August's Market Swoon Pulls Timing Outlook Back To Negative

1. Summary

After the stock market’s rally in July, which pulled the Timing Outlook up into positive territory, August has seen a nearly equal but opposite slide. Today’s Timing Outlook is negative at 4.5, significantly down from 7.5 last time. Today’s S&P 500 value (at mid-day) of about 1048, is a value that has been crossed through several times in the last few months as the market see-saws up and down. In other words, the market has overall been sideways for three months, but with significant volatility that has looked like trend-starts, but turned out to be false hopes.

This kind of yo-yo action causes the Timing Outlook to jump around too. The last five readings, including today’s, have been Negative-Positive-Negative-Negative-Positive-Negative. Short-term (2-3 week) market reversals are the worst conditions for discerning an investable trend. The Timing Outlook is least useful under these conditions, as swings to-and-fro with the market.

My Capital Appreciation Portfolio has remained 100% in cash since early May. That means that it has gained nothing, but in so doing it has outperformed the S&P 500, which has an overall loss since that time. In the last report, the July rally led me to review the criteria for re-entering the market.

• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• Etc.

The market’s August drop has put these criteria out of reach again, at least for a while. It is hard to see the catalyst that would trigger a sustained rally. Q2 earnings came in strong: 66% of companies in the S&P 500 beat earnings estimates, and 63% beat revenue estimates. But that good news has been offset by poor economic news. Corporations are doing well, but individuals are not. It seems that every day, some negative report is issued about housing, manufacturing, unemployment, a “jobless recovery,” troubles in Europe, the possibility of a double-dip recession, or the possibility that we’ve never actually exited the Great Recession. Ben Bernanke stated recently that the economy is displaying “unusual uncertainty.” Traditionally, markets hate uncertainty.

My Dividend Portfolio is 100% invested, but I made some changes this month. I completed a Portfolio Review, which led me to sell three stocks (Diageo, Emerson Electric, and Royal Bank of Canada) and replace them with two others (added to position in Alliant Energy and initiated position in Johnson & Johnson). These are the first changes to the portfolio in a year. Hopefully they will strengthen the portfolio for its key objective: To generate ever-increasing income streams. The holdings in the Dividend Portfolio are not protected by sell stops. Risk management is accomplished by means of the Portfolio Reviews.

2. Market Performance Since Last Outlook
(“now” figures are as mid-day, Wednesday, August 25, 2010)

Last Outlook (8/5/10): 7.5 (positive)

S&P 500 last time (8/5/10): 1126
S&P 500 now: 1048 Change: -7%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1048 Change in 2010: -6%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1048 Change since 3/9/09: +55%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report last week showed a tiny increase in this index. The index has been gyrating the past few months (displaying “unusual uncertainty” too, I guess), rendering it ambiguous. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5

• Fed Funds Rate: No change. The Fed continues to reinforce the idea that rates will not be raised anytime soon. In a nutshell, they seem to see “unusual uncertainty” in the economic recovery combined with little possibility for inflation in the next few months. With the Federal Funds rate near zero, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 15.2, same as last time. This indicator stays in positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.91, down significantly from 0.98 last time and close to the 0.90 level that would move this indicator into positive territory. For now, the indicator remains in the neutral range, which is any value between 0.90 and 1.10. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs). The configuration is 20-day > 50-day > Index. That is ambiguous, reflecting the yo-yoing in the market. Neutral. +5

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day). The lineup is 200-day > 50-day > Index. This is exactly the opposite of an uptrend. Negative. +0

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Neutral. +5

• DJIA Medium Term Technical Trend: Same as the S&P 500. Negative. +0

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5

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

TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE