(Note: The original version of this article incorrectly stated the Timing Outlook's value as 5.0. It is 6.0.)
The Timing Outlook increases from its last reading (4.5 or "negative") to 6.0. That is a “positive” reading.
The market has recently continued its volatile, hair-trigger behavior. “Big” moves (more than 10 points on the S&P 500) have characterized the market’s daily behavior for well over a month. They have occurred on the majority of trading days.
That has been well documented, so for a change of pace, let’s step back to see the long-term forest instead of the daily trees. The accompanying chart shows the S&P 500 weekly (instead of daily) for the past two years. The simple moving average (SMA) lines are for 10 weeks (about equal to 50 trading days, shown in blue) and 40 weeks (about 200 trading days, shown in red). This kind of chart provides an extreme smoothing of the market’s activity.
(Note to subscribers: If you are having trouble reading this chart in your email, simply click on the title at the top to go to the actual Newsletter. There, you can click the chart to enlarge it.)
Three things jump out at me from this chart.
• First, the blue line (10 weeks or 50 days) has just logged its longest period of descent (about 6 weeks) since the 2009 bull market began in March, 2009.
• Second, the red line (40 weeks or 200 days) has flattened from a clearly ascending mode. It looks like it may be at an inflection point, about to turn downward.
• Third, the past 6 weeks look qualitatively different from any other time-period since the rally began. The market has turned in a downward performance for a fairly significant length of time.
One conclusion might be that the rally that began in 2009 is exhausted, and that it may be turning over to a flat or down market. That said, no one can predict the future, and what looks like an inflection point may be no more than a pause. We won’t know until after it happens.
The Timing Outlook uses a blend of technical and fundamental information. The two forms of analysis really cannot be separated for me; each has its place. The goal, of course, is simple: To own stocks when they are going up, and to not own them when they are going down.
The word “when” in the preceding sentence is what makes things tricky. It is impossible to separate the simple own-or-don’t-own goal from what might be called a “prediction time-frame.” My prediction time-frame is 2 to 4 weeks. That is, the Timing Outlook attempts to answer the question, In what direction will the market or individual stock go over the next 2-4 weeks? Everybody’s prediction time-frame differs. For a day trader, it is shorter than a day. For a long-term holder, it is measured in years. Anything that happens in a shorter period than your prediction time-frame can be regarded as noise, meaning that it can be regarded as a mere fluctuation rather than an investable trend.
In real life, of course, everybody’s total investing time-frame covers many years. You chain together your prediction time-frames and/or your holding periods to get to your total results over your investing lifetime.
My Capital Appreciation Portfolio remains 100% cash at this point. It will remain in cash until the entire market—or an individual stock—displays charts, fundamentals, and valuations that suggest a positive outcome. I take this binary approach—in or out, invested or in cash—because it strikes me as the easiest way to manage the risk inherent in stock ownership when the goal is to buy low and sell high. It is neither a bullish nor bearish approach—it is simply pragmatic.
On the other hand, my Dividend Portfolio remains 100% invested. This seemingly contradictory position compared to the Capital Appreciation Portfolio is not contradictory at all. It is the result of utterly different strategies. In the Dividend Portfolio, the main goal is not to buy low and sell high. Rather, it is to generate an ever-increasing stream of dividend income. The holdings are not protected by sell stops. If you want to learn more, use the following links:
• To see the long-term total performance results of the two portfolios, click here.
• To see the strategy of the Dividend Portfolio, click here.
• To read a complete description of my e-book, THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks, click here.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday June 11, 2010)
Last Outlook (5/21/10): 4.5 (negative)
S&P 500 last time (5/21/10): 1088
S&P 500 now: 1092 Change: +0%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1092 Change in 2010: -2%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1092 Change since 3/9/09: +61%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed a drop from the prior month, the first decline in a year. That lowered this indicator to neutral, where it will stay until there are three consecutive months of either increases or decreases. Neutral. +5
• Fed Funds Rate: The Fed has left rates near zero for many months. It seems clear that 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 is 15.7, practically unchanged from last time. That keeps this indicator in positive territory. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph (which it calculates by comparing the prices of the stocks in its universe of about 2000 stocks to its analysts' "fair alue" for each stock) is at 0.96, also practically unchanged from last time. That keeps it in the “fairly valued” band of plus or minus 10% of 1.00. Neutral. +5
• S&P 500 Short Term Technical Trend: All three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) had a snapback rally last week, causing each index to rise just slightly above its 20-day SMA, while remaining below its 50-day and 200-day SMAs (simple moving averages). Looking just at the two shorter SMAs, the charts are in an ambiguous configuration: 50-day SMA > Index > 20-day SMA. That makes this indicator neutral. +5
• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its two longer SMAs. This indicator remains ambiguous and therefore neutral: 50-day SMA > 200-day SMA > Index. As mentioned last time, many technical analysts use only the 200-day SMA, and they would interpret the index being below it as a huge negative sign. +5
• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Neutral. +5
• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart is the closest to turning positive using the two shorter-term SMAs. The index is at 2243.6, while the 20-day SMA is just above it at 2244.8. The lines not having crossed (and there is no guarantee that they will), this indicator is like the other two, neutral. +5
• NASDAQ Medium Term Technical Trend: Looking at the two longer SMAs, the index has passed back above its 200-day SMA (just barely). The configuration is 50-day SMA > Index > 200-day SMA. It’s still neutral here, but some technical analysts would say it has turned positive because of the clearance of the 200-day SMA. +5
TOTAL POINTS: 60
NEW READING: 60 / 10 = 6.0 = POSITIVE
