SENSIBLE STOCKS.com Newsletter

Web Site Updated

2012-01-20T13:13:00.000-06:00

The total publication process for 2012 is complete. I finished updating my Web site today. Practically every page in the site is new, if for no other reason than to update links pertaining to the new edition, TOP 40 DIVIDEND GROWTH STOCKS FOR 2012: How to Create and Maintain a Dividend Growth Portfolio.

If you would like to see the new description page for the eBook (aka the "landing page"), please click here. Also, if anyone finds a broken link or other error anywhere on the site, I'd appreciate it if you would let me know.

In its first week of publication, the new edition has set sales records. I appreciate so much your support, encouragement, and purchases.

Now I can turn my attention back to catching up with my email and writing articles for Seeking Alpha. I have published only one article since the end of October, but I have a lot of ideas in the pipeline. I hope that I run into you there!

Dave

TOP 40 DIVIDEND GROWTH STOCKS FOR 2012 IS NOW AVAILABLE!

2012-01-14T16:11:00.002-06:00

The new edition of TOP 40 DIVIDEND GROWTH STOCKS FOR 2012 was published on January 14. For the next few days it will ONLY be available from this Newsletter. It will take a few days to update my main website.

If you know that you want to purchase the new edition without reading a complete description of it, click the "Buy Now" button that appears to the upper right. This is the only button that will work at the present time. The buttons on my main website have been disabled.

If you are reading this as an email subscription version of my newsletter, you cannot see the "Buy Now" button. Click on the blue title at the top of this article. That will take you to the online version of this Newsletter, and you can purchase the new edition from there.

Thanks to everyone for all your support! I hope that you find the new 2012 edition to be helpful in your investing!

NOW AVAILABLE!

2012 Edition -- Progress Report

2012-01-04T12:22:00.000-06:00

I have received many inquiries about Top 40 Dividend Growth Stocks for 2012. Here is the latest news.

First, to answer the most basic question. Yes, there will be a 2012 edition. It will be available in a week or two.

I have been working on the 2012 edition since October, when I first began to update, add new material, and reorganize the text. When I needed a break from that, I turned my attention to the Top 40 stocks themselves. Beginning with a starting list of over 450 candidates, I used a series of preliminary tests to knock out obvious non-contenders. After that, the analysis became more detailed. I got the pile down to about 60 "Finalists" in December. Further study has reduced that number to 48. About 32-33 of those are "in," and the rest will be selected after further study.

The eBook's subtitle this year will be How to Create and Maintain a Dividend Growth Portfolio. I have received numerous comments from readers that the text--the investing guide--is more important than the Top 40 stocks themselves. I considered flipping the title, emphasizing the guide and dropping the Top 40 to subtitle status. Like this: 2012 Edition: How to Create and Maintain a Dividend Growth Portfolio featuring Top 40 Dividend Growth Stocks for 2012. But I rejected that because the ongoing Top 40 title has built up an identity of its own. A subtle change in the title this year is to drop the hyphen between DIVIDEND and GROWTH. I want to convey that in this strategy of investing, not only do dividends grow, but generally the stock values grow too.

I am making several improvements and upgrades to the text this year:

The chapters have been expanded so that there is one full chapter for each "phase" of stock investing: (1) finding excellent companies; (2) valuing them so that you can buy them at attractive prices; and (3) portfolio management. The discussions of all these topics have been enhanced.
I am adding a "Resource and Article Guide" chapter. This will collect in one place the various resources that I use in writing the eBook, and which I suggest that you use when you are evaluating companies. Plus it will contain a complete guide to the many articles that I have written on dividend growth investing, with direct links to the articles.
Other new features this year include: a table of all stocks that have ever made a Top 40 list by year; a new chapter on the conceptual and theoretical foundations for dividend growth investing; and a new valuation metric using Morningstar’s "star" stock ratings.
I decided to opened the Top 40 list to tobacco stocks this year. I had not done that previously, because smoking killed both of my parents. But I decided that I was allowing personal considerations to influence business decisions. People can decide for themselves what companies they do or don't want to invest in based on personal beliefs. I will also cap the number of MLPs (to around 6-8) in order to get a wider variety of stocks into the Top 40.

Publication of the new eBook may be delayed into the third week of January, because we will be having houseguests, and I will not be able to work on the manuscript for a few days. It's always something! Some of you may recall that last year, I had a hard-drive crash at the worst possible time. (And thanks for all of you who told me to get an online backup sytem. Several suggested Carbonite, and I use it now.)

When it is first available, I will announce the 2012 release in this newsletter only. That's not because I'm being coy, but rather it's because I can get an announcement in here almost immediately, including a "Buy" link for those who know they want the eBook without further information. It will take me 2-3 days to update my website to reflect the new edition, which will include a new "description page" about the eBook.

Thank you to everyone for your encouragement and suggestions throughout the year! The encouragement helps keep me going, and several of your suggestions have been implemented in this year's edition.

Stay tuned!

Portfolio Reviews

2011-12-05T09:34:00.000-06:00

In dividend-growth investing, you are relieved from watching the market every day and agonizing over its every move. However, dividend-growth investing is not "buy and forget." It is "buy and monitor." I monitor my portfolio in two ways.

I keep up with news on my stocks. If a catastrophe happens, such as last year's oil spill by BP, I want to know about it and decide if it is likely to threaten the company's dividend.
Twice per year, I conduct formal Portfolio Reviews. These are methdocial, stock-by-stock examinations that come from a higher, strategic point of view. I want to know if each stock is successfully fulfilling its role in the portfolio or whether it is a candidate for sale or swap.

I have written several articles on actual portfolio reviews for my Dividend Growth Portfolio. These articles illustrate the information examined and the kind of thinking involved.

Portfolio Forensics (August 3, 2010). This first article in the series explained that during a Portfolio Review, the burden is placed on each company to prove why it should be kept. I described the sorts of questions that I ask about each company. This review led to the selling of three positions.

Dividend Growth Portfolio Review: Sherwin Williams Is Out (April 26, 2011). The review last April led to the decision to sell Sherwin Williams, because its dividend increases and yield had stagnated but its price had ballooned. I was able to redeploy the money to better advantage elsewhere.

Dividend Growth Portfolio Semi-Annual Review: Pretty Boring Stuff... The Dividends Just Keep Increasing (Yawn) (October 11, 2011). As the title of this article implies, this Portfolio Review led to no changes. Everything is working to my satisfaction.
__________

The complete methodology for Portfolio Reviews is explained in my annual eBook on dividend-growth investing. Top 40 Dividend Growth Stocks for 2012 is now being prepared. I'm working on it nearly every day, and I hope to release it in mid-January after I get my hands on year-end numbers. In addition to the Top 40 list (and complete analysis of each stock), the eBook will contain a comprehensive guide to the investing strategy, from how to pick stocks to how to manage your portfolio. Some readers have told me that the investment guide is more important than the list and analyses of the Top 40 stocks. In fact, I considered changing the title this year (to How to Create and Maintain a Dividend-Growth Portfolio), but I feel that the Top 40 title is now well established, so will leave it alone.

As soon as the new edition is available, I will announce it in this newsletter first.

Dividend Growth Investing and Retirement

2011-11-26T14:40:00.000-06:00

I am continuing here with my Seeking Alpha articles organized by topic. This post's subject is retirement. I have written several articles on the subject of dividend growth investing's relationship to investing for retirement.

I have become frustrated with the retirement and investment advisory industries' failure to include dividend-growth investing as worthy of consideration for retirement planning. The "standard" industry approach to retirement funding goes something like this:

Invest all your life to reach "The Number." That's as big a collection of assets as you can amass. There are various ways to compute Your Number. One common method, and one which is usually extremely misleading, is to say that you will need retirement income equal to 70% of your final working year's salary.
As you approach retirement, convert a large portion of your assets from riskier to "safer." Safety is invariably associated with bonds, completely ignoring the fact that bond interest (and the principal itself) is powerless against inflation, because it stays static for the life of the bond.
In retirement, withdraw from your assets to create the income you need. That is, you sell your assets--you liquidate them.
Hope that you don't outlive your money.

You can immediately see why I believe that dividend-growth investing should be considered as an alternative to the conventional approach to retirement planning. For one thing, while I too believe you should focus on a number, it is not the largest pile of assets you can assemble, but rather it is the annual income you will need each year in retirement. For another, if you have been accumulating assets that themselves produce income, then you don't have to convert them--thus sidestepping market risk during the conversion. Yet another point is that each dollar your assets produce as income wipes out a dollar that you would have to create by selling something off. In the ideal case, if your investments produce enough income each year that you do not ever have to sell anything, you guarantee that you won't outlive your money. Finally, dividend-growth portfolios produce income that rises each year, usually faster than inflation. Thus inflation is wiped out as a worry factor.

Topic: Retirement

The following series of four articles are the most highly-read articles that I have published on Seeking Alpha. The 4% Rule referred to in each title is the conventional rule for withdrawing assets in retirement: Withdraw 4% in Year 1, then increment that each year by 3% to account for inflation. (You wouldn't believe what that makes your withdrawal amounts in the later years of retirement.)

Retirement's 4% Rule: Surprising Answers You Need to Know About the Inflation Factor (July, 2011) This Editor's Pick article generated more than 350 comments. It introduces Mr. and Mrs. Growth, who plan their retirement according to conventional financial advice. Even though they save a cool $1,000,000 for retirement, they get surprised by how inflation (at 3% per year) forces them to withdraw more and more money each year. Despite similar-sized returns on their assets, their money runs out in Year 25 of a planned 30-year retirement. In other words, they're screwed.

Retirement's 4% Rule: The Importance of Return Sequence (August, 2011) In this article, we try some different withdrawal and return scenarios to see if they help Mr. and Mrs. Growth or hurt them even more. Along the way, we see how damaging it can be to need to make withdrawals early in retirement if that happens to coincide with a bear market. People who retired in 2008 can relate to this. So can people who retired in 2000-2001. The combination of a declining market and making withdrawals to fund retirement is a recipe for disaster.

Retirement's 4% Rule: Why Mr. & Mrs. Income Don't Need It (Part 1) (August, 2011) This article introduces Mr. and Mrs. Income, who saved for retirement by relying largely on dividend-growth concepts instead of amassing a Giant Number. They went to a financial planner who advised them on shooting for The Number, but they rejected that advice. Instead, they decided to do it themselves, creating a portfolio of some bonds and lots of dividend-growth stocks. This article was an Editors Pick and drew more than 300 comments.

Retirement's 4% Rule: Why Mr. & Mrs. Income Don't Need It (Part 2) (August, 2011) This article follows Mr. and Mrs. Income through their retirement. Using the same scenarios that destroyed Mr. and Mrs. Growth, we discover that the Incomes' portfolio worked wonderfully. The total income needed by the couple in 30 years of retirement was a little over $1.9 million. Their portfolio actually delivered more than $2.5 million. This article drew more than 450 comments, which as far as I know is the record on Seeking Alpha. I have never seen an article there with more comments.

The following series of articles appeared in 2010. The titles are pretty self-explanatory.

Financing Retirement: It's All About Income (July, 2010)

Financing Retirement: What's Your Real Number? (July, 2010) Hint: It's how much income you'll need.

Financing Retirement: Turning Capital into Income (July, 2010)

Financing Retirement: Asset Allocation (August, 2010)

Financing Retirement: The Cistern Analogy (August, 2010) I love this metaphor for visualizing retirement. It's better than "nest egg," because a cistern is dynamic, with inflows (dividends, interest, Social Security, pension payments), outflows (taking the income for spending money), and a leak (inflation).

The following articles are on various retirement subjects.

A Sampling of Investment Advisers Seeking Dividend Growth for Your Retirement Portfolio (May, 2011) Not all investment advisers follow the conventional path. There are a few who 'get it" about dividend growth approaches. This article drew more than 140 comments.

You're Retiring: Where Is Your Income Going to Come From? (March, 2011). This Editors Pick article was directed at professional financial planners. I asked them to tell me: "Why are the unique characteristics, benefits, and risks of dividend-growth portfolios ignored? Why are dividend-growth stocks never singled out as an investment category well suited to the needs of retirees, instead of being lumped in with all other stocks? Why are the rising-income-generating qualities of dividend-growth stocks never mentioned? Why is the dollar-for-dollar offset of dividend income against capital withdrawals never discussed?" There were nearly 400 comments.

Top 40 Dividend Growth Stocks for 2012

I have been receiving inquiries daily about whether there will be a 2012 edition of Top 40, and if so, when will it come out?

The answers are yes and mid-January. Readers of this newsletter will be the first to know, as I will announce the launch here. Thanks for your interest!!

Where Have I Been?

2011-11-15T09:09:00.000-06:00

I had hoped to write some original material for this newsletter after I stopped the Timing Outlook in June, but that hasn’t worked out. Keeping up with articles on Seeking Alpha (SA), plus other activities, have burned up all of my available time.

I am in the process of preparing the 2012 edition of Top 40 Dividend Growth Stocks for 2012. A new feature I want to add in 2012 is a guide to all of the articles I have written over the years on dividend-growth investing. I think that will provide a library of sources for people who want to delve deeper into certain subjects. I already work the major points from articles into the eBook itself—that is a primary reason that the text changes from year to year. But I can’t work everything in—the text would become too long. Hence the desire to provide a guide to source articles.

I thought that I would start that work now, and provide it to you here prior to publishing Top 40 in January. My thinking right now is to present the guide in logical clusters of articles. It’s natural to start with the basics. So here is the first installment in next year’s guide to articles about dividend growth investing.

Dividend Growth Investing: The Basics

Here’s What Mr. Market Says: “Ban Dividends” A fun interview with Mr. Market, the fictional(?) fellow that controls all market movements. An Editors’ Pick that has picked up more than 115 comments. (October 31, 2011)

Debating Dividends: What Would You Want Your Company to Do With Its Excess Cash? Is it better for a company to retain all of its earnings or to send some of the earnings to shareholders as dividends? It depends on several factors that are discussed in this article. An Editors’ Pick that attracted more than 230 comments. (June 2, 2011)

Are Dividend-Growth Stocks a Distinct Asset Class? Asset classes are the major categories of investments, such as stocks and bonds. This article explores whether dividend-growth stocks are unique enough in their own right to comprise their own asset class. There are more than 100 comments to the article. (May 5, 2011)

The 5-Year Rule in Dividend Growth Investing. I require 5 straight years of dividend increases for a stock to be eligible for the Top 40 list. This article explains why. 123 comments. (April 15, 2011)

Portrait of a Beautiful Dividend Growth Stock. This article examines the stocks that have made every Top 40 list since I began the series in 2008 and investigates what they have in common. 89 comments. (March 23, 2011)

Why I Love Dividends. This article marked my entry into an age-old debate that continues to the current day. Some people love dividends and others do not. This article explains why I do. 139 comments. (February 9, 2010)

Dividends: A Company’s Leading Indicator. This article concludes from other studies that the amount by which a company raises its dividend is often a leading indicator of how it sees its own fortunes playing out over the next few years. (May 18, 2009)

Why Dividend Investors View Stocks Differently. The difference between traders and investors. (September 3, 2008)

4 Qualities of the Best Dividend Stocks. An Editors’ Pick. What to look for in a good dividend stock. (August 17, 2008)

Final Timing Outlook

2011-06-22T18:57:00.000-05:00

I have decided to stop publishing the Timing Outlook. I have had increasing difficulty keeping up with the bi-weekly publication schedule. I also have had insufficient time to analyze capital-gains stocks for more than a year, with the result that I only use SPY (which tracks the S&P 500) as an investment vehicle for my Capital Gains Portfolio. I feel that I am doing my readers a disservice with such paltry informatkion.

Since I became seriously interested in dividend-growth investing in 2008, I have found that pursuit to be more fun and rewarding personally. Most of my original articles are now about dividend investing, and most of them are published on Seeking Alpha. I have even fallen behind on posting summaries of them here, which is another reason to drop the Timing Outlook. With the time freed up, I hope to catch up on the summaries here and maybe also post some original content here.

Thanks for all the emails--questions, kudos, and criticisms--about the Timing Outlook and market commentaries. I have really appreciated them. I hope that the Timing Outlook has demonstrated that market timing is possible if not perfectible. I also hope that it has illustrated a way to keep emotions out of investing. That's an important trait for any investor no matter what the strategy.

The Timing Outlook is not copyrighted or trademarked, so if anyone wants to pick it up, feel free to do so. All of the indicators are available for free on the Internet. If anyone picks it up and publishes the results, please let me know.

Thanks again for reading. Please continue your subscriptions to this newsletter as I go through this transition. I hope to keep the newsletter useful and attractive as I change its focus.

Regards,
Dave

Timing Outlook Hanging in There, Barely Positive

2011-05-28T07:41:00.001-05:00

1. Summary

The S&P 500 closed last week down about 1% from the last Timing Outlook report two weeks ago. The index is now at 1331. All of the indicators stayed the same, except for The Conference Board’s Index of Leading Economic Indicators, which declined after 9 consecutive monthly increases. This shaves another half point off the Timing Outlook, lowering it to 7.5. That is still in positive territory. (Click chart to enlarge.)

In the chart above, you can see that the S&P 500 is just a little above where it was three months ago, but that it fell about 2% in May. The old “sell in May and go away” aphorism looks like good advice right now, but that could change by Halloween, which by tradition is when one is supposed to re-enter the market. The market is up 6% for the year.

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 trailing 6% sell-stop that applies to all shares. The stop sits now about 4% below Friday’s close.

My Dividend Growth Portfolio remains 100% invested except for accumulating dividends waiting to be invested. I reinvest dividends when they accumulate to $1000, and the total right now is just less than that, so I anticipate making a purchase in June after one or two more dividend payments are received. I love reinvesting dividends, because the inevitable result is that the dividend stream increases: More shares, more dividends. The increase in the dividend stream means that the yield on my original cost ($40,000) goes up. That’s the math of dividend-growth investing in a nutshell.

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—check out this page: 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 27, 2011)

Last Outlook (5/15/11): 8.0 (positive)

S&P 500 last time (5/15/11): 1338
S&P 500 now: 1331 Change: -1%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1331 Change in 2011: +6%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1331 Change since 3/9/09: +97% (in about 27 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: After 9 consecutive monthly increases, the report on May 19 showed a decline in this indicator. That lowers it from positive to neutral. I require three straight increases or declines to rate this indicator as positive or negative, otherwise it is ambiguous and therefore neutral. +5

• Fed Funds Rate: No change at 0% to 0.25%. More attention is now being paid to the scheduled June termination of “QE2”—the Fed’s $600 B program of purchasing Treasury bonds. Some speculate that the Fed will be forced to start a QE3 program to help the still-sluggish economy along, but the majority seem to believe that the Fed will stop QE on schedule. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar’s operating P/E of the S&P 500 remains at 16.4. They do not seem to be recalculating this number as often as they used to. But the value is well within the positive range of being <17.3. Positive. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is 1.00, down from 1.02 last time. That makes it exactly neutral, which it has been for well over a year. +5

• S&P 500 Short Term Technical Trend: The market’s downward tilt in May has it flirting with its 50-day simple moving average (SMA) and has taken it below its 20-day SMA. So the configuration is 20-day > Index > 50-day. If the market falls below its 50-day SMA, which it did earlier this week only to climb back up, this indicator will turn negative. Right now it’s neutral. +5

• S&P 500 Medium Term Technical Trend: This indicator remains positive, but just slightly as the S&P 500 index is barely over its 50-day SMA. The configuration is Index > 50-day SMA > 200-day SMA. +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: Same as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 75
NEW READING: 75 / 10 = 7.5 = POSITIVE

Timing Outlook Still Positive at 8.0 as Market Meanders

2011-05-15T19:31:00.002-05:00

1. Summary

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

Who's Who of Wall Street

2011-05-10T07:27:00.001-05:00

An organization called Wall Street Economists has published the results of a research project on influential persons and opinion leaders. As announced in a news release dated May 04, 2011, yours truly made the list. According to Wall Street Economists, their researchers spent hundreds of hours analyzing the most important news stories, articles, interviews, and blog posts about the financial crisis and its impact on Wall Street.

My name appeared on the list in a category of Top Wall Street Experts and Opinion Leaders.

I don't think of myself as working "on" Wall Street, but I am certainly part of the investment industry. Many of the things I write about--like market timing and dividend-growth investing--are anti-Wall Street in the sense of going opposite to much mainstream thinking. But it is nice to be recognized as an opinion leader.

Market Breaks Out of Trading Range, Timing Outlook Remains at 9.5

2011-05-01T17:57:00.002-05:00

1. Summary

The S&P 500 closed the week up 2% at a level not seen in two years. The index is now 101% above the March 9, 2009 low. In other words, it has more than doubled on price alone. The index has now climbed to within 13% of its all-time high of October 9, 2007. In the past few days, the S&P 500 broke out of a trading range that it had been in for more than three months.

Here is an interesting chart from Doug Short, who creates great market graphics in his articles on Seeking Alpha. (Click the chart to enlarge it.) It’s good to get a long-term perspective sometimes.

In this chart, the red area depicts a 20% decline from that all-time high—the usual definition of a bear market is a 20% decline from a recent high. We can see that that point (-20%) was reached in July, 2008, and the market stayed in the red zone until January of this year. Of course, what we’ve had since the all-time high is two distinct market trends. First a bear market pulled the S&P 500 down almost 57% by March 9, 2009 (17 months), then a bull market has pulled the market back up more than 100% by last Friday (26 months). By all appearances, the bull market trend is still intact.

Earnings season is in full swing. The “beat rate” is running around 70% so far, compared to a historical average of about 62%. The good earnings reports seem to be the major factor influencing investor behavior, with the market advancing steadily almost daily for the past couple of weeks. There was one nasty day (right after the last Timing Outlook) when S&P issued a “negative outlook” on the long-term credit situation in the USA, but the market bounced back almost immediately from that. With the steady rise in the past couple of weeks, I have invested the last 25% back into SPY (an ETF that tracks the S&P 500) in my Capital Gains Portfolio, which is now 100% invested again. The holding is protected to the downside with a 6% sell-stop that applies to all shares.

On the dividend-investing side, where the focus is on creating an ever-increasing stream of dividends rather than accumulating capital, I made a couple of changes to my Dividend Growth Portfolio as the result of an overdue Portfolio Review. With the changes, the portfolio’s yield on cost has now reached 5.1%. If you’d like to read an article about the Portfolio Review, go here: “Dividend Growth Portfolio Review: Sherwin Williams is Out.” Since last time three more stocks in the DG Portfolio have announced dividend increases: Chevron 8%, Johnson & Johnson 6%, and Procter & Gamble 9%.

If you would like 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.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, April 29, 2011)

Last Outlook (4/15/11): 9.5 (positive)
S&P 500 last time (4/15/11): 1320
S&P 500 now: 1364 Change: +3%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1364 Change in 2011: +8%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1364 Change since 3/9/09: +101% (in about 26 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: New report April 21 increased marginally, bringing the streak to 9 monthly increases 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. Ben Bernanke, in his press conference last week, said that he does not see any rate tightening for at least two more Fed meetings (about 4 months). Note that at the end of June, “QE2”—the Fed’s $600 B program of purchasing Treasury bonds—will end. While not a rate hike, this will have the effect of tightening up the money supply as time goes on and may lead to bond-market and mortgage interest rates rising. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current operating P/E of the S&P 500 at 16.1. This marks four readings in a row at that level, which makes me think that Morningstar has an error in its system. The computed number usually changes more frequently. However, since that number is well below the lower edge of the 17.3 – 21.1 neutral range, I will still consider this indicator positive while I look into the matter. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is 1.05, up from 1.03 last time. Any value within +/- 10% of 1.00 is neutral. The 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: After the one-day drop just after the last Timing Outlook, the market has risen steadily. The S&P 500 has traded up on 10 of the last 12 trading sessions. The index has distanced itself from its 20-day simple moving average (SMA), which has also put some distance between itself and the 50-day SMA. This configuration of Index > 20-day > 50-day is the most positive lineup. +10

• S&P 500 Medium Term Technical Trend: Index > 50-day SMA > 200-day SMA. This configuration is the same as last time and is also 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. Positive. +10.

• DJIA Medium Term Technical Trend: Same as the S&P 500 chart. Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ is always more volatile than the other two indexes. For a brief time, the 20-day SMA had dropped below the 50-day. But that condition reversed itself on April 15, and the configuration is now the same as the other two short-term indicators. Positive. +10

• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Four New Articles on Seeking Alpha

2011-04-29T08:35:00.001-05:00

In the past couple of weeks, I have posted these articles on Seeking Alpha. Use the article title to link directly to any of the articles.

Dividends in Danger? This is a monthly series in which stocks that might have dividends at risk are discussed. One of the stocks examined in the first article (Hudson City Bancorp) did, in fact, cut its dividend a couple of weeks later. The articles have proved very popular, and they draw lots of comments and suggestions for stocks to consider.

The Five-Year Rule in Dividend-Growth Investing. This article received Editors Pick recognition. It discuses a rule that I follow in dividend-growth investing: The five-year rule. Simply stated, I will not consider a stock that has not compiled a record of at least five consecutive years of dividend growth. I explain why I use the rule and discuss several stocks that fall on one side or the other of the dividing line, including big banks and technology companies. I nominate two stocks as Dividend Champions of the future. Go to the article to see who they are.

Periodic Table of Dividend Champions--New and Improved. Dividend Champions are stocks that have raised their dividends for at least 25 consecuttive years. Believe it or not, there are 100 such stocks. The Periodic Table arranges them visually by their current yields and dividend growth rates. It is a quick way to identify interesting dividend-growth stock ideas.

Dividend Growth Portfolio Revew: Sherwin Williams is Out. I recently completed a review of my Dividend Growth Portfolio and decided to sell Sherwin Willliams and replace it with two other stocks. This article explains the Portfolio Review process and why I reached the specific decision about Sherwin Williams. (In a nutshell, their dividend growth rate slowed to a crawl.)

Timing Outlook Drops After Bad Day on Wall Street

2011-04-18T15:57:00.002-05:00

Well, it only took one day. I felt that I should let you all know that today's little stock-market slide, following S&P's "negative outlook" on U.S. debt, took all three of the short-term trend indicators from positive yesterday to neutral today.

I have reproduced here a single-month graph of the S&P 500 so that you can see clearly how close the 20-day (green) and 50-day (blue) simple moving averages are to the index level itself. Whereas yesterday they lined up Index > 20-day > 50-day, tonight they are 20-day >50-day (by a whisker) > Index. That means they are jumbled and ambiguous. The NASDAQ and Dow charts look more or less the same, meaning that all three short-term trend indicators fall from positive to neutral. That pulls the entire Timing Outlook down by 1.5 points, bringing it to 8.0.

That's still positive, but as you can see, another bad day or two could quickly pull the 20-day SMA (which reacts fairly quickly) below the 50-day SMA, which would make the configuration 50-day > 20-day > Index, which is upside down from what you want. That would lop another 1.5 points off the Timing Outlook.

This is S&P's own summary of its press release today. I'm sure discussion of this will be all over the news tonight and that the status of U.S. budget and debt-ceiling negotiations will be at the top of a lot of agendas for the next few weeks and months.

•We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
•The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
•Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
•We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful
implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

Timing Outlook: If There’s Such a Thing as a Weak 9.5, This Is It

2011-04-17T17:36:00.001-05:00

1. Summary

The Timing Outlook has improved from 8.0 to 9.5, or strongly positive. That’s on the numerical scale. From a subjective point of view, this has to be the weakest, least-inspiring 9.5 I have ever seen. All three short-term technical indicators are just barely positive. If we have a couple of down days, they could turn neutral or even negative in a heartbeat. That would drop the Timing Outlook from 9.5 to 6.5.

The market has been moving up and down within a range of about 80 points on the S&P 500 for around 3 months. On the 3-month graph (above, click to enlarge), this looks like volatility. Indeed, the volatility was enough to take me out of the market via a 5.5% sell-stop. Then it was enough in the other direction to get me 75% back into the market in my Capital Gains Portfolio. All I am buying these days is SPY, an ETF that tracks the S&P 500. I am currently protecting to the downside with a 6% sell-stop that applies to all shares.

On the 2-year long-range graph, it looks like we are in a sideways market. Indeed, Friday’s trading (April 15) was around the same area as on March 29, March 7, March 3, March 1, February 25, February 22, February 10-11, and February 7-8. Since the last report, the market has gone up on 7 days and down on 6.

In the coming few weeks, earnings season will be in full swing. Major companies reporting this coming week include Johnson & Johnson and GE. S&P estimates that Q1 earnings will be up 13% from Q1 2010. The earnings news will compete for attention with macro events, such as the nuclear situation in Japan, Middle East developments, European sovereign debt, the looming end to the Fed’s stimulus program known as “quantitative easing” or QE2, struggles over the federal budget and debt ceiling, continuing high unemployment, and the general impact on consumer spending of high oil prices. Life being what it is, the major story will probably be something other than what I have just listed.

Life is more relaxed in dividend-growth investing, where the focus is on creating an ever-increasing stream of dividends. My Dividend Growth Portfolio always remains 100% invested except for dividends that I am accumulating to purchase more shares. So far in 2011, several stocks in the portfolio have already announced dividend increases: Abbott Labs (9%), Alliant Energy (8%), AT&T (2%), Kinder Morgan Energy Partners (2% so far—they may increase more than once this year), Realty Income (<1% so far, they will increase each quarter), and Sherwin-Williams (1%). I am overdue to give this portfolio its semi-annual Portfolio Review. 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.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, April 15, 2011)

Last Outlook (3/29/11): 8.0 (positive)

S&P 500 last time (3/29/11): 1319
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 25 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. The streak stands at 8 monthly increases in a row. 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 operating P/E of the S&P 500 at 16.1. This marks three readings in a row at that level, which is 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, same as last time. Any value within +/- 10% of 1.00 is neutral. +5

• S&P 500 Short Term Technical Trend: The market’s swings back and forth have brought this indicator to positive. Barely. The close Friday was just slightly above the 20-day simple moving average (SMA), which is just above the 50-day SMA. All three are so close that they are practically touching. Nevertheless, the configuration of Index > 20-day >50-day is the most positive lineup. +10

• S&P 500 Medium Term Technical Trend: Index > 50-day SMA > 200-day SMA. This configuration is the same as last time. Positive. +10

• DJIA Short Term Technical Trend: The Dow’s configuration is the same as the S&P 500’s. Positive. +10.

• DJIA Medium Term Technical Trend: Same as the S&P 500 chart. Positive. +10

• NASDAQ Short Term Technical Trend: On the NASDAQ’s chart, the index, 20-day SMA, and 50-day SMA literally are touching—both SMAs are within the small range that the index traded within on Friday. But when you look really close, the configuration is the same as the other two indicators. Positive. +10

• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Three New Articles (and Comments) Available on Seeking Alpha

2011-04-11T08:06:00.000-05:00

In the past couple of weeks, I have posted the folowing articles on Seeking Alpha. The comment streams have been lively and informative:

Portrait of a Beautiful Dividend Growth Stock. This article identifies the 10 stocks that have made my Top 40 Dividend Growth Stocks list every year since I began publishing it (2008-2011). It takes common characteristics from those 10 stocks to form a "portrait" of what a great dividend-growth stock looks like. The article generated 89 comments.
Dividends in Danger? This article is the first in a monthly series that will compile Seeking Alpha's readers' ideas and comments about companies whose dividends may be in danger of being frozen or cut. Companies discussed in the first article include Sysco, Hudson City Bancorp, and Pitney-Bowes. The article has generated 142 comments. The second article in the series will appear later this week.
10 by 10: The Interaction of Dividend Yield and Growth. This is an update and expansion of one of the most popular articles I have ever published. It discusses what combinations of yield and dividend growth rates (DGR) will lead to achiving the "10 by 10" goal": Delivering a yield on cost of at least 10% within 10 years. The article achieved "Editors Pick" status on Seeking Alpha. The original article's contents have been expanded to include a table showing how many years it takes to double your dividend stream at various DGRs, plus another table that illustrates how many years it takes a stock with low yield + high DGR to surpass the income stream of another stock that starts out with a hgher initial yield. The article has received 130 comments so far.

Timing Outlook Strengthens a Little, Remains Positive

2011-03-30T10:01:00.001-05:00

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

2011-03-20T10:54:00.000-05:00

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?

2011-03-15T14:42:00.001-05:00

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

2011-03-12T09:14:00.000-06:00

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

Market & Timing Outlook Both Go Down (A Little)

2011-02-27T13:12:00.001-06:00

1. Summary

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

Road Map for Managing a Dividend Growth Portfolio

2011-02-24T08:56:00.000-06:00

I have posted an article on Seeking Alpha with the title above. The article discusses how to map out an investment plan. The general principles are applicable to any type of planning. I used my Dividend Growth Portfolio as a specific example. The general principles are summarized in the diagram below, which the article discusses in detail. To read the full article, click here.

Seeking Alpha: Why the Market Doubled

2011-02-16T15:42:00.001-06:00

I want to let all my subscribers know that I also write for an excellent investment site called Seeking Alpha (SA). I have been posting articles on SA since July, 2008. Most of those aticles have been reproduced in this Newsletter. In fact, many of them appeared here first, then were adapted for SA.

Recently, Seeking Alpha instituted payments to authors for articles (based on page views), provided that the article is not provided for free elsewhere. After much soul-searching, I have decided to submit occasional articles exclusively to SA and not reproduce them here. When I do that, I will provide a brief summary of the article here along with a link to the full article on SA.

Many of you may find SA to be a very interesting site. It provides over 200 articles per day on every conceivable investing topic. Articles can be accessed for free. They provide a comment system, plus a scoring system (thumbs up and thumbs down) for comments. (I do not allow comments here, preferring to keep this Newsletter as clean as possible.) If you want to comment or vote on comments, you must register with SA. Registration is free (they have over 600,000 registered users). You can also sign up for daily emails notifying you of articles by favorite authors, articles about subjects you have designated, and so on. You can "follow" your favorite authors and receive notifications whenever they post a new article. (I have over 1300 followers on SA.)

Here is a link to Seeking Alpha's home page: http://seekingalpha.com/ .

Yesterday, I posted my first exclusive article on Seeking Alpha, "4 Reasons the Stock Market Has Doubled." In the article, I lay out the reasons that I think have been behind the stock market's doubling since its low on March 9, 2009 nearly two years ago. If you would like to read the full article (and people's comments about it), you can access it here: http://seekingalpha.com/article/252838-4-reasons-the-stock-market-has-doubled .

One topic that I have kept exclusively for readers of this newsletter are my periodic Timing Outlook updates and market commentaries. I currently have no plans to submit those articles to Seeking Alpha. For one thing, it would take too much background explanation to bring those readers up to speed on how the Timing outlook works. If I change that policy, I will let you know.

As always, best of luck with your investing!

Bored Yet? Timing Outlook Remains at 9.5

2011-02-09T12:58:00.001-06:00

1. Summary

Since the last report about three weeks ago, the market has continued to chug steadily upward. It has now made gains in six straight months. Looking at the chart, you can see that there are only two periods (the second half of November and one day at the end of January) that the S&P 500 has fallen below its 20-day Simple Moving Average. (Click on the chart to enlarge it.)

The Timing Outlook remains elevated at 9.5. Similar to the past two readings, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph. Every other indicator is positive.

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.

I read a lot of financial blogs and commentaries, and many are saying that the rally has gone on too long, it’s way past the length of the average rally, the market is far overvalued, the economy still stinks, and rising commodity costs spell doom. Warnings about an impending crash—or at least a correction (drop of 10% or more)—abound.

Well, maybe. In fact, a correction or reversal is inevitable—we just don’t know when. As long-time readers know, 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. The sell-stops do that automatically—if SPY reverses by 5.5%, I am out, no questions asked and no regrets. Market trends sometimes have a way of continuing far longer than anyone would expect. This is probably already one of those times, but that does not mean that it is over. Wait for the turn.

If the commentators and bloggers invest the way they write, they have missed out on (or actually shorted) one of the most amazing money-making opportunities ever. They have been on the wrong side of the trade. The market has nearly doubled since March 9, 2009. There have been a few breaks in the action, but overall it has been a steady upward climb following one of the worst years (2008) in market history.

In one sense, the market’s rally has been remarkable. But in another sense, it is not surprising. After all, companies (not individuals) have been out of the recession for well over a year. Year-over-year profit growth has been a repeating story for at least seven quarters now. Many companies are awash in cash—as evidenced by the big upswing in merger-and-acquisition activity over the past few months. As I see it, there has been a massive transfer of wealth from individuals to corporations. The overall economy is still unsound, because of the high unemployment rate and a housing market that is still searching for its bottom. But the corporate economy is not unsound. On average, corporations could hardly be healthier. All the laid-off people represent cost savings for corporations, many of whose profit margins and profits are at all-time highs. Since the stock market represents the value of corporations—not individuals—it is to be expected that the stock market should rise roughly in step with those rising profits.

As usual, my Dividend Growth Portfolio is 100% invested. As reported last time, I reinvested dividends in January to grab some more Abbott Labs. Thanks to all of you who purchased TOP 40 DIVIDEND STOCKS FOR 2011: How to Create Wealth or Income with Dividend-Growth Stocks. Incredibly, sales from the e-book’s release in mid-January to the end of January—half a month—reached 50% of total sales for all of 2010! Click here (or the book’s image to the right) to see the description page for this annual e-book, which has been completely updated for the new edition.

2. Market Performance Since Last Outlook
(“now” figures are as of mid-day Wednesday, February 09, 2011)

Last Outlook (1/24/11): 9.5 (positive)

S&P 500 last time (1/24/11): 1287
S&P 500 now: 1321 Change: +3%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1321 Change in 2011: +5%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1321 Change since 3/9/09: +95% (in about 23 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. January’s report showed the 6th increase in a row. Positive. +10

• Fed Funds Rate: No change. 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, up just slightly from 15.5 last time. This is well within positive territory (any value below 17.4). +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.06, up from 1.04 last time, continuing to suggest that the market is slightly overvalued. This indicator has been hanging around 1.05 since the tail end of December. It would need to reach 1.10 for me to consider it to be saying that the market is overvalued. Neutral. +5

• S&P 500 Short Term Technical Trend: All of the technical indicators have been in the same configuration for at least a couple of months: Index > 20-day SMA > 50-day SMA > 200-day SMA. This lineup is the best you can get, and all six of the technical indicators are positive. +10

• S&P 500 Medium Term Technical Trend: Positive. +10

• DJIA Short Term Technical Trend: Positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Timing Outlook Remains High at 9.5

2011-01-24T10:32:00.000-06:00

1. Summary

Since the last report about a month ago, the market has continued to go pretty steadily upward, making gains in 13 of the past 16 weeks through last Friday. Click on the chart to enlarge it.

The Timing Outlook remains elevated at 9.5. As last time, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph. Every other indicator is positive.

My Capital Gains Portfolio remains 100% invested in SPY, an index-tracking ETF. As explained in previous posts, most of my time recently has been devoted to working on the 2011 edition of TOP 40 DIVIDEND STOCKS, which I published on January 14. So I have not had time to evaluate individual stocks for the Capital Gains portfolio. The SPY shares are protected by a tight 5.5% trailing sell-stop. Incidentally, you may notice on the chart several red “down” days recently and be wondering why that is not a “sell” signal since it fails my 2/3 up-days requirement. The answer is that once the money is invested, any selling is determined by the sell-stop, not by the original entry requirements.

The rally is the kind I like—steady with little volatility. That makes it an easy trend to identify and to stay with. My confidence in the rally has improved as the trend has lengthened, but of course the 5.5% sell-stop represent my respect for the risk that any trend can reverse at any time.

My Dividend Growth Portfolio, as usual, is 100% invested. I accumulated enough dividends in early January to reinvest them, and I used the opportunity to pick up 20 more shares in Abbott Labs. If you are interested in learning more about TOP 40 DIVIDEND STOCKS FOR 2011, click here. The description page for this annual e-book has been completely updated on my website for the new edition.

2. Market Performance Since Last Outlook
(“now” figures are as of mid-day Monday January 24, 2011)

Last Outlook (12/4/10): 9.5 (positive)
S&P 500 last time (12/4/10): 1259
S&P 500 now: 1287 Change: +2%

S&P 500 at beginning of 2011: 1258
S&P 500 now: 1287 Change in 2011: +2%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1287 Change since 3/9/09: +90% (in about 23 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: January’s report, out last week, showed another increase, the 6th in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. 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 operating P/E of the S&P 500 at 15.5, up just slightly from 14.7 last time. This is well within positive territory (any value below 17.4). +10

• Morningstar’s Market Valuation Graph. Morningstar’s market valuation graph is at 1.04, down from 1.05 last time, continuing to suggest that the market is slightly overvalued right now. This is still well within my +/- 10% range of 1.00 for calling this indicator neutral. +5

• S&P 500 Short Term Technical Trend: All of the technical indicators are in the same configuration as last time. On the chart above, the 20-day simple moving average (SMA) is the green line, the 50-day is the blue line, and the 200-day is the red line. The short-term technical indicators use the two shorter (20-day and 50-day) simple moving averages (SMAs) of each index, and the current lineups are the best you can get: Index > 20-day > 50-day. +10

• S&P 500 Medium Term Technical Trend: The medium-term technical indicators use the two longer SMAs (50-day and 200-day) for each index. Right now all three indexes tell the same story: Index > 50-day >200-day. Positive. +10

• DJIA Short Term Technical Trend: Positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

TOP 40 DIVIDEND-GROWTH STOCKS FOR 2011 Is Now Available!

2011-01-14T14:24:00.005-06:00

The new edition of the TOP 40 DIVIDEND-GROWTH STOCKS FOR 2011 was published on January 14, 2011. It is now available from my main website. Click the cover image in the upper right corner of this Newsletter to go to a compalete description of the new edition.

Thanks again to all of you who sent me encouraging emails in the last few days of the homestretch of completing this year's edition! Additional and special thanks to those of you who talked me through my hard-drive crash and offered suggestions about how to back up my hard drive in the future. I will be enlisting a backup service shortly.

TOP 40 DIVIDEND STOCKS FOR 2011 Is Almost Complete

2011-01-11T10:58:00.002-06:00

I am sitting in a condo in Naples, FL (my wife is out at the beach). Just as we were leaving for the 3-day drive down here on January 1, I discovered that my hard drive had crashed overnight. The technical term for this is "Happy New Year."

I couldn't do anything about it during the drive. As soon as we got here, we located a computer repair place. The verdict: Drive was broken. The data could be recovered. He didn't have my drive in stock but could get one overnighted. He had a "courtesy" computer that I could work on. So we moved two essential files from my busted hard drive onto a thumb drive and plugged it into the courtesy computer. The two essential files were the text and the document I was using to score the Finalists for the Top 40.

That's where I worked last week, at the repair shop. It took until Thursday for my laptop to be fixed and for all my data and programs to be moved over to it. So, each morning I went to the computer place, my wife did fun stuff. That's OK, I love producing this.

The good news is that no data was lost, and perhaps I worked more diligently under these conditions than I otherwise would have. It was a good week.

Here's where things stand:

The Top 40 have been selected. I have gone throught their Easy-Rate sheets several times to check them for accuracy (tiny mistakes always creep in) and to fill in information from Yahoo that was not available from Morningstar. I have also created the four tables that help you find them (alphabetical; by Total Score; by Company Score; and by Yield).
The text is essentially done. I need to update a couple portions of it, and I want to give it one more full reading before I let it go. I'm particularly focusing on two areas. First, I combined two chapters into one, and I want to be sure I did it without losing any essential information or creating redundancies. Second, the reason I combined the chapters was to create a little room for a new chapter on Retirement Funding. That chapter was created from my five-article series on retirement, so again I need to be sure I haven't lost any critical information. The new chapter presents things in a different order from the articles, so it was a complete re-write.

After the book itself is completed, I need to do some marketing and technical things. These include creating a jpeg of the cover to use as links throughout my web site and for display on other sites (I lost the little program I have always used for that conversion in the hard-drive crash). I want to update the "landing page" where the e-book is described on my web site. I need to combine the Top 40 pages (the Easy-Rate sheets and the tables) with the text itself to create the finished product. Then that document (which is in Word) needs to be converted to a pdf file. I need to remove the 2010 edition from Payloadz and upload the 2011 edition in pdf form. Finally, I need to make sure PayPal understands what is going on. Then my wife and I will make test purchases to be sure it all works as it should.

My target date to get this all done is a week at the most. That would mean availability on 1/18--last year's launch date was 1/19, so that would be about the same.

Two questions for anybody who cares to respond:

A couple of people have expressed interest in having all four editions available for comparison and to see the "flow" of information as this series has developed over the years. I could work out some sort of combo package if there is enough interest. One thing I'd have to check would be size problems--the combined document would be well over 400 pages, which could create upload problems at my end or download problems at your end. Maybe just offer past editions individually at a big discount?
My wife has offered to do the work required to offer a print version. She would get it printed at FedEx Office or somewhere, put a simple cover on it, and mail it out. I don't know the additional cost, I imagine it would be somewhere between $15-$20. I also don't know if Payloadz can take orders for a physical product rather than a pdf download.

OK. Writing this was my break for this morning. Time to get back to work. I want to thank the many of you who have sent encouraging notes and emails. They are really inspirational to me, and I appreciate them immensely. The same goes for the questions some of you have sent. They get me thinking and also give me great insights into the audience for this e-book. All of the messages I have received combine to form a sort of virtual focus group, and that helps me design the product in the way that will help the most people. Thanks very much.

Warren Buffett In His Own Words, Plus Some Other Timeless Quotes

2010-12-27T18:07:00.000-06:00

I first wrote this article in 2007. By page views, it is the most popular article I have ever published, having been read by more than 15,000 people.

The original article contained 23 timeless quotes by Warren Buffett. In this re-write, I have removed a couple of the originals and replaced them with others that I like better. I have also included a few other great quotes from such sages as Yogi Berra and Woody Allen. Not all of them were about investing, but all can be applied to investing.

Warren Buffett’s best sound bites of all time on being a sensible investor.

1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

2. Investing is laying out money now to get more money back in the future.

3. Never invest in a business you cannot understand.

4. I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

5. I put heavy weight on certainty. It's not risky to buy securities at a fraction of what they're worth.

6. If a business does well, the stock eventually follows.

7. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

8. Time is the friend of the wonderful company, the enemy of the mediocre.

9. For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.

10. Risk comes from not knowing what you're doing.

11. It is better to be approximately right than precisely wrong.

12. You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.

13. What we learn from history is that people don’t learn from history.

14. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

15. You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

16. You should invest in a business that even a fool can run, because someday a fool will.

17. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

18. The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.

19. Diversification may preserve wealth, but concentration builds wealth.

20. Someone’s sitting in the shade today because someone planted a tree a long time ago.

21. Many in Wall Street—a community in which quality control is not prized—will sell investors anything they will buy.

22. There seems to be some perverse human characteristic that likes to make easy things difficult.

23. Our favorite holding period is forever.

And here are the quotes from a few others:

1. Hindsight is much more precise than foresight but not as valuable. (Dwight D. Eisenhower)

2. If you don’t know where you’re going, you’ll end up somewhere else. (Yogi Berra)

3. It ain't over 'til it's over. (Yogi Berra).

4. Promise me you'll always remember: You're braver than you believe, and stronger than you seem, and smarter than you think. (Christopher Robin to Pooh, written by A. A. Milne)

5. A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. (Winston Churchill)

6. Investing is easy. Buy stocks that go up. If they don't go up, don't buy them. (Will Rodgers)

7. Eighty percent of success is showing up. (Woody Allen).

8. The race is not always to the swift, nor the battle to the strong—but that's the way to bet. (Damon Runyan).

Timing Outlook Remains Positive at 9.5

2010-12-23T08:55:00.001-06:00

1. Summary

Since the last report 2½ weeks ago, the market has just gone pretty steadily up, making gains in 11 of the past 12 days through Wednesday. The Timing Outlook remains elevated at 9.5. As last time, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph, which at 1.05 suggests that the market is 5% overvalued right now. Every other indicator is positive.

