Timing Outlook Drops Significantly, from Positive to Neutral

1. Summary

After 6 straight positive readings, the Timing Outlook fell significantly in the past two weeks, from 7.5 to 5.5, or “neutral.”

The S&P 500 is still 30% above its March 9 low, but both June (-3%) and the first 10 days of July (-5%) have seen the market slide backwards. The S&P 500 index has stayed above its March 9 close for 18 consecutive weeks, but it’s going in the wrong direction now. I have halted my purchases of SPY (the ETF that tracks the index), and in fact the various purchases are only a percent or so from hitting the 8% trailing sell-stop that I have been using.

I think this is a market dominated by sentiment. There has been a slowdown--to a trickle--of good news ("green shoots") over the last several weeks. At the same time, more and more investors are becoming impatient with the pace of economic recovery. They are no longer satisfied with "less bad," they want to see actual "good," that is, an upturn in major economic indicators. I think that if the flow of good news resumes, the rally will start back up. If not, the market will probably just drift slowly lower. If there is significant bad news, the market could suffer significant drops.

The second-quarter earnings season just began, so as results roll in, there will be plenty of news for investors and traders to react to. The market typically becomes volatile during earnings season. Trading volume has been low for several weeks, suggesting that a lot of people are on vacation and/or are waiting for a good reason to do something.

2. Market Performance Since Last Outlook

New Outlook (7/10/09): 5.5 NEUTRAL

Last Outlook (6/29/09): 7.5 (POSITIVE)
S&P 500 last time (6/29/09): 927
S&P 500 now: 879 Change: -5%

S&P 500 at beginning of 2009: 903
S&P 500 now: 879 Change YTD: -3%

S&P 500 at close 3/9/09: 677
S&P 500 now: 879 Change since 3/9/09: +30%

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 continue to inject money into the economy. +10

· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E fell from 14.9 to 14.3. At a value below 17.4, this indicator remains positive. +10

· Morningstar’s Market Valuation Graph is 0.88, down from 0.92 last time. This takes the 2000-or-so stocks covered by Morningstar to 12 % below “fairly valued” and turns this indicator from neutral to positive. (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.) Positive. +10

· S&P 500 Short Term Technical Trend: The S&P 500’s rally, which began on March 10, turned backward in June (down 3%) and continued downward in July, falling from 923 to 879 (or -5%) so far. The index is now below its 20-day simple moving average (SMA), which in turn is below the 50-day SMA. So the readings are lined up in a negative way: index < 20-day SMA < 50-day SMA. In other words, the falling index is pulling down the 20-day and 50-day SMAs, exactly the opposite of what you want. That pattern drops this indicator to negative . +0

· S&P 500 Medium Term Technical Trend: The 50-day SMA remains above the 200-day SMA, but the index itself has dropped below the 50-day SMA and is exactly even with the 200-day. The order is thus: 50-day SMA > 200-day SMA = index. You may recall that a few weeks ago, the 50-day SMA crossed upward through the 200-day, a "golden cross" that was positive. The reversal of the index means that it is now pulling the 50-day SMA down. That drops this indicator to ambiguous and neutral. +5

· DJIA Short Term Technical Trend: Same situation as the S&P 500’s short-term technical trend. Negative. +0

· DJIA Medium Term Technical Trend: Similar to the S&P’s medium term technical trend, except here, the index has fallen clearly below the 200-day SMA. So we have 50-day SMA > 200-day SMA > index. This is going in a bad direction, but still qualifies as ambiguous and neutral, because the 50-day SMA is still above the 200-day. +5

· NASDAQ Short Term Technical Trend: The index is below the 20- and 50-day SMAs, but the 20-day is still above the 50-day. This is ambiguous and neutral. +5

· NASDAQ Medium Term Technical Trend: The index has fallen below the 50-day SMA, but both are still above the 200-day SMA. That makes this chart ambiguous and neutral. +5

TOTAL POINTS: 55 NEW READING: 55 / 10 = 5.5 = NEUTRAL

Remember, the Timing Outlook is meant to increase the value of buy and sell decisions by helping them get off to positive starts. Dividend investors are faced with many fewer buy and sell decisions, because their focus is on rising dividends, not the prices of stocks. Learn more about The Top 40 Dividend Stocks for 2009 by clicking here.