Timing Outlook Remains Positive at 9.5

1. Summary

Since the last report 2½ weeks ago, the market has just gone pretty steadily up, making gains in 11 of the past 12 days through Wednesday. The Timing Outlook remains elevated at 9.5. As last time, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph, which at 1.05 suggests that the market is 5% overvalued right now. Every other indicator is positive.

The steady trickle of up-days raised the percentage of up-days such that my additional criteria for buying into the market were satisfied. Thus I am now 100% invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment.

As stated last time, the Capital Gains Portfolio’s investments simply are in the S&P 500-tracking SPY ETF. Most of my time recently has been devoted to working on THE TOP 40 DIVIDEND STOCKS FOR 2011, so I have not had time to evaluate individual stocks for the Capital Gains Portfolio. The SPY shares are protected by a tight 5.5% trailing sell-stop. My confidence in the rally has improved a little, for two reasons. First, I like slow, steady trends. Second, the tone of the “net news flow” seems to have changed from generally downbeat to somewhat positive. That’s my subjective judgment, anyway.

I hope everyone has a great Christmas, New Year, and/or whatever else you celebrate at this time of year. When the year has ended, the market will probably have gone up >10-11% for the year in price, plus another couple percent for dividend investors. That makes it a pretty good year in my book.

2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday, December 22, 2010)

Last Outlook (12/4/10): 9.5 (positive)

S&P 500 last time (12/4/10): 1225
S&P 500 now: 1259 Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1259 Change in 2010: +13%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1259 Change since 3/9/09: +86% (in about 22 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: December’s report, out last Friday, showed another increase, the fifth in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. The Fed is clearly 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, same as last time. This is well within positive territory (any value below 17.4). +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.05, up from 1.03 last time, suggesting that the market is 5% overvalued right now. This is still well within my 10% range of 1.00 for calling this indicator neutral. I like this indicator a lot, because of the unique and sensible way they construct it. You can see it by clicking here. Use the tabs across the top to see different timeframes and types of stocks. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter (20-day and 50-day) simple moving averages (SMAs) of the S&P 500. The current configuration is the best you can get: Index > 20-day > 50-day. +10

• S&P 500 Medium Term Technical Trend: This medium-term technical indicator uses the two longer SMAs (50-day and 200-day). Right now it tells the same story: Index > 50-day >200-day. 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