The steady trickle of up-days raised the percentage of up-days such that my additional criteria for buying into the market were satisfied. Thus I am now 100% invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment.

As stated last time, the Capital Gains Portfolio’s investments simply are in the S&P 500-tracking SPY ETF. Most of my time recently has been devoted to working on THE TOP 40 DIVIDEND STOCKS FOR 2011, so I have not had time to evaluate individual stocks for the Capital Gains Portfolio. The SPY shares are protected by a tight 5.5% trailing sell-stop. My confidence in the rally has improved a little, for two reasons. First, I like slow, steady trends. Second, the tone of the “net news flow” seems to have changed from generally downbeat to somewhat positive. That’s my subjective judgment, anyway.

I hope everyone has a great Christmas, New Year, and/or whatever else you celebrate at this time of year. When the year has ended, the market will probably have gone up >10-11% for the year in price, plus another couple percent for dividend investors. That makes it a pretty good year in my book.

2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday, December 22, 2010)

Last Outlook (12/4/10): 9.5 (positive)

S&P 500 last time (12/4/10): 1225
S&P 500 now: 1259 Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1259 Change in 2010: +13%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1259 Change since 3/9/09: +86% (in about 22 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: December’s report, out last Friday, showed another increase, the fifth in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. 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 P/E of the S&P 500 at 14.7, same as last time. This is well within positive territory (any value below 17.4). +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.05, up from 1.03 last time, suggesting that the market is 5% overvalued right now. This is still well within my 10% range of 1.00 for calling this indicator neutral. I like this indicator a lot, because of the unique and sensible way they construct it. You can see it by clicking here. Use the tabs across the top to see different timeframes and types of stocks. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter (20-day and 50-day) simple moving averages (SMAs) of the S&P 500. The current configuration is the best you can get: Index > 20-day > 50-day. +10

• S&P 500 Medium Term Technical Trend: This medium-term technical indicator uses the two longer SMAs (50-day and 200-day). Right now it tells the same story: Index > 50-day >200-day. Positive. +10

• DJIA Short Term Technical Trend: Same story as the S&P 500 short-term trend. Positive. +10

• DJIA Medium Term Technical Trend: Same story. Positive. +10

• NASDAQ Short Term Technical Trend: Same story. Positive. +10

• NASDAQ Medium Term Technical Trend: Same story. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Interview with author David P. Van Knapp

2010-12-22T19:38:00.001-06:00

A promotional video for my first book, SENSIBLE STOCK INVESTING: How to Pick, Value, and Manage Stocks, has just been completed. We shot 90 minutes of tape to get the raw material for this 1:44 video. I'm not quite as dynamic as the Sham Wow guy, or Cramer, but that's why I called the book "Sensible."

"THE TOP 40 DIVIDEND STOCKS FOR 2011" Nearing Its Final Stages

2010-12-17T14:22:00.000-06:00

In earlier posts, I described the various stages and processes that I use to produce THE TOP 40 DIVIDEND STOCKS series. Here is where things stand for the 2011 edition.:

I have passed all of the 136 survivors of Stage 1 testing through Stage 2. In that second stage, all of the stocks were again subjected to the six fundamental Stage 1 tests, but this time with no "easing" of the requirements. In addition, I applied several additional tests designed to anticipate how the stocks were likely to score when I applied my Easy-Rate standards to them. As I have stated, I love to eliminate stocks--it's like eliminating the non-contenders in a horse race. After you do it, you have the pleasure of knowing that you are looking at the likely winners of the race. This year's Stage 2 phase dropped the 136 survivors of Stage 1 all the way down to 46 "Semi-Finalists." The 90 stocks that didn't make it were removed to a "2012 Contenders" document, where they joined the stocks that were eliminated in Stage 1. I will maintain that document throughout next year, as it will become the pool of candidates a year from now (along with all the survivors) for 2012.
Stage 3 consists of preparing the "Company Quality" portion of the Easy-Rate scoresheets for all of the survivors. Thus I write (or re-write) their Stories; study their EPS growth rates, ROEs, debt ratios, and other financial factors; and rate their dividend prowess (current yield, years increased, average rate of increase, and the like). The result is a Company Quality score using a system that has been optimized for dividend-growth stocks. (I tinker a little with the system each year based on new learnings and insights.) As I complete the analysis of each stock, I place it in a table in order of its Company Quality score. I also record the stock's current yield, as that may be used as a tie-breaker in selecting the Top 40.
I have just about completed Stage 3. When I finish, I will have ranked the 46 Semi-Finalists by Company Quality. That list will then be frozen until the first of the year. (If you saw the weather up here in Webster, NY, you might think I mean "frozen" literally.) In a first for us, my wife and I are driving to Florida on January 2-4. By the time we arrive, full-year 2010 data should be available. At that time, I will value the stocks using my Easy-Rate stock valuation system and update the Company Quality scores. That will give me all the information I need to pick the Top 40. If there are any ties, I'll select the stock with the higher yield--all other factors equal, higher yield is better.
I will also go through the text at least one more time. I will have full-year 2010 statistics about dividends generally and also be able to complete the table showing how 2010's picks did for the full year. As I said in an earlier post, I am adding a new chapter this year on Retirement Financing, and I want to go over that again. This is the time to catch errors, from important logical mistakes down to little spelling errors.

Once those operations are complete, I can assemble the book. The Top 40 Easy-Rate sheets will have been completed and can be moved right into the final manuscript document. Certain mechanical operations must be performed, including converting the manuscript into a PDF document, "loading" the document to Payloadz (the company that I use for secure distribution), removing the 2010 edition from Payloadz, and setting up PayPal to accept credit/debit card payments for the new edition. Both my wife and I will go through the ordering process ourselves to make sure that it works and is intuitive. Then it will be ready for launch, hopefully some time around January 15-20.

Interesting tidbits: 32 of the 46 Semi-Finalists have been a Top 40 pick in 2008, 2009, and/or 2010. That is not a surprise: It takes a special kind of company, with lots of great characteristics, to survive this kind of analysis. Certain companies have been on that plateau for years and are simply excellent companies that many would call Blue Chips. But some of the other Semi-Finalists are relatively new to the dividend-raising world (I require at least 5 consecutive years of increases to be eligible at all). Maybe they are the Blue Chips of the future and now is the time to get in on the ground floor. The Semi-Finalists represent all manner of size and many industries. Most but not all are domiciled in the USA. Even if domiciled in the USA, most get close to or more than half their revenues from outside the country. When you go through an exercise like this, the ongoing globalizaton of companies and markets just jumps out at you. My take: You do not have to invest in foreign companies to gain access to many of the opportunities represented by global markets and developing economies. These companies are already doing it.

September-October-November Rally Continues Into December; Timing Outlook Positive at 9.5

2010-12-04T14:15:00.002-06:00

1. Summary

The chart tells the story. (Click on the chart to enlarge it.) The market has been generally rising since the beginning of September. This is reflected in the high reading for the Timing Outlook, currently 9.5, up from 9.0 last time. The only indicator that is neutral instead of positive is the Morningstar Market Valuation Graph, which clocks in at 1.03, suggesting that the market is 3% overvalued right now. Every other indicator is positive.

The strange thing about this rally is that there have been quite a few down days (shown in the red candlesticks and in the red volume bars at the bottom of the chart). They have been more than offset by occasional large one-day lifts. This characteristic has kept me from becoming fully invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment. The proliferation of small down days has kept the portfolio from fully participating in the 3-month rally. I check approximately every week, and if the conditions are right, I invest 10% more cash. The portfolio is about 70% invested (30% cash) at this time.

While the slowed pace of re-investing costs me some gains when the market rises as unevenly as it has, I nevertheless continue to follow the 2/3 rule. It provides a margin of safety and conservatism that has served me well over the long term. It does guarantee that I will miss the beginning couple weeks of any rally.

As stated last time, The Capital Gains Portfolio’s only investments currently are in the S&P 500-tracking SPY ETF. Most of my time in the last three months has been devoted to preparing 2011’s edition of THE TOP 40 DIVIDEND STOCKS, so I do not have up-to-date Easy-Rate™ sheets for individual capital-gains stocks. SPY allows me to participate in the market rally without having currently rated individual stocks.

The SPY shares are protected by a tight 5% trailing sell-stop. This has not been a high-confidence rally for me. The uneven nature of the market’s rise shows that it is prone to react quickly to negative news on any particular day. That suggests to me that lots of investors have their fingers on the Sell button. Friday’s increase in the unemployment rate to 9.8% from 9.6% certainly did not increase confidence in the recovery. Despite that, interestingly, the market went up Friday. Those who believe that the market is always rational need not apply. I think that it is rational in the long term, but is unpredictable—nearly random—in the very short term of a few days.

As mentioned last time, I have re-named my Dividend Growth Portfolio to emphasize its focus on rising-dividend stocks. That portfolio remains 100% invested, as it usually is. Because the focus there is on continually increasing the dividend stream, I don’t use sell-stops or go to cash when the market plunges. The only cash is accumulated dividends waiting to be reinvested when the total hits $1000. As stated earlier, I am deep into preparation of THE TOP 40 DIVIDEND STOCKS FOR 2011. I will keep you up to date on its progress. I hope to release it in January, and I am still on schedule to do that.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, December 4, 2010)

Last Outlook (11/12/10): 9.0 (positive)
S&P 500 last time (11/12/10): 1199
S&P 500 now: 1225 Change: +2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1225 Change in 2010: +10%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1225 Change since 3/9/09: +81% (in about 21 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report in November showed an increase in this index, the fourth in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. The Fed seems 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 14.7, down slightly from 15.1 last time. This is still well within positive territory at any value below 17.4, suggesting that the market is undervalued. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.03, up from 1.01 last time, suggesting that the market is 3% overvalued right now. This is well within my +/- 10% range for calling this indicator neutral. As you can see, this indicator's suggestion is different from the suggestion of the market's P/E just stated. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration has become even more positive than last time, as the Index > 20-day > 50-day picture has become more pronounced. +10

• S&P 500 Medium Term Technical Trend: This tells the same story: Index > 50-day >200-day. The index is up about 4% since the “golden cross” (the upward passage of the blue 50-day SMA through the red 200-day SMA) on October 22, visible in the middle of the chart. Positive. +10

• DJIA Short Term Technical Trend: Same story as the S&P 500 short-term trend. Positive. +10

• DJIA Medium Term Technical Trend: Same story. Positive. +10

• NASDAQ Short Term Technical Trend: Same story. Positive. +10

• NASDAQ Medium Term Technical Trend: Same story. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Top 40 Dividend Stocks for 2011--Progress Report

2010-11-22T09:39:00.000-06:00

I have completed what I call Stage 1 work on The Top 40 Dividend-Growth Stocks for 2011. This work consisted of the following:

A complete re-write of the text. I made two major changes to the text this year. First, I condensed my 5-article series on retirement funding into a single new chapter for the book. I incorporated a few additional ideas that came to light in the comments I received on the original articles as well as further thinking I have done on the topic. Second, I combined two chapters (formerly called "What Are Dividends?" and "Why Invest in Dividend Stocks?") into a single new chapter, "Why Invest in Dividend-Growth Stocks?" I did this to eliminate redundancies and try to create some space for the new chapter on retirement. The 2011 edition will contain about 17 more pages than 2010's edition. As usual, I also tinkered with the stock-scoring system. I bumped up the points available for a company's Story from 10 to 15 to reflect how important I think every company's business model and competitive position are. I changed the "look-back" period for dividend growth rates from 3 years to 5 years. I tightened the standards for Stock Valuation a little. I am more consistently using the phrase "dividend-growth stocks" instead of "dividend stocks" to emphasize the focus on companies that increase their dividends every year. That will also be relected in the title of the book itself.
I completed the most tedious part of the whole project, which is reviewing more than 700 companies to select those that have any reasonable chance of being selected for the Top 40. There are 6 initial tests I put these companies through, including minimum yield, minimum yield growth, minimum number of years of increasing their dividends, and the like. This year's Stage 1 processing took 708 stocks and eliminated 572 of them. So 136 stocks remain for Stage 2 testing, which will begin immediately. Because I start testing stocks so early (in September), I use "eased" requirements that allow some stocks to pass forward if they just miss on one or two requirements. I do this because the numbers may change in the last 3 months of the year, and I don't want to drop a stock prematurely. Stage 2 will allow no easing. From past experience, Stage 2 will eliminate 20%-30% of the stocks. I love eliminating stocks, not only beause it reduces the work required in later stages, but also because I love to see the best of the best begin to emerge.

