The unrest in Northern Africa and the Middle East has spilled over into the stock markets, mainly on concerns over oil prices. Other general economic data has been mixed. On Thursday the Commerce Department reported that the U.S. trade deficit had broadened well above estimates in January. China also showed a trade deficit, its first in nearly a year. However, consumer credit, retail sales, and business inventories all showed healthy increases. During earnings season, about 70% of companies reporting beat their earnings estimates compared to a historical average of about 62%. The next earnings season is about three weeks off.
The charts have broken out of their positive configurations. The action has moved from smoothly upward to jaggedly sideways, with much higher daily volatility than had been the case. After a couple of months of near-continuous up-weeks for the S&P, the last four weeks have been +1%, -2%, +0%, and -1%. The weekly totals mask some pretty severe daily volatility, which you can see on the chart (click to enlarge).
The Timing Outlook remains positive at 7.5 (compared to 9.0 the last time and 9.5 the time before that). The value is positive, but the direction is not. Overall, it’s an ambiguous picture. A strong case can be made that we are about to see a significant pullback or correction. An equally strong case can be made that the general upward trend since the bottom of the bear market two years ago can and will continue for a while longer.
As you know, I use the Timing Outlook to get me into the market but trailing sell-stops to get me out. My Capital Gains Portfolio remains 100% invested in SPY, an S&P 500 tracking ETF. The SPY shares are protected by a 5.5% trailing sell-stop. The “width” of the cushion has been cut in half by the overall 3% price decline over the past 4 weeks. Right now the stop sits about 2.9% below the value of SPY.
In contrast to the timing involved in the Capital Gains Portfolio, my Dividend Growth Portfolio remains 100% invested. Accumulated dividends are now about one-third of the way to an additional purchase, following the one just made in January. Thanks again 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 to see the description page for this annual e-book. Check out the Dividend Growth Portfolio’s performance by clicking here. I don’t use sell-stops (or any other form of hedging) in the dividend portfolio, because my focus is on the dividend stream, not stock prices.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, March 10, 2011)
Last Outlook (2/27/11): 9.0 (positive)
S&P 500 last time (2/27/11): 1320
S&P 500 now: 1304 Change: -1%
S&P 500 at beginning of 2011: 1258
S&P 500 now: 1304 Change in 2011: +4%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1304 Change since 3/9/09: +93% (in about 24 months)
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: No new report since last time. The 2/17/11 report showed a slight increase, the 7th increase in a row. Positive. +10
• Fed Funds Rate: No change at 0% to 0.25%. 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 operating P/E of the S&P 500 at 16.1, up from 15.7 last time, but well below the lower edge of the 17.3 – 21.1 neutral range. Positive. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary indicator is at 1.02, down from 1.04 last time and 1.06 the time before that. This is the lowest (that is, most positive) reading since last November. Any value within +/- 10% of 1.00 is neutral. +5
• S&P 500 Short Term Technical Trend: Last week’s action took the S&P 500 not only down through its 20-day simple moving average (SMA), but also briefly through its 50-day SMA. The S&P chart ended the week lined up like this: 20-day SMA > Index > 50-day SMA. This configuration is ambiguous and neutral. +5
• S&P 500 Medium Term Technical Trend: Index > 50-day SMA (just barely) > 200-day SMA. This is still positive but now it is living on the edge. +10
• DJIA Short Term Technical Trend: The Dow’s configuration is the same as the S&P 500’s. Thus it is ambiguous and neutral: +5.
• DJIA Medium Term Technical Trend: Same as the S&P 500 chart, with the index having dropped briefly below the 50- day SMA but then rallying Friday to finish just above it. Teetering but still positive. +10
• NASDAQ Short Term Technical Trend: The NASDAQ is usually the most volatile of the three indexes. Its picture is not as good as the other two. The configuration for the NASDAQ is 20-day SMA > 50-day SMA > Index > 200-day SMA. For the short-term indicator, this is still neutral, as the 20-day SMA is still above the 50-day SMA, although the Index has dropped below both. Neutral. +5
• NASDAQ Medium Term Technical Trend: Because the Index is now below its 50-day SMA, this medium-term indicator drops from positive to neutral. +5
TOTAL POINTS: 75
NEW READING: 75 / 10 = 7.5 = POSITIVE
