Timing Outlook Snaps Back to Positive

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 reading just a week ago. But a 3% rally in the markets this past week has brought the reading back up to 6.1, which is positive.

The market has basically moved sideways since October. If P stands for a positive week, N for a negative week, and 0 for no change, here is what the market has done since the second week in October: P-P-N-0-P-P-N-0-P-0-N-P-P-N-N-N-N-P-P. That’s 9 P’s, 7 N’s, and 3 0’s. The net change in the S&P 500 index over all that time, until last week, was less than 1%.

The question, obviously, is what kind of market are we in?

1. A continuing bull market that began last March, leveled off, went through an 8% “correction,” and is now starting up again? Or…
2. A new bear that began with the 4-week decline? Or…
3. A range-bound, trend-less market that might end up about where it is now in several weeks or even several months?

After 4 down weeks with seemingly dour sentiment, in the past 2 weeks investor sentiment seemed to become more buoyant and optimistic. It was telling that when the Fed raised its overnight lending rate after the close on Thursday—the first “tightening” of any kind from the Fed in more than a year—the market shrugged it off, ending Friday with a slight gain for the day and a 3% gain for the week.

The news from earnings season continues to be positive, with about 70% of companies beating earnings expectations and nearly as many beating revenue expectations. The other economic news continues mixed overall.

A range-bound, trend-less market would render the Timing Outlook least useful. The Timing Outlook is designed to detect trends, so a range-bound market simply means that the Timing Outlook would spend most of its time just above or just below 5.0, throwing off meaningless weak positive or negative signals. That’s what last week’s 4.4 may have been, a meaningless weak negative signal. Or this week’s reversal to positive may be that. It’s too soon to tell.

I reported a couple of weeks ago that my 8% sell-stops in the Capital Appreciation portfolio had been hit. Last week’s negative Timing Outlook seemed to confirm that choice #2—a new bear market—was most likely what we have. Now the 2-week rally, plus the switchback in the Timing Outlook, have called that conclusion into question.

In late 2008 and 2009, during the bear market, I wrote several articles entitled “Are We There Yet?” meaning was the long bear market over, had the bottom been hit, and was it time to venture back into the market? In those articles, I successfully avoided being faked out by two potential bottoms (11/10/08 and 11/20/08) by being patient and insisting on 3+ weeks of what I called a “clear upward trend” combined with a positive Timing Outlook. Those finally came in March, 2009.

Here, of course, we are not dealing with an 18-month bear market, just a 4-week pullback. That makes me think that the standards for venturing back in can be a little looser. If my sell stops had been 9% rather than 8%, they would not have been hit at all.

To me, it is impossible at this time to conclude whether #1, #2, or #3 is the most likely choice. We have a 2-week clear positive trend underway and now a positive Timing Outlook again. If the markets keep reacting positively to positive news, and not too negatively to negative news, I’d say that the likely choice is #1—still in the bull market that began last March. Otherwise, the most likely choice is either #2 or #3.

If it looks like it’s #1, I will probably cautiously put some (but not all) of the money in the Capital Appreciation portfolio back into the market. Obviously, I am hedging my bets for now with caution. As usual, any money in the market is protected by sell stops, except for shares owned specifically for their dividends.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 2/19/10)

Last Outlook (2/14/10): 4.4 (negative) 

S&P 500 last time (2/14/10): 1076
S&P 500 now: 1109      Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1109      Change in 2010: -1%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1109      Change since 3/9/09: +64%

S&P 500 at peak 1/19/10: 1150
S&P 500 now: 1109      Change since 1/19/10: -4%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since January’s showed the ninth consecutive monthly increase. Positive. +10

• Fed Funds Rate: No change. However, the big news this week was the Fed’s raising of the “discount rate” from 0.5% to 0.75%, announced Thursday after the close. The stock market, interestingly, seemed to absorb this news with little concern, dropping modestly at the start of Friday’s session, then recovering to a slight gain for the day and a 3% gain for the week. The Fed Funds rate itself remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: (Usual source: Morningstar’s calculation of P/E based on operating earnings.) Morningstar’s value still looks fishy at 11.7. I have found a potential alternative source at USA Today Money that appears to calculate the P/E ratio based on operating earnings the way that Morningstar does. Based on prior readings, the value should be around 20; USA Today shows it at 20.5. I have an inquiry in to Morningstar to see what's up with their calculation. In the meantime, I am going to delete this indicator, since its likely value is neutral anyway. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It now stands at 1.01, up from 0.98 last time. That suggests the market is fairly valued right now. Neutral. +5

• S&P 500 Short Term Technical Trend: The market had 4 straight down weeks beginning with the week of 1/10/10, followed by 2 consecutive up weeks. During the down weeks, the S&P 500 lost about 8% of its value, then gained back 4% during the two up weeks. The index fell through its 20-day and 50-day simple moving averages (SMA), and the 20-day SMA fell through the 50-day SMA. But after the two-week recovery, the index is back above its 50-day SMA. So the relationship of the index to its key SMAs is now: Index > 50-day SMA > 20-day SMA > 200-day SMA. That renders this short-term indicator ambiguous and neutral. +5

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, remains neutral, with the index lying between the two SMAs. +5

• DJIA Short Term Technical Trend: Has the same configuration as the S&P 500. Neutral. +5

• DJIA Medium Term Technical Trend: Neutral. +5

• NASDAQ Short Term Technical Trend: Neutral. +5

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 55 NEW READING: 55 / 9 = 6.1 = POSITIVE