Timing Outlook Turns Negative for the First Time Since Last March

1. Summary


After getting off to a good start in 2010, the S&P 500 has dropped fairly rapidly from a close of 1150 on Tuesday, January 19 to 1076 on Friday, February 12. That is a fall of 6% from the peak of the rally that began last March 10.

The Timing Outlook falls from 6.0 last time (barely positive) to 4.4 this time or negative. It’s the first negative reading since last March 5, 2009, just days before the Great Rally of 2009 began. As I stated in my last post (below this one), I have had a growing feeling that the rally may be over. This negative Timing Outlook is more evidence that may be true.

Regular readers are familiar with my belief that the market rally was news-driven, with the “net news flow” seeming to herald what the stock market would do. We are in the midst of the Q1 earnings season, and the news from there has been generally good. About 65% of companies that have reported so far have beaten their consensus estimates. But other general economic news has been mixed to negative, and the market seems to be paying more attention to the general news than to earnings reports. I refer here to data such as consumer confidence readings, employment/unemployment statistics, the problems with Greece, and the like. Another source of news is the market itself: What the indexes do is not only the result of news, it is news. The falling market over the past few weeks seems to have put investors in a more pessimistic and demanding mood. News about “less bad green shoots” right now no longer seem to have the positive impact that it had during most of the rally.

Most of my own sell stops in my Capital Appreciation portfolio got hit at the end of January and in early February, when the market briefly dipped to a loss of more than 8% from the peak. That portfolio has gone from 100% invested to 86% cash. The stops got triggered while I was on vacation. That illustrates one of the great attributes of sell stops—they work when you are not paying complete attention. They automatically execute an exit strategy that you developed when you were thinking clearly. You do not have to decide what to do in the heat of a fast-moving market.

What would it take to get me to re-invest that money again? I will talk about that next time.

If you are still invested, the usual risk-management advice applies: Protect yourself on the downside. I generally exclude from this advice stocks held for their dividends rather than for price appreciation. I evaluate dividend stocks on the basis of their dividend stream and the apparent reliability of that stream, not on what the stocks are selling for at any given time. On the dividend front, things are looking OK. Several companies have already raised their dividends for 2010, and the general dividend outlook for 2010 looks quite healthy compared to 2009.

2. Market Performance Since Last Outlook

(“now” figures are as of close Friday 2/12/10)

Last Outlook (1/22/10): 6.0 (positive)

S&P 500 last time (1/22/10): 1092
S&P 500 now: 1076 Change: -1%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1076 Change in 2010: -3%

S&P 500 at trough 3/9/09: 677
S&P 500 now: 1076 Change since 3/9/09: +59%

S&P 500 at peak 1/19/10: 1150
S&P 500 now: 1076 Change since 1/19/10: -6%

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. 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.) Morningstar’s value looks fishy at 12. (You may recall that last time, they had a blank value, and the time before that, it was 21.3) The Wall Street Journal’s number is 26, but that is based on as-reported earnings as distinguished from Morningstar’s use of operating earnings. The P/E based on operating earnings would normally be the smaller of the two, but the difference would not usually be this dramatic. For this cycle, I am going to drop this indicator and see if I can get a better value next time. 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 0.98, down from 1.00 last time. That suggests the market is fairly valued right now, although it should be noted that this indicator has been declining steadily for several weeks along with the market. Neutral. +5

• S&P 500 Short Term Technical Trend: After peaking at a close of 1150 on 1/19/10, the S&P 500 experienced three straight double-digit drop sessions. Since then it has wandered up and down, with one more dramatic down day on 2/4/10. The index has fallen through its 20-day AND 50-day simple moving averages (SMA), and the 20-day SMA has now fallen through the 50-day SMA. So the relationship of the index to its key SMAs is: 50-day SMA > 20-day SMA > Index > 200-day SMA. With the 20-day SMA now below the 50-day, this short-term indicator has turned negative. +0

• 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: Same configuration as the S&P 500. Negative. +0

• DJIA Medium Term Technical Trend: Neutral. +5

• NASDAQ Short Term Technical Trend: Same pattern as the other two. Negative. +0

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 40 NEW READING: 40 / 9 = 4.4 = NEGATIVE