Rally In Eighth Month; Timing Outlook Remains Positive

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1. Summary

The stock market's rally passed its 7-month anniversary on October 10. It is up 61% since then, making this one of the sharpest rallies on record in terms of speed + magnitude.

The Timing Outlook bounced back up to 9.0, remaining positive. That makes 14 consecutive positive readings, roughly matching the time of the rally. Reminder: The interpretation of the Timing Outlook has been changed to eliminate “neutral.” Any reading of 5.0 or above is “positive,” and any reading below 5.0 is “negative.” (If you missed that change, scroll down to the article below this one.)

Q3 earnings season started a couple of weeks ago, and most companies reporting so far have beaten analysts' earnings estimates. Lots of people, including me, are also watching revenue results and the companies' forward-looking statements about their expectations for Q4 and 2010. Those areas have been mixed so far.

An extended string of bad news during earnings season (earnings missing estimates or poor outlooks), or on other fronts such as employment, would probably kill the rally. That said, such a string of bad news has not materialized since the rally began in March. That in itself seems remarkable and has many pundits questioning how long the rally can go on.

As always, use sell-stops or some other form of downside protection to protect profits already accrued but not realized, and also to protect against losses if the market suddenly reverses course. (This suggestion does not necessarily apply to stock positions held as long-term dividend-producing investments).

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 10/16/09)

Last Outlook (10/5/09): 7.5 (positive)
S&P 500 last time (10/5/09): 1025
S&P 500 now: 1088 Change: +6%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1088 Change YTD: +20%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1088 Change since 3/9/09: +61%

3. Indicators in Detail

--Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed its fifth consecutive monthly increase. Positive. +10

--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

--S&P 500 Market Valuation: The S&P 500’s P/E rose since last time from 18.2 to 19.5, or back into neutral territory. As a reminder, I use Morningstar as the source for the P/E ratio based on trailing operating earnings, and I use three "bands" by adding and subtracting 10% from the recent-years’ average (19.3) to allow room for normal market volatility and noise. Therefore, P/E < 4 =" Positive" 1 =" Neutral"> 21.2 = Negative = 0 points. At 19.5, therefore, this indicator is neutral. +5

--Morningstar’s Market Valuation Graph increases from 0.98 to 1.03. The graph has been yo-yo-ing back and forth around 1.0 (which would mean just right, like the littlest bear’s porridge) since late July. That is noteworthy, as the stock market has risen 16% since then while this indicator has remained near 1.0. That means, of course, that even as stock prices have risen, Morningstar's analysts have been increasing their fair value estimates of stocks' worth at about the same pace, which is a positive sign. The currrent reading of 1.03 is within the neutral range of 0.90 to 1.10. (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. All-time high = 1.14 at the end of 2004.) Neutral. +5

--S&P 500 Short Term Technical Trend: The market has risen sharply since the last Timing Outlook (up 6%). The effect on the charts has been to bring them back into their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. 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