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