The Timing Outlook has improved from 7.5 to 8.0, remaining in positive territory.
On February 22, the market began a fairly steady and quick descent, fueled by such things as the unrest in Northern Africa and the Middle East, which sparked concern about oil prices among other things. The market declined about 6% in 17 trading days. That was enough to take me completely out of the market in my Capital Gains Portfolio, where I was using 5.5% sell stops. (Click this image to enlarge it.)
You can’t win them all. Practically the very day that the sell stops were hit, the market reversed itself, for no apparent reason other than what is being called “remarkable resiliency.” In the last 10 trading sessions, it has recovered about two-thirds of its loss. I did not participate in that recovery, because I was in cash. If my stops had been just a little wider, I never would have been stopped out.
Does that make me question my approach? I always question my approach. It does not make me doubt the overall strategy of timing and surfing trends. It doesn’t even make me reconsider using sell stops, even though had I just relied on the Timing Outlook, which stayed positive the whole time, I would not have sold. I remain convinced that avoiding big losses is key to investing for capital gains.
But the width of the stops is always open for debate. A few years ago, I commonly used 15% stops as my default. For whatever reason—probably the severity of the 2008 crash—I have lately used much narrower ones. The slow steady nature of the bull market that began in March, 2009, made narrow stops easy to use. They only got hit twice; this was the third time. So, even though in the short term I lost 5.5% here, over the long term, big-loss avoidance (like the 50%+ losses that many suffered in 2008) has kept this portfolio well above the market itself.
I re-entered the market this morning by using 25% of my cash to purchase SPY, the ETF that tracks the S&P 500. If the market keeps going up, I will continue to make purchases until I am all-in again. I may widen my stops a little, I haven't decided yet.
The end of March is tomorrow, which means that another earnings season will soon be upon us. The market usually gets more volatile during earnings season. The year-over-year comparisons for the quarter just ending are getting harder, since companies were well into their recovery by this time last year. Hopefully, companies will generally report improving earnings, enough to fuel a continuation of the uptrend that began short-term a couple of weeks ago, but that began long-term two years ago.
As you know, the focus in dividend-growth investing is not on capital gains, it is on creating an ever-increasing stream of dividends. So my Dividend Growth Portfolio always remains 100% invested. If you want to learn more about getting wealthy slowly through dividend-growth investing, take a look at TOP 40 DIVIDEND STOCKS FOR 2011: How to Generate Wealth or Income from Dividend-Growth Stocks. Check out my Dividend Growth Portfolio’s performance by clicking here.
2. Market Performance Since Last Outlook
(“now” figures are as of close Tuesday, March 29, 2011)
Last Outlook (3/11/11): 7.5 (positive)
S&P 500 last time (3/11/11): 1304
S&P 500 now: 1319 Change: +1%
S&P 500 at beginning of 2011: 1258
S&P 500 now: 1319 Change in 2011: +5%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1319 Change since 3/9/09: +95% (in about 24 months)
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: A new report was issued on 3/17/2011, and it registered another increase in this index. That makes 8 monthly increases in a row. Positive. +10
• Fed Funds Rate: No change at 0% to 0.25%. This sentence has not changed for several months: 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, same as last time and well below the lower edge of the 17.3 – 21.1 neutral range. Positive. +10
• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is 1.03, up a tiny bit from 1.02 last time. Any value within +/- 10% of 1.00 is neutral. +5
• S&P 500 Short Term Technical Trend: The market’s upward trend over the last couple of weeks has seemingly reversed the decline that started on February 22. The index and the two shorter moving averages (20-day and 50-day) have crossed back and forth through each other. The chart is still ambiguous, because the 20-day SMA has not yet crossed back up through the 50-day SMA, although the index is above both. Neutral. +5
• S&P 500 Medium Term Technical Trend: Index > 50-day SMA > 200-day SMA. This configuration is the same as last time but much more solid now. Positive. +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. Positive. +10
• NASDAQ Short Term Technical Trend: The NASDAQ, as usual, has been the most volatile of the three indexes. Its present configuration is the same as the other two. Neutral. +5
• NASDAQ Medium Term Technical Trend: Last time, the Index had dropped below its 50-day SMA, but now it is back above it, boosting this indicator to positive from neutral. +10
TOTAL POINTS: 80
NEW READING: 80 / 10 = 8.0 = POSITIVE
