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
