Timing Outlook Strengthens a Little, Remains Positive

1. Summary

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

Two New Dividend Investing Articles

In the past week, I posted two new articles on Seeking Alpha. They both may be of interest to dividend investors.

In "The Highest Yielding Dividend Champions by Cap Size," I used a table to position all of the Dividend Champions, Challengers, and Contenders according to their market capitalizations. Surprisingly, nearly half the stocks were small-caps. Most people automatically assume that dividend-paying stocks are those of huge companies like Coca-Cola or GE. But there are many good smaller companies that pay dividends too.

For those who are not familiar with Dividend Champions, Challengers, and Contenders, they are stocks that have increased their dividends every year for 25, 10, and 5 years, respectively. There is a link in the article to that source document, which is updated monthly and is one of the best research tools for dividend investors.

"Do Dividend Increases Keep Up with Inflation?," just published this morning, illustrates that in the aggregate, dividend increases grow faster than inflation in most years. In the aggregate over many years, they crush inflation by a factor of around 1.7-to-1. The article is based on data from S&P about stocks in its S&P 500 index. The real picture is even better than shown in the article, because the S&P 500 is not a good proxy for a good dividend-growth portfolio--more than 100 of its stocks do not even pay dividends. So if the S&P 500's stocks' dividends grow faster than inflation, a serious dividend-growth portfoli will do even better.

Where Will Your Retirement Income Come From?

Last week, I posted an article about funding retirement on Seeking Alpha. I made the point that conventional retirement strategies based on slowly depleting your nest egg in retirement (via withdrawals, the 4% rule, and the like) may be more risky than building a retirement portfolio that itself throws off some or all of the income you need. The article has generated over 300 comments, many of which are quite educational. You can read the full article and the comment stream by clicking here. Its title is "You're Retiring: Where Will Your Retirement Income Come From?"

Timing Outlook Drops a Little More But Remains Positive

1. Summary

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