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.
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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.
Wednesday, September 30, 2009
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.
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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.)
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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.
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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.
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