value of 0.90 to 1.10 is considered neutral. Below 0.90 = positive, above 1.10 = negative. (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 rally, which began swiftly March 10, has become far less dramatic but has remained more-or-less steady, with normal levels of volatility. No rally is ever "straight up." The index, its 20-day simple moving average (SMA), and 50-day SMA are all converging as the rally has flattened out. That said, they still line up same as last time: The index is above its 20-day SMA, and both are above the 50-day SMA. Thus the indicator remains positive. +10

· S&P 500 Medium Term Technical Trend: The index and its two shorter SMAs remain below its 200-day SMA. That keeps this indicator neutral. +5

· DJIA Short Term Technical Trend: Same situation as S&P 500. Positive. +10

· DJIA Medium Term Technical Trend: Same situation as S&P 500. Neutral. +5

· NASDAQ Short Term Technical Trend: The NASDAQ, which had dropped slightly below its 20-day SMA, has risen back above it. The index, 20-day, and 50-day SMAs line up in that order. Positive. +10

· NASDAQ Medium Term Technical Trend: The index has risen above its 20-day and 200-day SMAs, and the 20-day has risen above the 200-day, a “golden cross.” However, unless and until the 50-day also surpasses the 200-day, this indicator remains neutral. +5

TOTAL POINTS: 75 NEW READING: 75/10 = 7.5 = POSITIVE