The chart tells the story. (Click on the chart to enlarge it.) The market has been generally rising since the beginning of September. This is reflected in the high reading for the Timing Outlook, currently 9.5, up from 9.0 last time. The only indicator that is neutral instead of positive is the Morningstar Market Valuation Graph, which clocks in at 1.03, suggesting that the market is 3% overvalued right now. Every other indicator is positive.
The strange thing about this rally is that there have been quite a few down days (shown in the red candlesticks and in the red volume bars at the bottom of the chart). They have been more than offset by occasional large one-day lifts. This characteristic has kept me from becoming fully invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment. The proliferation of small down days has kept the portfolio from fully participating in the 3-month rally. I check approximately every week, and if the conditions are right, I invest 10% more cash. The portfolio is about 70% invested (30% cash) at this time.
While the slowed pace of re-investing costs me some gains when the market rises as unevenly as it has, I nevertheless continue to follow the 2/3 rule. It provides a margin of safety and conservatism that has served me well over the long term. It does guarantee that I will miss the beginning couple weeks of any rally.
As stated last time, The Capital Gains Portfolio’s only investments currently are in the S&P 500-tracking SPY ETF. Most of my time in the last three months has been devoted to preparing 2011’s edition of THE TOP 40 DIVIDEND STOCKS, so I do not have up-to-date Easy-Rate™ sheets for individual capital-gains stocks. SPY allows me to participate in the market rally without having currently rated individual stocks.
The SPY shares are protected by a tight 5% trailing sell-stop. This has not been a high-confidence rally for me. The uneven nature of the market’s rise shows that it is prone to react quickly to negative news on any particular day. That suggests to me that lots of investors have their fingers on the Sell button. Friday’s increase in the unemployment rate to 9.8% from 9.6% certainly did not increase confidence in the recovery. Despite that, interestingly, the market went up Friday. Those who believe that the market is always rational need not apply. I think that it is rational in the long term, but is unpredictable—nearly random—in the very short term of a few days.
As mentioned last time, I have re-named my Dividend Growth Portfolio to emphasize its focus on rising-dividend stocks. That portfolio remains 100% invested, as it usually is. Because the focus there is on continually increasing the dividend stream, I don’t use sell-stops or go to cash when the market plunges. The only cash is accumulated dividends waiting to be reinvested when the total hits $1000. As stated earlier, I am deep into preparation of THE TOP 40 DIVIDEND STOCKS FOR 2011. I will keep you up to date on its progress. I hope to release it in January, and I am still on schedule to do that.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, December 4, 2010)
Last Outlook (11/12/10): 9.0 (positive)
S&P 500 last time (11/12/10): 1199
S&P 500 now: 1225 Change: +2%
S&P 500 at beginning of 2010: 1115
S&P 500 now: 1225 Change in 2010: +10%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1225 Change since 3/9/09: +81% (in about 21 months)
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: The most recent report in November showed an increase in this index, the fourth in a row. That keeps this indicator positive. +10
• Fed Funds Rate: No change. The Fed seems committed to a loose money policy until the economy is well into recovery or they become concerned with inflation. Positive. +10
• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, down slightly from 15.1 last time. This is still well within positive territory at any value below 17.4, suggesting that the market is undervalued. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.03, up from 1.01 last time, suggesting that the market is 3% overvalued right now. This is well within my +/- 10% range for calling this indicator neutral. As you can see, this indicator's suggestion is different from the suggestion of the market's P/E just stated. +5
• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration has become even more positive than last time, as the Index > 20-day > 50-day picture has become more pronounced. +10
• S&P 500 Medium Term Technical Trend: This tells the same story: Index > 50-day >200-day. The index is up about 4% since the “golden cross” (the upward passage of the blue 50-day SMA through the red 200-day SMA) on October 22, visible in the middle of the chart. Positive. +10
• DJIA Short Term Technical Trend: Same story as the S&P 500 short-term trend. Positive. +10
• DJIA Medium Term Technical Trend: Same story. Positive. +10
• NASDAQ Short Term Technical Trend: Same story. Positive. +10
• NASDAQ Medium Term Technical Trend: Same story. +10
TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE
