The S&P 500 closed last week down about 2% from the last Timing Outlook report two weeks ago. The downward move pulled all three short-term momentum indicators into neutral territory, lowering the Timing Outlook to 8.0. That is still in positive territory.
If you were to place a ruler on this chart connecting the bottom edge of the March 16 low of 1257 to the bottom edge of Friday’s close at 1338, you would have a line sloping upward 6% in about 2 months. That is the upward trend reflected by the positive Timing Outlook. However, if you follow the rolling terrain day by day, it’s a little like climbing a mountain. Overall you are going up, but there are peaks and dips along the way. A pattern like this is called “higher highs and higher lows.”
As I’ve often stated in the past, I think the market is news-driven. What’s in the news? Steep gasoline prices impact everybody as individuals and the costs of doing business for most corporations. Prices paid by producers and consumers are rising at their fastest 12-month clip in more than two years. Economists are thus keeping a sharp eye on inflation. If “core” inflation (excluding food and fuel costs) begins to climb upward, the Fed, whose job it is to control inflation, will need inevitably to raise interest rates. The last statement from the Fed a couple of weeks ago suggested that they did not see any rate-raising for a couple of meetings (about 7 weeks), if then. Rate increases are not usually good for the market, except initially they can have a positive impact if investors see them as confirmation that the economy is improving enough that the Fed needs to slow it down a little.
As it is, the Fed is about to end its “quantitative easing” program in June. Some pundits refer to QE as the punchbowl that has fueled the last several months of the stocks market’s performance. Earnings season is just about over, and it was good but not great. The overall “beat rate” of companies reporting earnings fell to just a little over its historical average of 62%. With earnings season ending, attention will turn to other news.
We are also entering the “sell in May and go away” months, the dog days of summer, when the market has historically performed its worst. Let’s hope for some good news to tide us over to the next earnings season, which starts in July, and that the news from that season is good.
I continue to remain 100% invested in SPY (an ETF that tracks the S&P 500) in my Capital Gains Portfolio. The holding is protected to the downside with a 6% sell-stop that applies to all shares. Since the stop moves up when the market moves up but stays put when the market moves down, it is actually sitting about 4% below Friday’s close. As long as we continue to get higher highs and higher lows, it won’t get triggered.
On the dividend-investing side, my Dividend Growth Portfolio remains 100% invested, as it always is (except for accumulating dividends waiting to be invested), because the focus is on building the dividend stream, not on capital gains.Since last time, one stock in the portfolio announced a dividend increase: Pepsico raised their dividend by about 7%.
If you would like to learn more about dividend-growth investing—building wealth slowly or creating an ever-growing dividend stream that stays ahead of inflation—take a look at TOP 40 DIVIDEND STOCKS FOR 2011: How to Generate Wealth or Income from Dividend-Growth Stocks.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, May 13, 2011)
Last Outlook (4/29/11): 9.5 (positive)
S&P 500 last time (4/29/11): 1364
S&P 500 now: 1338 Change: -2%
S&P 500 at beginning of 2011: 1258
S&P 500 now: 1338 Change in 2011: +6%
S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1338 Change since 3/9/09: +98% (in about 26 months)
3. Indicators in Detail
• Conference Board Index of Leading Economic Indicators: No new report since last time. This indicator has increased 9 months in a row. Positive. +10
• Fed Funds Rate: No change at 0% to 0.25%. The Fed remains committed to a loose money policy until the economy is well into recovery or they become concerned with inflation. Attention is now starting to turn to what the market’s reaction will be at the end of June. That is when “QE2”—the Fed’s $600 B program of purchasing Treasury bonds—will end. While not a rate hike per se, it does mean that the stimulative effect of the Fed being an active bidder for US bonds will come to an end, and that probably will be seen as the first step in the Fed’s tightening process that practically everyone thinks is coming as inflationary pressures seep back into the economy. Positive. +10
• S&P 500 Market Valuation (P/E): Morningstar’s “stuck” operating P/E of the S&P 500 has become unstuck, currently reading 16.4, up from 16.1. This slight increase does not move the needle on this indicator, because it is still 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 1.02, down from 1.05 last time. Any value within +/- 10% of 1.00 is neutral. This indicator has not strayed outside that neutral range for over a year, despite the market’s considerable increase in value over that time. The reason is the simultaneous growth in corporate earnings. +5
• S&P 500 Short Term Technical Trend: The short-term technical trends keep bouncing from positive to neutral and back as the market meanders up and down. The market’s decline on Friday took the S&P 500 index value below its own 20-day simple moving average (SMA). The day before, it had been above it. Whereas last time I reported that the S&P 500 had traded up on 10 of the last 12 trading sessions, as of Friday it has traded down on 6 of the last 10 sessions. The index is now just below its 20-day SMA. So the configuration has moved from a positive Index > 20-day > 50-day last time to a neutral 20-day > Index > 50-day this time. +5
• S&P 500 Medium Term Technical Trend: No change from last time: Index > 50-day SMA > 200-day SMA. This configuration is the most positive you can have. +10
• DJIA Short Term Technical Trend: The Dow’s configuration is the same as the S&P 500’s. Neutral. +5.
• DJIA Medium Term Technical Trend: Same as the S&P 500 chart. Positive. +10
• NASDAQ Short Term Technical Trend: The volatile NASDAQ finished Friday just slightly below its 20-day SMA, dropping this indicator to neutral along with the other two short-term trend indicators. +5
• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10
TOTAL POINTS: 80
NEW READING: 80 / 10 = 8.0 = POSITIVE
