Timing Outlook Declines Along With Market, But Remains Positive

1. Summary

The Timing Outlook declines to 7.5 from 9.0. This is a mid-range positive reading.

This past week, the market registered its first real “down” week since February, dropping more than 2%, with two very bad days and one very good day. With P meaning a positive week, N a negative week, and 0 = no change (less than ½ of 1%), here is what the market has done in 2010: P-N-N-N-N-P-P-0-P-P-P-P-P-P-0-P-N. That’s 10 up weeks, 5 down weeks, and 2 with negligible change. The market is up 6% in 2010 and 75% since March 2009’s lowest point.

Market action over the past couple of weeks has gotten more volatile and shaky. There have been three large “down” days (declines of more than 1%) in the past 11 trading sessions, including two this past week (on Friday, the market dropped 1.7%). Average daily trading volume has increased, as it tends to do when the market gets unsteady. Friday’s declines pulled all three major indices below their 20-day moving averages (SMA), which is the reason for the decline in the Timing Outlook reading from 9.0 last time to 7.5 today.

Because I am not a day-trader, I don’t feast on volatility, so I am less comfortable with this kind of market than with a “boring” steady one. (If the market went up 1/8 percentage point per session for the rest of my life, I would be very happy.)

The earnings season is in full swing, and it is again a good one, with about 80% of companies beating expectations so far. On the negative side, news about Goldman Sachs continues to be bad and ubiquitous: Congressional hearings; word of possible criminal charges; and the SEC civil fraud charges from a couple weeks ago. Greece’s financial situation—and its potential “contagion” to other countries in Europe—also seems to be worrying investors quite a bit. BP’s oil spill in the Gulf of Mexico has affected certain stocks individually as well as placing an overall negative cast on the daily news.

My Capital Gains Portfolio remains fully invested. Its 6% sell-stops have been eroded by about 2-3%, but they have not been hit. The portfolio’s holdings and performance will be updated for May on my Web site by the end of the weekend. Click here to check it out. Be sure you have your own sell-stops (or other exit strategies) in place.

My Dividend Portfolio’s management does not depend on the direction of the market. Rather it focuses on collecting and re-investing rising dividends. Use this link to view its holdings and performance. For a description of the book on which the Dividend Portfolio is based, see 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 April 30, 2010)

Last Outlook (4/16/10): 9.0 (positive)
S&P 500 last time (4/16/10): 1192
S&P 500 now: 1187 Change: -0%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1187 Change in 2010: +6%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1187 Change since 3/9/09: +75%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: Report two weeks ago indicated the 12th consecutive monthly increase. Positive. +10

• Fed Funds Rate: The Fed met this week and left the Fed Funds rate near zero, so this indicator stays positive. There was no important change in the accompanying statement, and Chairman Ben Bernanke has made copious statements suggesting that the Fed will keep interest rates at rock-bottom levels for a while longer. My interpretation: The Fed will not change rates as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 based on operating earnings as 19.1, down from 20.0 last time, and well within the “fairly valued” neutral zone. +5

• Morningstar’s Market Valuation Graph. This indicator had been slowly climbing along with the market since mid-February. The market’s flattening over the past two weeks, along with increased earnings being reported, have brought the level down from 1.07 to 1.05, still within the “fairly valued” band of 0.9 to 1.1. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) deteriorated since the last report, with each index dropping below its 20-day SMA. That dropped all three of the short-term trend indicators to neutral from positive. Each index lines up the same way: 20-day SMA > Index > 50-day SMA > 200-day SMA. So this short-term technical indicator is now neutral, as are the two others. +5

• S&P 500 Medium Term Technical Trend: This mid-term indicator uses the index plus the 50-day and 200-day SMAs. All three medium-term indicators remain positive, with each index above its 50-day SMA, which in turn is above the 200-day SMA. +10

• DJIA Short Term Technical Trend: As stated above, the DJIA’s chart looks like the S&P 500’s chart. Neutral. +5

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart looks like the other two. Positive. +5

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 75 
NEW READING: 75 / 10 = 7.5 = POSITIVE