Market & Timing Outlook Both Go Down (A Little)

1. Summary

Until last week, the market had continued to chug steadily upward. The unrest in Northern Africa, especially Libya, unsettled the markets last week, largely over concerns about oil supplies. The S&P 500 fell 2%, its first weekly loss since late November. The swoon took the index below its 20-day simple moving average (SMA), although Friday’s snap-back brought it back above. (Click on the chart to enlarge it.)

The Timing Outlook remains positive at 9.0 (compared to 9.5 last time). The Dow Short-Term Trend indicator moved from positive to neutral, as the Dow failed on Friday to finish above its 20-day SMA. Every other indicator remains positive except Morningstar’s Market Valuation Graph, which has been in neutral territory for some time now.

My Capital Gains Portfolio remains 100% invested in SPY, an index-tracking ETF. The SPY shares are protected by a 5.5% trailing sell-stop. “Trailing” means that I move the stop upward when the market advances but don’t move it downward when the market declines. I usually adjust the stop (if necessary) once per week (on Fridays). Because of last week’s decline in the S&P 500, there was no adjustment, and the stop is now about 3% below the index itself. So it’s now like a 3% sell-stop.

As I said last time, a correction or reversal in the long uptrend is inevitable, but we don’t know when it will happen. Last week’s drop could have been the inflection point where the market changed into a downward trend, but it also may have been nothing more than a little blip. To repeat an important point, I believe in “waiting for the turn.” That is, I don’t hedge or pull out of a rally in anticipation of a reversal, I wait for it to actually happen. Market trends sometimes can persist far longer than anyone would expect. We may see in the next week or two whether the market has reversed trend, resumes its upward trend, or just meanders sideways for awhile.

In contrast to the timing involved in the Capital Gains Portfolio, my Dividend Growth Portfolio remains 100% invested. Thanks to all of you who have purchased TOP 40 DIVIDEND STOCKS FOR 2011: How to Generate Wealth or Income from Dividend-Growth Stocks. Click here (or the book’s image to the right) to see the description page for this annual e-book, which was completely updated for 2011. Check out the Dividend Growth Portfolio’s performance by clicking here. The reason that I don’t use sell-stops (or any other form of hedging) in the dividend portfolio is because my focus there is on the dividend stream, not stock prices.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, February 27, 2011)

Last Outlook (2/9/11): 9.5 (positive)

S&P 500 last time (2/9/11): 1321
S&P 500 now: 1320 Change: -0%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1320 Change in 2011: +5%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1320 Change since 3/9/09: +95% (in about 23 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: A new report on 2/17/11 showed a slight increase, the 7th increase in a row, suggesting continued expanson in the economy. Positive. +10

• Fed Funds Rate: No change at 0% to 0.25%. The Fed continues to be 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 15.7, same as last time. I have recalibrated the S&P’s average P/E to add 2010 data. The average P/E based on operating earnings over the period 1988 to 2010 was 19.2. (Before adjustment, the average was 19.4.) Any value within +/- 10% of that is considered neutral. Thus the new neutral range is 17.3 – 21.1. (The former range was 17.4 – 21.3.) Any value below neutral is considered positive, any value above neutral is considered negative. Thus this month’s value of 15.7 is positive. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is 1.04, down from 1.06 last time, continuing to suggest that the market is slightly overvalued. This indicator has been hovering near 1.05 since the tail end of December. I consider any reading within +/- 10% of 1.00 to be neutral. +5

• S&P 500 Short Term Technical Trend: All of the six technical indicators had been in the same positive configuration for at least a couple of months: Index > 20-day SMA > 50-day SMA > 200-day SMA. Last week’s swoon took all three briefly below their 20-day SMAs, but Friday’s rally brought two of them back—only the Dow failed to close above its 20-day SMA. Thus all trend indicators except the Dow Short-Term are positive. +10

• S&P 500 Medium Term Technical Trend: Positive. +10

• DJIA Short Term Technical Trend: The Dow’s configuration is 20-day SMA > Index > 50-day SMA. This is an ambiguous picture. Neutral: +5.

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 90
NEW READING: 90 / 10 = 9.0 = POSITIVE

Road Map for Managing a Dividend Growth Portfolio

I have posted an article on Seeking Alpha with the title above. The article discusses how to map out an investment plan. The general principles are applicable to any type of planning. I used my Dividend Growth Portfolio as a specific example. The general principles are summarized in the diagram below, which the article discusses in detail. To read the full article, click here.

Seeking Alpha: Why the Market Doubled

I want to let all my subscribers know that I also write for an excellent investment site called Seeking Alpha (SA). I have been posting articles on SA since July, 2008. Most of those aticles have been reproduced in this Newsletter. In fact, many of them appeared here first, then were adapted for SA.

Recently, Seeking Alpha instituted payments to authors for articles (based on page views), provided that the article is not provided for free elsewhere. After much soul-searching, I have decided to submit occasional articles exclusively to SA and not reproduce them here. When I do that, I will provide a brief summary of the article here along with a link to the full article on SA.

