The Outlook remains in positive territory for the sixth straight reading. It has been bouncing between 7.0 and 7.5 for about 3 months. In the market, March, April, and May each showed positive returns, while June is +1% with one day to go. So March 9 still represents a possible end of the 16-month bear market that began in October 2007. The S&P 500 index has stayed above its March 9 close for 16 consecutive weeks.
2. Market Performance Since Last Outlook
New Outlook (6/29/09): 7.5 (POSITIVE)
Last Outlook (6/17/09): 7.0 (POSITIVE)
S&P 500 last time (6/17/09): 911
S&P 500 now: 927 Change: +2%
S&P 500 at beginning of 2009: 903
S&P 500 now: 927 Change YTD: +3%
S&P 500 at close 3/9/09: 677
S&P 500 now: 927 Change since 3/9/09: +37%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: No new report since last time. The indicator stays neutral. +5
· 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 are injecting money into the economy. +10
· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E remained about the same at 14.9 (it was 14.8 last time). At a value below 17.4, this indicator remains positive. +10
· Morningstar’s Market Valuation Graph is 0.92, unchanged from last time. It remains in neutral territory. (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 on March 10, slowed in June (up 1%). The index fell below its 20-day simple moving average (SMA) for a few days, but since has risen slightly back above it. So the readings are lined up: index > 20-day SMA > 50-day SMA. Thus this indicator rises back to positive. +10
· S&P 500 Medium Term Technical Trend: The 50-day SMA has crossed through the 200-day SMA (a “golden cross”). Everything lines up: index > 50-day SMA > 200-day SMA, with the result that this indicator rises to positive for the first time in a long time. +10
· DJIA Short Term Technical Trend: The Dow also fell below its 20-day SMA, but unlike the S&P 500, it has not yet returned above it. The lineup: 20-day SMA > index > 50-day SMA. That makes this chart ambiguous and neutral. +5
· DJIA Medium Term Technical Trend: Unchanged since last time: Index > 200-day SMA > 50-day SMA. Ambiguous and neutral. +5
· NASDAQ Short Term Technical Trend: The index, 20-day, and 50-day SMAs line up in that order. Positive. +10
· NASDAQ Medium Term Technical Trend: The 50-day SMA had its “golden cross” through the 200-day SMA a couple of weeks ago. Index > 50-day SMA > 200-day SMA. Positive. +10
TOTAL POINTS: 75 NEW READING: 75/10 = 7.5 = POSITIVE
Learn more about the philosophy behind the Timing Outlook and how it is calculated. Click here.
Monday, June 29, 2009
Thursday, June 18, 2009
Timing Outlook Remains Positive Despite Market Moderation in June
1. Summary
The Timing Outlook remains in positive territory for a fifth straight reading, dropping a half-point to 7.0. Therefore, March 9 still represents a possible end of the 16-month bear market that began in October 2007, as the S&P 500 has stayed above its March 9 close for 14 weeks. March, April, and May each showed positive returns. June is down 1% through June 17. I have paused buying for my Capital Appreciation portfolio, which is now 68% invested and 32% in cash. (It was all cash for many months until April 2.) I will resume buying if the market shows signs of restoring its upward trend of the previous three months.
2. Market Performance Since Last Outlook
New Outlook (6/17/09): 7.0 (POSITIVE)
Last Outlook (5/30/09): 7.5 (POSITIVE)
S&P 500 last time (5/30/09): 919
S&P 500 now: 911 Change: -1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 911 Change YTD: +1%
S&P 500 at close 3/9/09: 677
S&P 500 now: 911 Change since 3/9/09: +35%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: June’s report (covering May) rose for the 2nd straight month after 7 months of decline. The indicator stays neutral. Another increase next month would put the indicator into positive territory. Ken Goldstein, Economist at The Conference Board, stated “The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery beginning before the end of the year. However, employment will take longer to turn around.” Neutral. +5
• Fed Funds Rate: No change. The Fed Funds rate remains at 0.5%. Ten cuts (with no increases) beginning in 8/07 brought the rate to near zero, plus 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 fell (a good sign) from 16.8 to 14.8. At a value below 17.4, this indicator remains positive. +10
• Morningstar’s Market Valuation Graph is 0.92, nearly unchanged from 0.93 last time. It remains in neutral territory. (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 on March 10, has slowed and is on a three-day losing streak (through Wednesday 6/17). The index has fallen below its 20-day simple moving average (SMA), but the index and its 20-day SMA are both above the 50-day SMA. Thus this indicator is neutral. +5
• 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. Neutral. +5
• DJIA Medium Term Technical Trend: Same situation as S&P 500. The 20-day SMA has almost reached an identical level with the 200-day, but it has not crossed through it. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ is slightly above its 20-day SMA (as of 6/17). The index, 20-day, and 50-day SMAs line up in that order. Positive. +10
• NASDAQ Medium Term Technical Trend: The 50-day SMA rose this period above the 200-day SMA, a “golden cross.” The index, 50-day, and 200-day SMAs now line up in that order. Positive. +10
TOTAL POINTS: 70 NEW READING: 70/10 = 7.0 = POSITIVE
Learn more about the philosophy behind the Timing Outlook and how it is calculated. Click here.
The Timing Outlook remains in positive territory for a fifth straight reading, dropping a half-point to 7.0. Therefore, March 9 still represents a possible end of the 16-month bear market that began in October 2007, as the S&P 500 has stayed above its March 9 close for 14 weeks. March, April, and May each showed positive returns. June is down 1% through June 17. I have paused buying for my Capital Appreciation portfolio, which is now 68% invested and 32% in cash. (It was all cash for many months until April 2.) I will resume buying if the market shows signs of restoring its upward trend of the previous three months.
2. Market Performance Since Last Outlook
New Outlook (6/17/09): 7.0 (POSITIVE)
Last Outlook (5/30/09): 7.5 (POSITIVE)
S&P 500 last time (5/30/09): 919
S&P 500 now: 911 Change: -1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 911 Change YTD: +1%
S&P 500 at close 3/9/09: 677
S&P 500 now: 911 Change since 3/9/09: +35%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: June’s report (covering May) rose for the 2nd straight month after 7 months of decline. The indicator stays neutral. Another increase next month would put the indicator into positive territory. Ken Goldstein, Economist at The Conference Board, stated “The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery beginning before the end of the year. However, employment will take longer to turn around.” Neutral. +5
• Fed Funds Rate: No change. The Fed Funds rate remains at 0.5%. Ten cuts (with no increases) beginning in 8/07 brought the rate to near zero, plus 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 fell (a good sign) from 16.8 to 14.8. At a value below 17.4, this indicator remains positive. +10
• Morningstar’s Market Valuation Graph is 0.92, nearly unchanged from 0.93 last time. It remains in neutral territory. (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 on March 10, has slowed and is on a three-day losing streak (through Wednesday 6/17). The index has fallen below its 20-day simple moving average (SMA), but the index and its 20-day SMA are both above the 50-day SMA. Thus this indicator is neutral. +5
• 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. Neutral. +5
• DJIA Medium Term Technical Trend: Same situation as S&P 500. The 20-day SMA has almost reached an identical level with the 200-day, but it has not crossed through it. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ is slightly above its 20-day SMA (as of 6/17). The index, 20-day, and 50-day SMAs line up in that order. Positive. +10
• NASDAQ Medium Term Technical Trend: The 50-day SMA rose this period above the 200-day SMA, a “golden cross.” The index, 50-day, and 200-day SMAs now line up in that order. Positive. +10
TOTAL POINTS: 70 NEW READING: 70/10 = 7.0 = POSITIVE
Learn more about the philosophy behind the Timing Outlook and how it is calculated. Click here.
Wednesday, June 3, 2009
Is This Rally Sustainable?
The blogosphere is full of pundits trashing the current stock market rally, although the sentiment of all the articles I read can fairly be said to be softening on this question in the past week or two.
From its beginning on March 10, the current rally is now almost three months old. During it, the S&P 500 has risen from 677 to 932, a 38% increase. The climb started fast, then slowed somewhat but has still kept going generally up. Each month since the rally began, the S&P 500 has gone up: 9% in March, 9% in April, and 5% in May. The largest drawdown during the run has been 5%. I have been investing into the rally via a series of purchases of SPY (SPDRS, an ETF that tracks the S&P 500), using tight 8% trailing sell-stops. None of the stops has been hit. All positions are in positive territory.
So is the rally sustainable, or is it a "sucker's rally," a "dead cat bounce," an unsustainable short bullish period within a primary bear market that still has perhaps years to run?
By one measure, a definition used by Ned Davis Research, it already is a bull market. They declare a bull market occurs whenever there is a 30% rise in the stock market over a 50-calendar-day period. That's already happened.
