Timing Outlook Still Positive Despite Market Drop

1. Summary

The Timing Outlook drops from 9.0 to 7.5, still “positive” but less strongly so. That makes 12 of the last 13 readings positive, roughly matching the time of the rally. The “September swoon” never happened: the market rose 3% in September.

But October got off to a crummy start, capped by the bad employment news last week. Earnings season kicks off this week, which always brings a ton of news for investors to react to. Personally, I’ll be watching not only for earnings “surprises,” but also for revenue growth (which has been weak throughout the rally), companies’ forward-looking statements, and updated employment statistics.

The market is not technically overvalued, but it won't matter if companies' outlooks are not positive and/or the employment picture stays dismal. Either would would probably kill the rally. I suppose it is possible that a high percentage of positive revenue and earnings surprises for the past quarter could by themselves extend the rally, but I doubt it.

As always, sell-stops or some other form of hedging are recommended on your long stock positions.

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

New Outlook (10/5/09): 7.5 (positive)

Last Outlook (9/21/09): 9.0 (positive)

S&P 500 last time (9/21/09): 1068
S&P 500 now: 1025 Change: -4%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1025 Change YTD: +14%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1025 Change since 3/9/09: +51%

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: According to Morningstar, the S&P 500’s P/E fell back from 18.9 last time to 18.2. This is within the neutral range of 17.4 to 19.3, and the drop halted (at least temporarily) what had become a steady march toward “overvalued” territory. Neutral. +5

--Morningstar’s Market Valuation Graph drops to 0.98 from 1.04. This is within the neutral range of 0.90 to 1.10, and as above, the decline interrupted a march toward “overvalued.” (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: With the drop the last couple of weeks in the stock markets, all three charts have lost their ultra-positive quality. The actual index value in each case has dropped below its 20-day simple moving average (SMA) but is still above its 50-day SMA. So on each chart, the lineup is this: 20-day SMA > Index > 50-day SMA > 200-day SMA. For this short-term indicator, the chart drops from positive to ambiguous, as the index value is between the 20-day and 50-day SMAs rather than above them. +5

--S&P 500 Medium Term Technical Trend: This remains positive, as the index remains above the 50-day SMA, which remains above the 200-day SMA. +10

--DJIA Short Term Technical Trend: Same as S&P’s short-term trend: Ambiguous. +5

--DJIA Medium Term Technical Trend: Same as S&P’s medium-term trend: Positive. +10

--NASDAQ Short Term Technical Trend: Same as the other two: Ambiguous. +5

--NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 75 NEW READING: 75 / 10 = 7.5 = POSITIVE