The market’s gyrations have the Timing Outlook gyrating too. The last three readings have been negative-positive-negative. Today’s value is 4.5, which is negative.
As shown in this year-to-date chart of the S&P 500, the market has continued its volatile behavior. “Big” moves (more than 10 points, up or down, on the S&P 500) have characterized the market’s daily performance for almost two months. Look at all the “long” candlesticks, each one of which represents a single day’s trading. Contrast them with the smooth upward glide from February 8 to April 12.
Some things to note from the chart, none of them good.
• There have been several crosses of lines in the past two months. First, we see the index itself cross downward through its 20-day, 50-day, and 200-day simple moving averages (SMA). Then the 20-day SMA crosses downward through the 50-day and 200-day SMAs. The only remaining “death cross” would be to see the 50-day SMA cross downward through the 200-day SMA.
• Focusing on the latter, the 50-day SMA (now at 1128) is rapidly falling toward the 200-day SMA (now at 1112). In mid-May, the 50-day was 7% above the 200-day. That difference has shrunk to 1%.
• The red line (200-day SMA) has gone nearly flat from a clearly ascending mode not that long ago.
The Timing Outlook is least useful when the market is gyrating. As noted earlier, the last three readings have been negative-positive-negative. The Timing Outlook attempts to answer the question, In what direction will the market or individual stock go over the next 2-4 weeks? My studies of the Timing Outlook’s performance show that it is least useful when the market is going back and forth every week or two. That’s the kind of market we have been in for more than two months. If U means up and D means down, the last 10 weeks of market action have been U-D-D-U-D-U-D-U-U-D.
As frequent readers know, I use an additional set of criteria to help determine when to re-enter the market when one is in cash. These criteria require a general up-trend in the market over the past 2-3-4 weeks and also require that 2/3 of the trading days be positive rather than negative. As you can see just from glancing at the chart, there has not been a time since late April when either requirement was satisfied. (For a full discussion of the criteria for re-entering the market, see the article here.)
My Capital Appreciation Portfolio remains 100% cash. It will remain that way until the entire market—or an individual stock—displays charts, fundamentals, and valuations that suggest a positive outcome.
As usual, my Dividend Portfolio remains 100% invested. While its value has gone down over the last couple of months, its main goal—generating ever-increasing income streams—is still being met. None of the stocks in the portfolio has cut or frozen its dividend this year. Many have raised their dividends. That's the goal of this portfolio. As long as a stock continues to foster success of the Dividend Portfolio's central mission of increasing dividends, it will not be sold. As dividends accumulate, I will re-invest them.
If you want to learn more about these two portfolios, use these 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 25, 2010)
Last Outlook (6/12/10): 6.0 (positive)
S&P 500 last time (6/12/10): 1092
S&P 500 now: 1077 Change: -1%%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1077 Change in 2010: -3%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1077 Change since 3/9/09: +59%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: A new report on June 17 showed an increases in this index, following a drop (later revised to flat) the prior month. That keeps this indicator at neutral, as I require three consecutive months of either increases or decreases to rate it as positive or negative. "The index points to continued, though slower, U.S. growth for the rest of this year," said Bart van Ark, chief economist of The Conference Board. "Public debt and deficits weigh heavily on growth prospects on both sides of the Atlantic." Neutral. +5
• Fed Funds Rate: At its meeting last week, the Fed has left rates near zero again. I have been saying for several months that the Fed will not change rates as long as the economic recovery remains slow and inflation remains low. In its statement last week, the Federal Open Market Committee (FOMC) maintained its "extended period" language (referring to how long it expects to keep interest rates low). The tone of the Fed's statement was not very upbeat: "Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months." The FOMC also noted that "underlying inflation has trended lower." Positive. +10
• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 15.7, unchanged from last time. That keeps this indicator in positive territory. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.95, down a tick from 0.96 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: Last week’s 4% fall in the S&P 500 pulled the index below its 20-day SMA. Looking at the two shorter SMAs that I use for this indicator (20-day and 50-day), the chart is the exact opposite of what one would like to see: 50-day SMA > 20-day SMA > Index. That renders this indicator negative. +0
• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its two longer SMAs (50-day and 200-day). This indicator remains ambiguous and therefore neutral: 50-day SMA > 200-day SMA > Index. It should be noted that the 50-day SMA is no longer very far above the 200-day SMA. If the index continues generally downward, the configuration will become totally negative, as a “death cross” will occur if the 50-day passes downward through the 200-day. As mentioned in prior posts, for many technical analysts, this chart already is quite negative by the simple fact that the index itself is below its 200-day SMA. +5
• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Negative. +0
• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart, while tighter than the other two, nevertheless has the same configuration. Negative. +0
• NASDAQ Medium Term Technical Trend: Looks like the other two. Neutral. +5
TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE
