Timing Outlook Positive for 18th Consecutive Time Since Rally Began in March

1. Summary

The Timing Outlook remains positive at 8.5. This is the 18th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally has lasted nine months. In that time, the S&P 500 has risen 62% without so much as an 8% correction along the way.

As I’ve said many times in the past, this market is news-driven. News comes mainly from two sources: (1) Government statistics and other reports about the economy (such as unemployment figures or the default last month by Dubai World on its loans). (2) Earnings and revenue reports from companies, with a focus on how figures compare to expectations and the companies’ own forward-looking statements. I call this “net news flow.” When the news is, on balance, good, the market tends to go up. When it is not good (such as the Dubai default), the market tends to go down. When it is net neutral, the market makes little moves up and down.

The Q3 earnings season just ended. The news was generally good. Around 75% of companies beat earnings expectations, and around 60% beat revenue expectations. Forward-looking statements were mixed, but overall sounded more positive than a quarter ago and much more positive than a year ago. In Q3, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year—encouraging rates of increase considering how bad things looked just a year ago.

Economic news in the past week was generally positive. Examples:
· The Conference Board’s consumer confidence report Monday took everyone by surprise, rising to a level not forecast by even the most optimistic. Most forecasters had expected a downturn.
· Retail sales improved 1.3% from October to November, almost double the gain that had been expected. On a year-over-year basis, retail sales were up 1.9%.
· And consumers did this without taking on additional debt. For the 9th consecutive month, the level of outstanding consumer debt (excluding real estate loans) decreased.
· For the first time in more than a year, the level of inventories held by businesses increased. While modest, October's 0.2% gain was a welcome surprise, given the expectation of another decrease. Furniture and accessories, electronics, and appliance stores led the way. Analysts cautiously interpret the rise in inventories as positive: Retailers are building depleted stocks in anticipation that they will be sold.

The fine print: The market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/11/09)

Last Outlook (11/29/09): 8.5 (positive)
S&P 500 last time (11/29/09): 1091
S&P 500 now: 1106 Change: +1%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1106 Change YTD: +22%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1106 Change since 3/9/09: +63%

3. Indicators in Detail

· Conference Board Index of Leading Economic Indicators: Unchanged, no new report since last time. Index has had seven consecutive monthly increases. Positive. +10

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

· S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is 20.0. This is in the neutral territory of 17.4 to 21.2. +5

· Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at exactly 1.00 Thus the market is “fairly valued” by this indicator. (Interesting 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 S&P 500 chart is currently in its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. For a couple of days last week, the index did drop below its 20-day SMA, but rose back above it on Thursday and Friday. Positive. +10

· S&P 500 Medium Term Technical Trend: Positive. +10

· DJIA Short Term Technical Trend: Exactly the same situation as with the S&P 500, including the two-day drop below the 20-day SMA. Positive. +10

· DJIA Medium Term Technical Trend: Positive. +10

· NASDAQ Short Term Technical Trend: The NASDAQ chart displays essentially the same pattern as the other two. Positive. +5

· NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE