The stock market rallied strongly in July, although not a straight-line fashion. The market’s volatility continues to have the Timing Outlook jumping around too. The last five readings have been negative-positive-negative-negative-positive. Today’s value is positive at 7.5, significantly better than 4.5 last time.
To repeat a message from the last several Timing Outlooks: The Timing Outlook is least useful when the market is gyrating, as it is pretty sensitive to short-term (2 to 3-week) market moves. Despite the strong (if choppy) July, we have been in a volatile market since mid-April. If U means up and D means down, the weekly market changes since mid-April have been D-U-D-D-U-D-U-D-U-D-D-U-U-U-D. This week is too soon to call.
My Capital Appreciation Portfolio has remained 100% in cash since early May. With the July rally, let’s look at the criteria for re-entering the market. As noted in this article, I look for:
• 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
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.
An astute reader has pointed out that I actually overlooked a “Buy” signal in early July. As of the close today (Thursday), we are just short of 3-week and 4-week “Buy” signals. The percentage increases are sufficient, but the number of positive trading days falls 1-2 short in each case. I will be watching the trading ranges more closely, and if a “Buy” signal comes along, I will re-enter the market with a portion of the portfolio’s cash, with any purchase protected by a sell stop.
Subjectively, this is a hard market to have confidence in. Q2 earnings reports are coming in strong, but economic factors and the general “feel” of things does not inspire confidence. Nevertheless, if the criteria generate another “Buy” signal, I will be buying. Gotta go with the system.
As usual, my Dividend Portfolio remains 100% invested. While its value has been dancing along with the market, 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. The holdings are not protected by sell stops.
2. Market Performance Since Last Outlook
(“now” figures are as of close Thursday, August 5, 2010)
Last Outlook (7/19/10): 4.5 (negative)
S&P 500 last time (7/19/10): 1071
S&P 500 now: 1126 Change: +5%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1126 Change in 2010: +1%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1126 Change since 3/9/09: 66+%
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: The most recent report showed a decline in this index. The index has had a couple of declines in the past few months, 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 and people speaking for it continue to reinforce the idea that rates will not be raised anytime soon. With the Federal Funds rate near zero, this indicator remains positive. +10
• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 15.2, up from 14.3 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 0.98, up from 0.93 last time. That keeps this indicator in the neutral range, which is any value between 0.90 and 1.10. +5
• S&P 500 Short Term Technical Trend: The market has rallied, in fits and starts, since the beginning of July. It has now reclaimed the value it had in early June. This short-term technical indicator uses the two shorter SMAs. The configuration is Index > 20-day > 50-day. That is the best configuration to indicate a rising market. Positive. +10
• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day). The lineup is Index > 200-day > 50-day. This is an ambiguous configuration. Neutral. +5
• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Positive. +10
• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5
• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Positive. +10
• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5
TOTAL POINTS: 75
NEW READING: 75 / 10 = 7.5 = POSITIVE