Many of you may find SA to be a very interesting site. It provides over 200 articles per day on every conceivable investing topic. Articles can be accessed for free. They provide a comment system, plus a scoring system (thumbs up and thumbs down) for comments. (I do not allow comments here, preferring to keep this Newsletter as clean as possible.) If you want to comment or vote on comments, you must register with SA. Registration is free (they have over 600,000 registered users). You can also sign up for daily emails notifying you of articles by favorite authors, articles about subjects you have designated, and so on. You can "follow" your favorite authors and receive notifications whenever they post a new article. (I have over 1300 followers on SA.)

Here is a link to Seeking Alpha's home page: http://seekingalpha.com/ .

Yesterday, I posted my first exclusive article on Seeking Alpha, "4 Reasons the Stock Market Has Doubled." In the article, I lay out the reasons that I think have been behind the stock market's doubling since its low on March 9, 2009 nearly two years ago. If you would like to read the full article (and people's comments about it), you can access it here: http://seekingalpha.com/article/252838-4-reasons-the-stock-market-has-doubled .

One topic that I have kept exclusively for readers of this newsletter are my periodic Timing Outlook updates and market commentaries. I currently have no plans to submit those articles to Seeking Alpha. For one thing, it would take too much background explanation to bring those readers up to speed on how the Timing outlook works. If I change that policy, I will let you know.

As always, best of luck with your investing!

Bored Yet? Timing Outlook Remains at 9.5

1. Summary

Since the last report about three weeks ago, the market has continued to chug steadily upward. It has now made gains in six straight months. Looking at the chart, you can see that there are only two periods (the second half of November and one day at the end of January) that the S&P 500 has fallen below its 20-day Simple Moving Average. (Click on the chart to enlarge it.)

The Timing Outlook remains elevated at 9.5. Similar to the past two readings, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph. Every other indicator is positive.

My Capital Gains Portfolio remains 100% invested in SPY, an index-tracking ETF. The SPY shares are protected by a 5.5% trailing sell-stop.

I read a lot of financial blogs and commentaries, and many are saying that the rally has gone on too long, it’s way past the length of the average rally, the market is far overvalued, the economy still stinks, and rising commodity costs spell doom. Warnings about an impending crash—or at least a correction (drop of 10% or more)—abound.

Well, maybe. In fact, a correction or reversal is inevitable—we just don’t know when. As long-time readers know, I believe in “waiting for the turn.” That is, I don’t hedge or pull out of a rally in anticipation of a reversal. I wait for it to actually happen. The sell-stops do that automatically—if SPY reverses by 5.5%, I am out, no questions asked and no regrets. Market trends sometimes have a way of continuing far longer than anyone would expect. This is probably already one of those times, but that does not mean that it is over. Wait for the turn.

If the commentators and bloggers invest the way they write, they have missed out on (or actually shorted) one of the most amazing money-making opportunities ever. They have been on the wrong side of the trade. The market has nearly doubled since March 9, 2009. There have been a few breaks in the action, but overall it has been a steady upward climb following one of the worst years (2008) in market history.

In one sense, the market’s rally has been remarkable. But in another sense, it is not surprising. After all, companies (not individuals) have been out of the recession for well over a year. Year-over-year profit growth has been a repeating story for at least seven quarters now. Many companies are awash in cash—as evidenced by the big upswing in merger-and-acquisition activity over the past few months. As I see it, there has been a massive transfer of wealth from individuals to corporations. The overall economy is still unsound, because of the high unemployment rate and a housing market that is still searching for its bottom. But the corporate economy is not unsound. On average, corporations could hardly be healthier. All the laid-off people represent cost savings for corporations, many of whose profit margins and profits are at all-time highs. Since the stock market represents the value of corporations—not individuals—it is to be expected that the stock market should rise roughly in step with those rising profits.

As usual, my Dividend Growth Portfolio is 100% invested. As reported last time, I reinvested dividends in January to grab some more Abbott Labs. Thanks to all of you who purchased TOP 40 DIVIDEND STOCKS FOR 2011: How to Create Wealth or Income with Dividend-Growth Stocks. Incredibly, sales from the e-book’s release in mid-January to the end of January—half a month—reached 50% of total sales for all of 2010! Click here (or the book’s image to the right) to see the description page for this annual e-book, which has been completely updated for the new edition.

2. Market Performance Since Last Outlook
(“now” figures are as of mid-day Wednesday, February 09, 2011)

Last Outlook (1/24/11): 9.5 (positive)

S&P 500 last time (1/24/11): 1287
S&P 500 now: 1321 Change: +3%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1321 Change in 2011: +5%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1321 Change since 3/9/09: +95% (in about 23 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. January’s report showed the 6th increase in a row. Positive. +10

• Fed Funds Rate: No change. The Fed continues to be 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 15.7, up just slightly from 15.5 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 1.06, up from 1.04 last time, continuing to suggest that the market is slightly overvalued. This indicator has been hanging around 1.05 since the tail end of December. It would need to reach 1.10 for me to consider it to be saying that the market is overvalued. Neutral. +5

• S&P 500 Short Term Technical Trend: All of the technical indicators have been in the same configuration for at least a couple of months: Index > 20-day SMA > 50-day SMA > 200-day SMA. This lineup is the best you can get, and all six of the technical indicators are positive. +10

• S&P 500 Medium Term Technical Trend: Positive. +10

• DJIA Short Term Technical Trend: Positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE