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
