Timing Outlook Advances

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 four weeks ago after 4 straight down weeks in the S&P 500 resulted in a loss of 8%. But a 7% rally in the markets since then has pulled the Timing Outlook up to 7.8, which is positive.

Last time, I noted that the market had basically moved sideways since October. Now let’s just focus in on the past 9 weeks. If P stands for a positive week, N stands for a negative week, and 0 stands for no change, here is what the market has done since the beginning of the new year: P-N-N-N-N-P-P-0-P. That’s 4 P’s, 4 N’s, and a 0. The S&P 500 has gone up 2% over that timespan, but the last 4 weeks have seen a 7% rise.

Last time, I asked the question, what kind of market are we in?

1. A continuing bull market that began last March, went through an 8% “correction,” and is now going up again? Or…

2. A new bear that began with the 4-week decline? Or…

3. A range-bound, trend-less market that might just go up and down in relatively small amounts for an indeterminate period of time?

After the 4 consecutive down weeks, during which investor sentiment seemed sullen, investor sentiment seemed to turn more positive. Perhaps it was the almost-consistently good news from earnings season. About 80% of companies that have reported have beaten earnings expectations, about the same number beat revenue expectations, and year-over-year earnings for many companies have actually been positive. Please note, on the latter point, that the year-ago comparisons are a low hurdle to clear, as Q4 2008 had negative earnings for one of the few times ever. That’s the quarter when many banks took massive write-downs in the midst of the credit crisis. Nevertheless, positive year-over-year comparisons are always good news.

It is still too soon to tell whether #1, 2, or 3 will answer “what kind of market are we in?” The positive action of the past 4 weeks seems to render choice #2 (new bear market) less likely than the others. 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. But overall, as I said, it’s too early to tell.

I reported several weeks ago that the 8% sell-stops in my Capital Gains portfolio had been hit, putting the portfolio more than 80% in cash. But with two straight positive Timing Outlooks and a solid 4-week rise in all the major indexes, I have decided to cautiously put some money back into the market. I made two purchases last week that put about 20% of the portfolio’s cash back into the market, and I will make one or two more purchases this coming week if things continue to trend positively. As always, these purchases are protected to the downside by sell stops.

If you want to check the performance of the Capital Gains Portfolio portfolio since its creation in 2001, check out this page on my Web site. The portfolio is well ahead of the S&P 500 since its inception.

For a portfolio that does not utilize timing or sell-stops, but rather uses dividend-paying stocks and basically a buy-and-monitor approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about The Top 40 Dividend Stocks for 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 3/5/10)

Last Outlook (2/21/10): 6.1 (positive) 

S&P 500 last time (2/21/10): 1109
S&P 500 now: 1139      Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1139      Change in 2010: +2%

S&P 500 at close 3/9/09: 677 (beginning of 2009's bull market)
S&P 500 now: 1139      Change since 3/9/09: +68%

S&P 500 at peak 1/19/10: 1150 (possible beginning of bear market)
S&P 500 now: 1139      Change since 1/19/10: -1%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The report issued 2/18/10 showed the 10th consecutive monthly increase. Because this index tracks data that tend to lean in advance of the business cycle, a string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change. Two weeks ago, the Fed’s raising of the “discount rate” from 0.5% to 0.75% seemed to be absorbed by the market with little concern. The market has risen 3% since then. The Fed Funds rate itself remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: I have been corresponding with Morningstar about this number, and they have acknowledged an error in their display of the data that I had been using. I still do not have a satisfactory substitute. On their page for the S&P 500 index itself, Morningstar reports the index’s P/E based on “prospective earnings,” but to use that, I would have to recalibrate what the bands are for the index being undervalued, overvalued, or fairly valued. So again for this report, I will drop this factor from the calculation. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It has been going up for the past several weeks, along with the market itself, but staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.04. Neutral. +5

• S&P 500 Short Term Technical Trend: This indicator looks at the index’s relationship with two key moving averages, the 20-day and 50-day simple moving averages (SMA). During the 4 down weeks in January, the S&P 500 lost about 8% of its value, fell through both its 20-day and 50-day SMAs), and pulled the 20-day SMA down through the 50-day SMA. Then the market reversed itself. After a four-week recovery, the index has risen 7% and gone back up through both SMAs, although it has not yet pulled the 20-day SMA obove the 50-day. So we have Index > 50-day SMA > 20-day SMA. The back-and-forth movement of the index 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, turns positive. The index has moved well above its 50-day SMA, which in turn has remained above the 200-day SMA through these back-and-forth weeks. Positive. +10

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

• DJIA Medium Term Technical Trend: Same pattern as the S&P 500. Positive. +10

• NASDAQ Short Term Technical Trend: Same as the other two. Neutral. +5

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

TOTAL POINTS: 70 NEW READING: 70 / 9 = 7.8 = POSITIVE