Timing Outlook Remains Positive

1. Summary

After a sharp rise in early November, the market has been going sideways, driven as usual by the news of the day. Last Friday, the biggest news—that Dubai has asked for a moratorium on its debt payments—took the market down significantly. But on other days, positive news has pulled the market up. The Timing Outlook remains positive at 8.5. This is the 17th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally is now well into its ninth month. In that time, the S&P 500 has risen 61% without so much as an 8% correction along the way.

The Dubai news spooked investors, as Dubai has about $80 billion in loans outstanding. It turns out that Dubai has little oil, unlike most of its neighbors, so it has been borrowing to fund its incredible building spree. You have probably seen pictures of the world’s tallest building, the series of man-made islands, and other wonders. As I said last time, the Dubai story, which came out of nowhere, is exactly the kind of news that seems to have been moving the market the entire time.

Some other recent news has been more positive.

--In the third quarter, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year, rather startling rates of increase considering how bad things looked just a year ago.

-- The Conference Board’s consumer confidence report on Monday took everyone by surprise, rising to a level not forecast by even the most optimistic forecasters. Most had expected a downturn in confidence.

--The early reports on Black Friday's shopping have been generally positive. Hard numbers will be released later in the week.

--As of the end of last week, 480 of the S&P 500's companies had reported their results. Per Thomson Reuters, 80% of them exceeded Wall Street’s consensus profit expectations. (Historically, the rate is about 60%.)

--And the earnings recovery is now accompanied by good news on the revenue front. Nearly 60% of companies beat analysts’ revenue expectations for the quarter.

I always feel the need to repeat the fine print: The market can turn on a dime. 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 11/27/09)

Last Outlook (11/13/09): 9.0 (positive)

S&P 500 last time (11/13/09): 1093
S&P 500 now: 1091 Change: -0%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1091 Change YTD: +21%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1091 Change since 3/9/09: +61%

3. Indicators in Detail

--Conference Board Index of Leading Economic Indicators: Last monthly report showed seventh consecutive monthly increase. 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 is not available on the Morningstar site nor several other sites I have checked. Will presume that it has not changed significantly since last time. Neutral. +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 0.98, compared to 1.0 last time. Being within 10% of 1.0, the market is “fairly valued” by this indicator. (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: Two of the three charts (S&P 500 and Dow) remain in their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. The market’s sideways movement since last time has tightened up the four values, but given the configuration, the technical indicators for these two indexes remain 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: The NASDAQ chart has tightened up enough that the index’s value, its 20-day SMA, and its 50-day SMA are practically identical. That drops this indicator to neutral. +5

--NASDAQ Medium Term Technical Trend: This longer-term indicator remains positive, as the index and the two shorter moving averages all remain well above the 200-day SMA. +10

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

Market's Up, So Is Timing Outlook

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1. Summary

As soon as November started, the market turned upward, and it has gone up on 8 of 11 trading days this month through last Friday. The backwards slide in the second half of October didn’t amount to much after all.

The Timing Outlook returns to a very positive 9.0. This is the 16th consecutive positive reading, essentially coinciding with the market rally that began on March 10 and continues now into its ninth month without so much as a 10% correction along the way. I hope you have been enjoying the ride.

As I write this on Monday morning, the market is rallying today, apparently based on good news from Japan concerning their economy’s growth rate. This is exactly the kind of news that, under my “net news flow” theory, seems to have been moving the market the entire time. The fact that about 80% of companies that have reported earnings so far have beaten their estimates has helped immensely.

That said, the market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on your long stock positions. Excluded from this, perhaps, might be those stocks you hold for their dividend distributions rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/13/09)

Last Outlook (10/28/09): 6.0 (positive)

S&P 500 last time (11/13/09): 1043
S&P 500 now: 1093 Change: +5%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1093 Change YTD: +21%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1093 Change since 3/9/09: +61%

3. Indicators in Detail

--Conference Board Index of Leading Economic Indicators: Next report is due Thursday. Last report showed sixth consecutive monthly increase. 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 S&P 500’s P/E rose since last time from 19.3 to 20.6, remaining in neutral territory. As an interesting side note, the P/E’s rise in percentage terms is 7%, compared to the S&P 500’s rise of 5%. This suggests that the market’s rise is mostly based on improving earnings, but also partly based on more positive sentiment toward the market, what some these days are calling “appetite for risk.” Neutral. +5

--Morningstar’s Market Valuation Graph. Since late July, this indicator has been meandering small distances around 1.0. Today, it is exactly 1.0, meaning “fairly valued.” (Historical data: All-time low = 0.55 on 11/20/08 during the last bear market. 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 steady trend up in November has returned all three charts to their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. All the technical indicators are therefore 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

"TOP 40 DIVIDEND STOCKS FOR 2010" Update

As I reported a few weeks ago, I have begun work on THE TOP 40 DIVIDEND STOCKS FOR 2010, my annual e-book for investors working on a dividend strategy. My hope this year is to release it in January, or three months sooner than 2009's and five months sooner than 2008's.

I have completed my first pass through all 700 original candidates. To refresh your memory, in the first pass I apply five requirements to each candidate. The five requirements are:

(1) Yield must be > 3.0%. For stocks that have increased their dividend for at least 20 years in a row, the minimum yield is 2.5%. For REITs, the minimum yield is 5.0%, to make up for the increased taxability of distributions by REITs compared to ordinary dividends.

(2) The 3-year total percentage increase in the dividend must be at least 16% (or about 5% annualized). For stocks that have raised their dividends for 20 or more years in a row, the three-year increase must be at least 12% (or about 4% annualized).

(3) The stock must have delivered a positive return in 3 of the past 5 years, including year-to-date in 2009.

(4) The total return for the stock over the past 5 years must be >0%. (For comparison, the S&P 500's return over the same time period has been about 2.6%.)

(5) The stock must have raised its dividend in each of the past 5 years.

During the first pass, I "eased" some of the foregoing requirements. The reason is that I was working with partial 2009 numbers, so I wanted to give stocks every fair opportunity to pass through to the next stage of testing. So, for example, I eased the 3.0% dividend requirement to 2.8% for the first pass. By the end of the year, a stock with a 2.8% yield might have a 3% yield.

Here are the results:

--95 stocks passed the first set of tests without missing any, although as just stated, some of the requirements were "eased" from what they will eventually be. I put these 95 stocks into what I call Group A.

--74 stocks did not pass all of the screens, but they fell just short in a single category. Again, mindful of the fact that I am doing this work prior to the end of 2009, I placed these 74 stocks into Group B...they will get another chance.

So a total of 169 stocks passed their way into the next stage of testing. Another way of looking at this is that more than 500 stocks have been eliminated from further consideration. I love to eliminate stocks. I think it goes back to my horse-race betting days. In handicapping a race, I always tried to eliminate every horse that appeared to have no chance to win the race. (Believe me, in the average horse race, some horses can barely trot, let alone compete.) Once I'd done that, I felt like I was gazing on the 3 or 4 legitimate contenders to win the race. It cut out a lot of further work.

Dividend stocks are the same way. I have now eliminated the halt, the lame, and the other stocks that have no chance of being selected as one of the Top 40. I don't have to do any more analysis on the eliminated stocks. I can focus on the real contenders.

On Monday, I will start to put Group A and Group B through the same 5 tests. This time there will be no "easing." The tests will be applied rigidly to select the stocks that will be allowed to pass to stage-3 testing. That said, I will make selective exceptions for a few stocks, based on unusual factors specific to individual companies. There will be just a few of these. Based on past experience, when I am done with stage-2 testing, about 75 stocks will have survived. To them, I will apply the full Easy-Rate scoring system, let them sort themselves out, and thus whittle the list down to the Top 40.

Sidebar: Of 2009's Top 40 Dividend Stocks, 29 passed through to Group A, and another 7 made it into Group B. That's good news: It means that 36 of 2009's Top 40 stocks "did good" in a year when, as you have probably read, dividend stocks in general got scalped, with many cutting their dividends, skipping a payment, or even eliminating dividends altogether. Of the remaining 4, two did not pass because their dividend yields have become too low. That's also good, because it means their prices went up enough to push their yields down...yields and prices move inversely to each other.