At the end of Stage 2, the stocks that remain will be the "Semi-Finalists." Those will then be put through many more tests than the initial 6 requirements. The best ones that rise to the front of the list will become the "Finalists." I'll choose the Top 40 from those some time in January.

I am still hoping to have the publication available in January. My final scoring of stocks and selection of the Top 40 cannot be completed until January, because I need year-end data. My wife and I have decided to take a southern trip just after the holidays, so I will lose a few days in the car. In 2010, I got the project published on January 19 (if I recall correctly). I am hoping to hit around that date again with this edition.

September-October Rally Continues Into November; Timing Outlook Positive at 9.0

2010-11-13T16:22:00.002-06:00

1. Summary

The market has been generally rising since the beginning of September. Because the Timing Outlook has a number of technical trend-following components, the market action has pulled the Timing Outlook higher. Its reading currently is 9.0, up from 8.0 last time. That said, last week’s trading was mostly down, and the market had its first losing week in the last six weeks.

After four months of trading sideways, in a range of 1,040 to 1,130, the S&P 500 index finally passed through and stayed above 1,130 on September 20, and it has stayed above that level ever since. It closed Friday at 1199.

As frequent readers know, I require both a positive Timing Outlook plus the satisfaction of a separate set of criteria to invest money in my Capital Gains Portfolio. (Click the “CRITERIA FOR RE-ENTERING THE MARKET” link in the right-hand column to see the additional criteria.) In a nutshell, I look to invest in a “rising” market. The criteria define what that means.

After months of failing to meet the criteria, they were finally met on September 14, and they have generally stayed satisfied since then. I have invested 60% of my portfolio’s money back into the market, in 10% chunks. Generally I check at least once per week to see whether to make another 10% investment. While the slow pace of re-investing costs me some gains when the market rises as sharply as it has, I nevertheless continue to move deliberately. This approach provides a margin of safety and conservatism that has served me well over the long term.

I apologize that my only investments are in ETFs, which reduces the educational value somewhat. Because most of my time in the last three months of the year is devoted to preparing 2011’s edition of THE TOP 40 DIVIDEND STOCKS, I do not have up-to-date Easy-Rate™ sheets for individual capital-gains stocks. Therefore, for re-entering the market, I have been purchasing shares of SPY, one of the ETFs that track the S&P 500. Well, this is meant to be a demonstration portfolio, so I guess it is demonstrating what happens when you don’t have the time to keep up with everything that you would like to do.

The third-quarter earnings season, now winding down, has been strong but not fabulous. The “beat rate” for stocks (that is, the percentage of those exceeding analysts’ consensus earnings estimates) has been just a little higher than the historical average of 61%. Economic news has been choppy. The pace of the economy’s growth is unimpressive. The unemployment rate remains stuck at 9.6%. The housing market is recovering very slowly if at all. Every good economic report seems to be followed by an equal-but-opposite bad report within a day or two. The Federal Reserve has announced that it will buy more Treasury bonds in an effort to stimulate more economic growth. Last week was the market’s first losing week in five weeks. I have a tight 5% sell-stop under my SPY holdings.

My newly re-named Dividend Growth Portfolio remains 100% invested, as it always is. Because the focus there is on continually increasing the dividend stream, I don’t use sell-stops or go to cash when the market plunges. The only cash in that portfolio is accumulated dividends waiting to be reinvested when the total hits $1000. As stated earlier, I am deep into preparation of THE TOP 40 DIVIDEND STOCKS FOR 2011. I will keep you up to date on its progress. I hope to release it in January.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, November 12, 2010)

Last Outlook (10/11/10): 8.0 (positive)
S&P 500 last time (10/11/10): 1167
S&P 500 now: 1199 Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1199 Change in 2010: +8%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1199 Change since 3/9/09: +77% (in about 20 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report in October showed an increase in this index, the third in a row. That satisfies my requirements for this indicator jumping from neutral to positive. +10

• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. As stated above, the Fed continues to try to cook up new ways to stimulate the economy besides keeping interests rates low. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 15.1, up slightly from 14.7 last time. This is still well within positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.01, up slightly from 1.00 last time. This suggests that the market is fairly valued right now. Neutral. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. Although the market’s fall on Friday pulled the index down close to its 20-day SMA, it finished above it. Thus the configuration remains the same as last time, Index > 20-day > 50-day, which is usually a positive picture. +10

• S&P 500 Medium Term Technical Trend: The medium-term configuration has risen to positive, as the 50-day SMA crossed upward through the 200-day SMA on October 21-22, the so-called “golden cross.” Many consider this to be one of the strongest technical indicators. Positive. +10

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart, except that Friday’s close was slightly under the 20-day SMA. That makes this chart ambiguous. Neutral. +5

• DJIA Medium Term Technical Trend: On the Dow, the “golden cross” took place at the beginning of October. Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the S&P for both time-frames, although Friday’s close was just a fraction above the 20-day SMA. Positive. +10

• NASDAQ Medium Term Technical Trend: Positive, after a “golden cross” on October 20-21. +10

TOTAL POINTS: 90
NEW READING: 90 / 10 = 9.0 = POSITIVE

THE TOP 40 DIVIDEND STOCKS FOR 2011 Is Well Underway

2010-10-28T08:08:00.005-05:00

For the past month, I have been preparing the manuscript for THE TOP 40 DIVIDEND STOCKS FOR 2011. The process proceeds along two parallel paths:

--The screening and selection process for the Top 40 stocks themselves.
--The writing (or rewriting) of the text.

One significant change in the text next year is that I am adding a chapter on the role of dividend stocks in funding retirement. This new chapter is based on my five-article series on Financing Retirement that appeared here earlier this year. The series was very popular and generated significant comments. To convert the articles into a Chapter for THE TOP 40, I am rearranging and condensing the material. I am also working in new or refined concepts that that came up in the comments and in my responses to those comments.

I am also making textual changes to emphasize that the e-book is about dividend growth investing. The subtitle next year will be How to Accumulate Wealth or Generate Income from Dividend-Growth Stocks. References in the text to "Sensible Dividend Investors" are being changed to "Dividend Growth Investors." The e-book has always been about dividend growth investing (as opposed to, say, investing in preferred shares, whose payout rates do not grow). Now the text will be more consistent in reflecting that.

On the stock-selection side, I again this year started out with about 700 stocks. (I collect references to and recommendations of dividend stocks throughout the year.) I am about two-thirds done with paring this starting list down to the real contenders. I do this by applying several minimal requirements regarding yield, consistency of raising dividends, and the like. That will get the list down to around 200 stocks. Then another round of screening will pare the list further to the 75 or so stocks that actually have a realistic chance of being one of the Top 40.

I am aiming for a publication date in January. Some magazine articles or special issues about investing in 2011 are already hitting the shelves in stores. But I like to wait for the current year to end so that I can use full-year 2010 data in my analyses.

I will keep you posted on the progress of THE TOP 40 DIVIDEND STOCKS FOR 2011: How to Accumulate Wealth or Generate Income from Dividend-Growth Stocks every few weeks until the publication date.

Yield on Cost: How It Works

2010-10-14T13:53:00.000-05:00

An important concept in income investing is yield on cost, but it is often misunderstood. Let’s look under the hood.

The basic idea is easy: Yield on cost is the income yield, right now, on money that you invested 10 minutes ago, a few months ago, or 10 years ago. It is determined by this simple formula:

Yield on Cost = Past 12 Months Income / Price You Paid.

I use the past 12 months’ income in this formula, because it is the only income we are sure about. (“Indicated” yield, based on the expected continuation of the most recent dividend payout, is also often used. I explain the nuances at the end of the article.)

Here’s an example taken from the latest Portfolio Review of my illustrative Dividend Portfolio. The review was conducted in August (read about it in this article: “Portfolio Forensics”), so the “Price Now” number is out of date, but it is perfect for illustration.
Stock MCD (McDonald's)
Date Bought 4/30/08 and 3/30/09
Price When Bought $60.06 and $53.93
Price Now $71.70
Price Return 19% and 32%
Current Yield 3.1%
Yield on Cost 3.7% and 4.1%
Action to Take Hold

You can see that I purchased McDonalds twice, in April 2008 and again in March 2009. The “Current Yield” shows MCD’s yield at the time of the review, based upon its price then. Note that it is the same for both purchases. That’s because current yield is based on current price. There's only one current price.

Current Yield = Past 12 Months Income / Current Price

In contrast, the “Yield on Cost” shows two yields, one for each purchase. That’s because yield on cost is based on the price you paid, not what the stock is selling for today. Note how my first purchase (2008) is now yielding 3.7%, while my second purchase (2009) is yielding even more, 4.1%. That is because the price went down between my two purchases. Each of the two purchases of MCD pays out the same dividend per share, obviously. But when you convert that dollar number into a percentage yield on cost, the divisor is different for each purchase, hence there are two yields on cost. The only way they would be identical is if the price had been identical when I made each of the two purchases.

This simple example allows me to illustrate several bedrock principles of dividend growth investing.

Each time the dividend increases, your yield on cost goes up. I went back and checked the then-current yield of MCD on the dates I made the two purchases. In 2008, it was $1.875 / $60.06 = 3.1%. In 2009, it was 1.75 / 53.93 = 3.2%. (Don’t be misled into thinking MCD lowered its dividend from 2008 to 2009. At the beginning of 2008, MCD switched from a single annual dividend to four quarterly dividends per year. The 2008 calculation “caught” an extra quarter of dividends, namely the first quarterly payment in March 2008.) Because of MCD’s annual dividend increases, my yield on cost on the two purchases has risen from 3.1% to 3.7% for the first purchase, and from 3.2% to 4.1% for the second purchase. The increase in yield on cost is a mathematical certainty if the dividend is increased, because the divisor (the price you paid) remains the same for as long as you own the stock.

Yield on cost is a measure of current performance, not past performance. Some people feel that yield on cost is a backwards-looking measure. That is incorrect. Because it is based on the most recent 12 months’ dividend payout—the last annual amount that we know for sure—yield on cost is a current measure of performance. Of course, today’s yield on cost “got there” because of past dividend increases, but it is a current performance metric.

Yield on cost is directly comparable to a bond’s yield. Bonds, as we know, are fixed-income investments. You pay $x for the bond, and its yield is stated and set for the term of the bond. It is a contractual obligation of the bond issuer, to whom you have lent money by buying the bond. So if you bought a bond yielding 4% in 2008, it is still yielding 4% to you. It will always yield 4% to you. It may pay a different yield to someone who buys it on the bond market today (because its price may have changed), but that has no impact on its yield to you. Its yield on cost will always equal its yield on the day you bought it.

Yield on cost can be considered to be your “personal” yield on a dividend-paying stock. It is dependent on the price you paid. The current yield stated in the newspaper or on Yahoo or Morningstar applies to someone who purchases the stock today. It is irrelevant to your yield on cost.

The dividend increases in a dividend-growth stock can cause its yield to surpass that of a bond which may have started out ahead. As just stated, if you buy a bond yielding 4% and hold it, it will always yield 4% to you. But the increasing dividends of a dividend-growth stock will cause its yield on cost—your personal yield—to inexorably climb, often reaching and then surpassing the annual income on a bond that originally paid more. In the year following my 2008 purchase of MCD, it paid $1.75 per share in dividends, or 2.9% based on my purchase price. In the past 12 months, it has paid me $2.20, or 3.7%. That’s a 26% increase in dollars in just a year. Looking ahead, MCD has already announced an increase in its dividend for the fourth quarter of this year (from $0.55 to $0.61) an 11% hike that will raise the dollars to me in the next 12 months to $2.44, for a yield on cost of 4.1% on my 2008 purchase. (This is the forward-looking “indicated” yield on cost; see the last paragraph of this article.)

Price and initial yield matter. My 2008 purchase at $60.06 had sunk to $53.93 by the time of my second purchase in 2009. Why would I buy more of a sinking stock? Because it was a better deal--a classic value-investing concept. I had long-term faith in McDonald’s the company. I still do. I wasn’t thrilled that its price drop had cost me 10% in capital losses. But I didn’t plan to sell it, and in dividend growth investing one focuses on the dividend stream. In the year between the two purchases, MCD had jacked up its dividend from $1.50 in calendar 2007 to $1.625 in 2008 (an 8% jump), and it would jack it up another 26% in 2009 to $2.05. I could not have expected that magnitude of increase, of course, but I certainly expected an increase—after all, MCD had been raising its dividend for 32 consecutive years.

Yield on cost and current yield gradually diverge from each other. If a stock’s price increases at exactly the same rate that the company increases the dividend each year, the current yield won’t budge. This fakes out some people, who equate yield on cost to current yield. As we have seen, they are quite different, as the yield on cost rises with each dividend increase. Some dividend-growth investors believe the increasing dividends are themselves a major reason that dividend-growth stocks tend to wallop all stocks in total return. The reasoning is that if the price decreases, the current yield increases, making the stock more attractive to income investors, who pile into the stock and drive its price back up—so the stock’s price tends to rise along with its dividend. It is not unusual to see a stock’s current yield stay pretty much the same year after year, even though its dividend is raised each year. The dividend increases are matched by approximately equal percentage increases in the price of the stock, so mathematically the current yield stays the same. MCD’s current yield is 2.9%, and its indicated current yield is 3.2%, both in the same range as when I bought it in 2008 and 2009. But my yields on cost, as already explained, are much higher.

If you don’t separate out new purchases from old ones, your “blended” yield on cost will often go down with a new purchase. A new purchase at, say, 3.1% current yield, when combined with an old purchase at, say, 4.1% yield on cost, will make the combined yield on cost lower. (At the moment of purchase, yield on cost and current yield are identical.) That’s why I track each purchase separately. It makes clear what is really happening: The new purchase has not diminished the yield on cost of a purchase made years ago. That never happens. What does happen is that the yield on cost of the original purchase continues to march upwards, while the new purchase starts at its current yield on the day of purchase, then commences its own upward march when the next dividend increase is declared.

Finally, a couple of points about the basic formulas.

(1) The formula for yield on cost could be Yield on Cost = (Last Quarter’s Dividends x 4) / Price You Paid. That formula differs from the one stated at the beginning of this article only in that it projects the current dividend payout rate forward (without presuming an increase). The proper name for this is “indicated” yield on cost.

(2) A similar change can be made in the formula for current yield, producing the “indicated” current yield.

September Rally Continues into October; Have Re-entered the Market for Capital Gains

2010-10-11T09:30:00.000-05:00

1. Summary

The market has been generally rising since the beginning of September. The rally has pulled the Timing Outlook to a strongly positive reading of 8.0, up from 6.0 last time.

For over four months, the S&P 500 had stayed stuck in a trading range of 1,040 to 1,130, essentially going sideways. The index finally passed through and stayed above 1130 on September 20, and it has stayed above that level ever since, slowly drifting upward in fits and starts. (See the chart below. Click on it to enlarge it.)

As frequent readers know, I require not only a positive Timing Outlook but also the satisfaction of a separate set of criteria to invest money in my Capital Gains Portfolio. The additional criteria, again, are:
• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.

The criteria were finally met on September 14, and I invested 10% of the portfolio’s funds on that day and another 10% a week later. There have been enough “down” days sprinkled in since then, however, to keep me from investing any more. This has cost me some gains as 80% of the portfolio sits in cash, but I will continue to require the additional margin of safety that the second criteria provide. Long term, that discipline has served me well.

Because I am hard at work on 2011’s edition of The Top 40 Dividend Stocks, I do not have up-to-date Easy-Rate™ sheets for capital-gains stocks. Therefore, for re-entering the market, I have purchased shares of SPY, one of the ETFs that tracks the S&P 500. I am following the market at the end of each day, and if the second set of criteria are satisfied, I will make another purchase.

The market’s action for the past three months is shown on the chart. It shows that the S&P 500 has risen about 11% since the beginning of September. It also shows the number of “down” days (red candlesticks) that frustrate the second criteria, even though the overall direction has been upwards.

My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.

2. Market Performance Since Last Outlook
(“now” figures are as of mid-morning, Monday, October 11, 2010)

Last Outlook (9/13/10): 6.0 (positive)
S&P 500 last time (9/13/10): 1122
S&P 500 now: 1167 Change: +4%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1167 Change in 2010: +5%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1167 Change since 3/9/09: +72%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report (September 23) showed an increase in this index, the second in a row. I require three straight monthly increases or decreases to label this as positive or negative, so this indicator remains neutral. +5

• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, up from 13.7 last time, but still well within positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.00, up from 0.96 last time and suggesting that the market is exactly at “fair value” right now. For our purposes, that means neutral. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the chart) is Index > 20-day > 50-day. That suggests rally mode, with the index “pulling up” the shorter SMA, which in turn is “pulling up” the longer SMA. Positive. +10

• S&P 500 Medium Term Technical Trend: The mid-term indicator remains ambiguous, as the 200-day SMA is still higher than the 50-day SMA. If (when) the 50-day crosses through and above the 200-day, that will be known as a “golden cross,’ which many consider to be one of the strongest technical indicators. Until then (if it happens), this indicator remains neutral. +5

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Positive. +10

• DJIA Medium Term Technical Trend: On the Dow, the “golden cross” took place a few days ago. Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the S&P’s for both trends. Positive. +10

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 80
NEW READING: 80 / 10 = 8.0 = POSITIVE

September Rally Pulls Timing Outlook Back To Positive, But Still Not Re-Entering Market

2010-09-13T10:16:00.001-05:00

1. Summary

An early September rally has pulled the Timing Outlook back into positive territory, up to 6.0 this time from a negative 4.5 last time.

For over four months, the S&P 500 has been stuck in a trading range of 1040 to 1130. The Timing Outlook has not performed well during this period, as the market’s drifts up and down have been timed nearly perfectly to repeatedly reverse the Timing Outlook, which I re-compute about every other week. So the Timing Outlook has been out of phase with the market’s short-term “trends.” There has been no long-term trend up or down; it has been sideways.

While the short drifts up and down have been long enough to keep the Timing Outlook off balance, they have been too short to pass my other criteria for being invested in stocks, so my Capital Gains Portfolio has been 100% cash since early May. The additional criteria, again, are:

• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.

The criteria are close to being met. Check out the chart above (click on it to enlarge it). It shows that the S&P 500 has risen about 6% during the past 10 trading sessions, with 8 of the past 10 sessions being positive. If the market’s rally continues a few more days, the criteria go to the three-week line, requiring a 3% rise with 10 out of 15 days being positive. We’re almost there. But patience is the watch-word. Don’t plug in hope as a substitute for actual performance. Waiting for the right entry point can be tedious, but avoiding losses is as important to overall success in investing for capital appreciation as scoring gains.

My Dividend Portfolio remains 100% invested after the changes described last time. By the way, I have begun to work on the 2011 edition of The Top 40 Dividend Stocks. I will keep you up to date on its progress. I hope to release it in January.

2. Market Performance Since Last Outlook
(“now” figures are as mid-day, Monday, September 13, 2010)

Last Outlook (8/25/10): 4.5 (negative)
S&P 500 last time (8/25/10): 1048
S&P 500 now: 1122 Change: +7%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1122 Change in 2010: +1%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1122 Change since 3/9/09: +66%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. This index has been gyrating the past few months, rendering it ambiguous for our purposes. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5

• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 13.7, down from 15.2 last time. This indicator is in positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph: Morningstar’s proprietary market valuation graph is at 0.96, up from 0.91 last time. It is still in the neutral range, which is any value between 0.90 and 1.10. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration (see the blue and green lines on the chart) is Index > 50-day > 20-day. That is ambiguous, reflecting the back-and-forth nature of the market over the past several months. Neutral. +5

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day, the blue and red lines on the chart). The lineup is Index > 200-day > 50-day. The recent 2-week rally has flipped this from last time, moving the indicator from negative to neutral. +5

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Neutral. +5

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5

TOTAL POINTS: 60
NEW READING: 60 / 10 = 6.0 = POSITIVE

Buffett May Not Pay Dividends, But He Sure Likes Them

2010-09-02T13:02:00.000-05:00

Berkshire Hathaway (BRK), aka Warren Buffett, has paid only one dividend since Buffett gained control. In 1967, Berkshire paid a dividend of 10 cents on its shares. It’s never happened again. Buffett has said he "must have been in the bathroom when the dividend was declared.”

Berkshire Hathaway is famous for not paying dividends despite having billions of dollars in cash. The company has many critics who believe that the company should “reward” or “return money to” shareholders. I am not one of those critics. I believe that Bershire/Buffett has proved itself to be perhaps the best allocator of capital on the planet, and I do not question that they can allocate their capital as well as or better than I could if they gave me some of it. I love dividends, but I don’t think Berkshire should pay a dividend.

Berkshire, while known mainly as an insurance company, is actually a conglomerate. It has a dizzying array of wholly owned companies in businesses as diverse as railroads, carpeting, candy, furniture, and jewelry. It also owns huge stakes in several public companies. It is the latter that I want to focus on, because Berkshire/Buffett has shown a great liking for companies that pay dividends.
Berkshire’s stock holdings are published quarterly. For the most recent quarter (ending June 30), here are its largest holdings, the percent of Berkshire’s stock portfolio represented by that holding, and the stock’s projected yield based on current payout. All information is from Morningstar.

• Coca-Cola (KO), 22%, yield = 3.2%
• Wells Fargo (WFC), 18%, yield = 0.9%
• American Express (AXP), 13%, yield = 1.8%
• Procter & Gamble (PG), 10%, yield = 3.3%
• Kraft (KFT), 6%, yield = 3.9%
• Johnson & Johnson (JNJ), 5%, yield = 3.8%
• Wal-Mart (WMT), 4%, yield = 2.4%
• Wesco Financial (WSC), 4%, yield = 0.5%
• U. S. Bancorp (USB), 3%, yield = 1.0%
• ConocoPhillips (COP), 3%, yield = 4.2%

These top 10 holdings account for 88% of all of Berkshire’s stock holdings—a very concentrated portfolio, especially considering its size. Overall, the company owns more than $46 billion in stocks, spread out over 37 different positions. (These figures do not include foreign investments held abroad.)