The same organization uses an alternative definition of a bull market: a 13% rise after 155 calendar days. That has not happened yet. It has been 86 days since the rally began on March 10. But note that the increase required by the second definition is just 13%. The market could go backward from here (to 765) and still satisfy the second definition. But we're interested in future sustainability. So for purposes of discussion, I'll arbitrarily tack on the second definition to the first to create a longer-term definition of "sustained." The bottom line: Will the S&P 500 reach 1050 by October 12, 2009? That would certainly be a sustained, investable rally in most people's minds. It would comprise a total increase of 55% since the March 9 low and a total duration of about seven months.
I think this is possible, perhaps even better than a 50-50 chance. At 936 today, the market is 11% short of the 1050 target, with more than four months to get there. Will it?
Plenty of articulate, intelligent commentators would say NO. They believe that this rally has been too sharp, too fast, and that the market is heading for a major fall, and soon. But there are arguments to be made on the other side. Here are the ones I consider to be the strongest:
(1) Bull markets usually begin during, not after, recessions. In talking about the market, I am emphatically not talking about the economy. The economy is staggering, with more shocks still to come. Unemployment will undoubtedly rise, perhaps to 10% or more. But unemployment has always been a lagging indicator. Charts of the last nine recessions show clearly that eight of them had bull markets begin prior to the end of the recession, about six months on average. So the question becomes, are we nearing the end of this recession?
(2) The evidence concerning the end of the recession is mixed, but there are some encouraging signs. These are the so-called green shoots. Some of them are:
--The Institute for Supply Management monthly survey of new orders bottomed in December, with a positive trend since then.
--Initial unemployment claims appear to have flattened out, even as the total number of unemployed still rises.
--We are seeing stable and rising commodity prices, with oil up more than 40% from its low and copper up more than 50%, both indicative of improved demand.
--There are some positive signs in the still-bleak housing sector: The inventory of unsold single-family homes peaked last summer at 4.5 million units and has subsequently declined to 3.7 million. (A more typical inventory level is 2 million units.) Affordability (the ratio of median house payments to median income) is improving, and the $8,000 first-time-homebuyer tax credit is beginning to impact the market, at least at the low end.
--The University of Michigan Consumer Sentiment Index, which fell to a low of 55.3 in November 2008, rose in March to 57.3, in April to 65.1, and in May to 68.7. The indicator has now been up five of the last six months.
--Bernanke and the Federal Reserve are pulling out all stops to stimulate the economy. Since September 2008, the money supply (M2) has been growing at a 13% rate, one of the highest in the post-World War II period.
--Measures of banks' willingness to lend each other money have shown substantial improvement. The rate premiums demanded for unsecured lending between banks fell by more than 80% from their 2008 peak to mid-May. In the past couple months, several banks have successfully floated secondary stock offerings, raising capital to get out from under TARP restrictions and/or to strengthen their capital positions.
--The Index of Leading Economic indicators rose in May for the first time in seven months.
(3) Post-recession rallies can be powerful. According to Navellier and Associates, the five most recent recessions before the current one each spawned powerful rallies. Working backwards in time:
--Recession: March, 2001 to November, 2001. Market bottomed in October, 2002, then gained 50% in 17 months. (Note: This is the only one of the bull markets that did not begin during the recession.)
--Recession: July, 1990 to March, 1991. Market bottomed in October, 1990, then gained 45% in 19 months.
--Recession: July, 1981 to November, 1982. Market bottomed in August, 1982, then rallied 66% in 15 months.
--Recession: January, 1980 to July, 1980. Market bottomed in March, 1980, then went up 35% in 12 months.
--Recession: November, 1973 to March, 1975. Market bottomed in October, 1974, then gained 76% in 21 months.
Conclusion: To repeat, the strongest argument that this rally is sustainable is the historical pattern that bull markets start about 6 months before the end of recessions, backed up by growing evidence that the current recession is in its final months.
Anybody who claims to know whether this is a bear-market rally or the end of the bear market is blowing smoke. Nobody knows at the time it is happening. What I've tried to do here is make a case that the rally may have more rooom to run, even in the face of a continuing bad economy. The jury -- the investing public -- will make the final call.
From its beginning on March 10, the current rally is now almost three months old. During it, the S&P 500 has risen from 677 to 932, a 38% increase. The climb started fast, then slowed somewhat but has still kept going generally up. Each month since the rally began, the S&P 500 has gone up: 9% in March, 9% in April, and 5% in May. The largest drawdown during the run has been 5%. I have been investing into the rally via a series of purchases of SPY (SPDRS, an ETF that tracks the S&P 500), using tight 8% trailing sell-stops. None of the stops has been hit. All positions are in positive territory.
So is the rally sustainable, or is it a "sucker's rally," a "dead cat bounce," an unsustainable short bullish period within a primary bear market that still has perhaps years to run?
By one measure, a definition used by Ned Davis Research, it already is a bull market. They declare a bull market occurs whenever there is a 30% rise in the stock market over a 50-calendar-day period. That's already happened.
The same organization uses an alternative definition of a bull market: a 13% rise after 155 calendar days. That has not happened yet. It has been 86 days since the rally began on March 10. But note that the increase required by the second definition is just 13%. The market could go backward from here (to 765) and still satisfy the second definition. But we're interested in future sustainability. So for purposes of discussion, I'll arbitrarily tack on the second definition to the first to create a longer-term definition of "sustained." The bottom line: Will the S&P 500 reach 1050 by October 12, 2009? That would certainly be a sustained, investable rally in most people's minds. It would comprise a total increase of 55% since the March 9 low and a total duration of about seven months.
I think this is possible, perhaps even better than a 50-50 chance. At 936 today, the market is 11% short of the 1050 target, with more than four months to get there. Will it?
Plenty of articulate, intelligent commentators would say NO. They believe that this rally has been too sharp, too fast, and that the market is heading for a major fall, and soon. But there are arguments to be made on the other side. Here are the ones I consider to be the strongest:
(1) Bull markets usually begin during, not after, recessions. In talking about the market, I am emphatically not talking about the economy. The economy is staggering, with more shocks still to come. Unemployment will undoubtedly rise, perhaps to 10% or more. But unemployment has always been a lagging indicator. Charts of the last nine recessions show clearly that eight of them had bull markets begin prior to the end of the recession, about six months on average. So the question becomes, are we nearing the end of this recession?
(2) The evidence concerning the end of the recession is mixed, but there are some encouraging signs. These are the so-called green shoots. Some of them are:
--The Institute for Supply Management monthly survey of new orders bottomed in December, with a positive trend since then.
--Initial unemployment claims appear to have flattened out, even as the total number of unemployed still rises.
--We are seeing stable and rising commodity prices, with oil up more than 40% from its low and copper up more than 50%, both indicative of improved demand.
--There are some positive signs in the still-bleak housing sector: The inventory of unsold single-family homes peaked last summer at 4.5 million units and has subsequently declined to 3.7 million. (A more typical inventory level is 2 million units.) Affordability (the ratio of median house payments to median income) is improving, and the $8,000 first-time-homebuyer tax credit is beginning to impact the market, at least at the low end.
--The University of Michigan Consumer Sentiment Index, which fell to a low of 55.3 in November 2008, rose in March to 57.3, in April to 65.1, and in May to 68.7. The indicator has now been up five of the last six months.
--Bernanke and the Federal Reserve are pulling out all stops to stimulate the economy. Since September 2008, the money supply (M2) has been growing at a 13% rate, one of the highest in the post-World War II period.
--Measures of banks' willingness to lend each other money have shown substantial improvement. The rate premiums demanded for unsecured lending between banks fell by more than 80% from their 2008 peak to mid-May. In the past couple months, several banks have successfully floated secondary stock offerings, raising capital to get out from under TARP restrictions and/or to strengthen their capital positions.
--The Index of Leading Economic indicators rose in May for the first time in seven months.
(3) Post-recession rallies can be powerful. According to Navellier and Associates, the five most recent recessions before the current one each spawned powerful rallies. Working backwards in time:
--Recession: March, 2001 to November, 2001. Market bottomed in October, 2002, then gained 50% in 17 months. (Note: This is the only one of the bull markets that did not begin during the recession.)
--Recession: July, 1990 to March, 1991. Market bottomed in October, 1990, then gained 45% in 19 months.
--Recession: July, 1981 to November, 1982. Market bottomed in August, 1982, then rallied 66% in 15 months.
--Recession: January, 1980 to July, 1980. Market bottomed in March, 1980, then went up 35% in 12 months.
--Recession: November, 1973 to March, 1975. Market bottomed in October, 1974, then gained 76% in 21 months.
Conclusion: To repeat, the strongest argument that this rally is sustainable is the historical pattern that bull markets start about 6 months before the end of recessions, backed up by growing evidence that the current recession is in its final months.
Anybody who claims to know whether this is a bear-market rally or the end of the bear market is blowing smoke. Nobody knows at the time it is happening. What I've tried to do here is make a case that the rally may have more rooom to run, even in the face of a continuing bad economy. The jury -- the investing public -- will make the final call.
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