In Q2, Berkshire purchased about 17 million shares of Johnson & Johnson, adding to the 24 million it already owned. The total spent was about $1 billion, or about $58 per share. This was the biggest increase in any holding in Berkshire’s portfolio, raising its stake by 70%. What’s that worth in dividends? In June, J&J raised its dividend from $0.49 per share per quarter to $0.54, or $2.16 per year. A year’s worth of dividends at that rate for 24 million shares is $51,840,000. Actually, Berkshire will get more than that in the next 12 months, because J&J will raise its dividend again next June, as it has for 48 straight years.

In fact, 5 of those 10 companies are Dividend Champions—companies that have increased their payouts for 25 years or more consecutively: Procter & Gamble (54 years), Coca-Cola (48), J&J (48), Wesco (38), and Wal-Mart (36). ConocoPhillips has a 10-year streak going. In Q2, the second-largest increase in shares held by Berkshire was in Becton Dickinson (BDX), in which Berkshire increased its position by 8%. Becton Dickinson is a Dividend Champion with a 37-year streak.

Charlie Munger, Buffett’s sidekick at Berkshire, has been quoted as saying, “Investing is where you find a few great companies and then sit on your ass." While dividend-raising companies require attention just as any stock holdings do, it is clear that Berkshire/Buffett have found several great companies with a common characteristic—they pay consistently rising dividends. They have helped make Buffett the richest investor in the world.

Portfolio Forensics

2010-09-01T12:02:00.000-05:00

From time to time, one runs across pointless arguments about whether buy-and-hold is dead. Most long-term stock holders know that buy-and-hold really means buy-and-monitor, or buy-and-homework, or some similar phrase that indicates that reasons can arise to sell a long-term holding. The days of the dying grandfather telling his family “Never sell the AT&T” are long gone. While the ideal might be to hold each stock “forever,” life happens, and in doing so it can create reasons to sell any stock.

How do you decide? I advocate periodic Portfolio Reviews. In my Dividend Portfolio, which is devoted to dividend growth stocks and does not require real close attention, I aim to conduct a review twice per year. The point is to impose upon yourself the discipline to really examine your stock portfolio periodically, apply standards designed to reveal whether each stock still deserves a place in your portfolio, and take action on what you find out.

In my Dividend Portfolio, normally the presumption is that each dividend stock will not be sold. But that presumption can be overcome. During a Portfolio Review, the burden shifts to the company to prove why it should be kept. Here are some of the questions I ask:

• What is its yield on cost (YOC)? I don’t penalize a dividend growth stock solely because its current yield may have dropped below qualifying levels. That may be only because the stock’s price has jumped way up. If I purchased it years ago, and I am still satisfied with how it is growing its dividend, the reliability of the dividend, etc., I normally would keep it. It is doing its job. By the way, the formula for YOC is: Yield on Cost = (Current Yield x Current Price) / Acquisition Price. An equivalent formula is Last 12 Months’ Dividends / Acquisition Price.

• Should some profits be taken? If the company’s price has skyrocketed, that may present an opportunity to cash out some or all of it and purchase another stock selling at a better price and offering a higher yield. The goal would be to have the total dividend stream increase after the transactions are completed. Notice that if you have held a stock a long time, its current yield may be low but its YOC may be quite high, difficult to match with a new purchase.

• Is the safety of its dividend in question? As soon as BP’s oil rig blew up, the safety of its dividend became perilous for anyone who thought about it. In a Portfolio Review, update your information on each company and give serious thought to the ongoing reliability of its dividend.

• Is there a chance to improve your portfolio by making a stock swap? There are various ways to improve your portfolio, such as increasing its total yield, increasing the rate of dividend growth, diversifying it, and so on. As to increasing yield, note the discussion above (second bullet) about making sure that the initial yield on a new purchase would exceed the YOC of the stock you would sell. If it wouldn’t, it’s hard to justify the swap. A higher expected rate of increase may tip the scales.

• Did the company cut or freeze its dividend? If so, it is subject to immediate examination. You will probably decide to sell most stocks that cut or freeze their dividend. The main goal of my Dividend Portfolio is to deliver an ever-increasing dividend stream, so obviously a cut or freeze hurts that goal. Also, a cut or freeze often portends a price drop. Confident management teams adhere to established dividend-growth patterns. A company that cuts or freezes its dividend is conserving cash for some reason. Find out why. The company may be in difficulty, and its price may be in for a drop too. Selling early usually brings in the most money you will be able to get for that stock for a long time to come.

• Has the company’s current yield risen above 10 percent? If so, it is subject to immediate review, but this is not an automatic reason to sell. An extremely high yield is usually the result of an extremely low price. Find out why the market has devalued the stock. It may be a clue that the company is having major problems, and upon examination you may discover that the dividend itself is in peril. This may be dividends’ equivalent of a “dead-cat bounce” in price.

• Has the rate of growth of the dividend taken a turn for the worse? Can you figure out why? Many dividend investors regard dividend growth as a key indicator of future prospects, because it reflects management’s view of and confidence in the next few years, often based upon information available to them but not to you.

Let’s look at some examples. Here is how these principles played out for six stocks in a recent Portfolio Review of my Dividend Portfolio.

Abbott Labs (ABT): I own two slugs, purchased in 2008 and 2009. Their yields on cost are 3.2% and 3.7%, respectively. Abbott increased its dividend 10% this year. The stock is working fine. Decision: Hold

Alliant Energy (LNT): Initiated position early in 2010, and it has worked out well. The stock has a 9% price increase and a 4.9% YOC after a 5% dividend hike this year. Decision: Hold.

Diageo (DEO): I bought this in 2008. Diageo is a foreign stock (Britain), and like many foreign stocks, it does not adhere to a predictable dividend-raising schedule. It makes two payments per year, and the first payment is typically less than the second payment, making the total year’s dividend impossible to predict. In its native currency, Diageo has been a steady dividend raiser, but with varying exchange rates, that has sometimes translated into fewer $US, as if it had cut its dividend. Too many headaches to keep track of, despite the company’s strengths. My position was small, and I had a 14% long-term price gain on the stock. Decision: Sell and put the money to work elsewhere.

Emerson Electric (EMR): Also purchased in 2008, EMR has disappointed lately with small dividend increases, just 2% in 2010. Its 2.7% yield on cost (YOC) was pulling the portfolio’s YOC down. Last year, I put it on sort of probation, sticking a 10% trailing sell-stop under it. It survived by steadily moving up in price from what had been a significant capital loss. After nearly hitting the breakeven point, its price began to weaken again. The lousy dividend increase motivated me to put a tighter stop under it (5%), which it hit a couple of weeks later. Decision: Put tight stop under it; the stop was hit, so stock sold.

McDonalds (MCD): Purchased in 2008 and again in 2009. YOC is 3.7% and 4.1% respectively. Blended price increase is more than 20%. Raised its dividend 26% in 2009; awaiting 2010’s increase (which typically comes with the final payment of the year). What’s not to like? Decision: Hold.

Royal Bank of Canada (RY): Purchased in 2008, the stock survived the financial crisis and is a solid, stable bank. But it has not increased its dividend since 2008. I decided to put this small position’s money to work elsewhere. Decision: Sell.

The Dividend Portfolio contained 12 stocks when I did the Portfolio Review. The 3 sells mentioned above are a little misleading, because I wanted to show examples of reasons to sell. Those were the only 3 sales resulting from this review. The other 9 stocks were held. In dollar terms, there is typically less than 10% turnover per year in this portfolio. Sometimes there is none.

A good practice is to keep a Shopping List ready—stocks that will help improve your portfolio in some way and that meet all your criteria for buying a stock. For my Dividend Portfolio, I use my e-book, The Top 40 Dividend Stocks for 2010, as my Shopping List. I make sure to update the information, especially any target’s yield and valuation, before making any purchase. With the proceeds from the 2 immediate sales, I increased my stake in Alliant Energy. At a current yield of 4.5%, that gave a nice boost to the portfolio’s overall YOC (which was 4.1%). When Emerson Electric hit its sell-stop, I used those proceeds to initiate a position in Johnson & Johnson (JNJ), whose price seems depressed, at a 3.6% initial yield. I was pleased to see that Warrren Buffett—through Berkshire Hathaway (BRK)—had made JNJ his single largest stock purchase in Q2, adding 17 million shares to the 24 million he already owned, spending about $1 billion on the purchase. I picked up 50 shares myself. What the hell. Always glad to be in agreement with Mr. Buffett.

August's Market Swoon Pulls Timing Outlook Back To Negative

2010-08-25T10:15:00.002-05:00

1. Summary

After the stock market’s rally in July, which pulled the Timing Outlook up into positive territory, August has seen a nearly equal but opposite slide. Today’s Timing Outlook is negative at 4.5, significantly down from 7.5 last time. Today’s S&P 500 value (at mid-day) of about 1048, is a value that has been crossed through several times in the last few months as the market see-saws up and down. In other words, the market has overall been sideways for three months, but with significant volatility that has looked like trend-starts, but turned out to be false hopes.

This kind of yo-yo action causes the Timing Outlook to jump around too. The last five readings, including today’s, have been Negative-Positive-Negative-Negative-Positive-Negative. Short-term (2-3 week) market reversals are the worst conditions for discerning an investable trend. The Timing Outlook is least useful under these conditions, as swings to-and-fro with the market.

My Capital Appreciation Portfolio has remained 100% in cash since early May. That means that it has gained nothing, but in so doing it has outperformed the S&P 500, which has an overall loss since that time. In the last report, the July rally led me to review the criteria for re-entering the market.

• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• Etc.

The market’s August drop has put these criteria out of reach again, at least for a while. It is hard to see the catalyst that would trigger a sustained rally. Q2 earnings came in strong: 66% of companies in the S&P 500 beat earnings estimates, and 63% beat revenue estimates. But that good news has been offset by poor economic news. Corporations are doing well, but individuals are not. It seems that every day, some negative report is issued about housing, manufacturing, unemployment, a “jobless recovery,” troubles in Europe, the possibility of a double-dip recession, or the possibility that we’ve never actually exited the Great Recession. Ben Bernanke stated recently that the economy is displaying “unusual uncertainty.” Traditionally, markets hate uncertainty.

My Dividend Portfolio is 100% invested, but I made some changes this month. I completed a Portfolio Review, which led me to sell three stocks (Diageo, Emerson Electric, and Royal Bank of Canada) and replace them with two others (added to position in Alliant Energy and initiated position in Johnson & Johnson). These are the first changes to the portfolio in a year. Hopefully they will strengthen the portfolio for its key objective: To generate ever-increasing income streams. The holdings in the Dividend Portfolio are not protected by sell stops. Risk management is accomplished by means of the Portfolio Reviews.

2. Market Performance Since Last Outlook
(“now” figures are as mid-day, Wednesday, August 25, 2010)

Last Outlook (8/5/10): 7.5 (positive)

S&P 500 last time (8/5/10): 1126
S&P 500 now: 1048 Change: -7%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1048 Change in 2010: -6%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1048 Change since 3/9/09: +55%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report last week showed a tiny increase in this index. The index has been gyrating the past few months (displaying “unusual uncertainty” too, I guess), rendering it ambiguous. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5

• Fed Funds Rate: No change. The Fed continues to reinforce the idea that rates will not be raised anytime soon. In a nutshell, they seem to see “unusual uncertainty” in the economic recovery combined with little possibility for inflation in the next few months. With the Federal Funds rate near zero, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 15.2, same as last time. This indicator stays in positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.91, down significantly from 0.98 last time and close to the 0.90 level that would move this indicator into positive territory. For now, the indicator remains in the neutral range, which is any value between 0.90 and 1.10. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs). The configuration is 20-day > 50-day > Index. That is ambiguous, reflecting the yo-yoing in the market. Neutral. +5

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day). The lineup is 200-day > 50-day > Index. This is exactly the opposite of an uptrend. Negative. +0

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart. Neutral. +5

• DJIA Medium Term Technical Trend: Same as the S&P 500. Negative. +0

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Same as the other two. Negative. +0

TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE

Financing Retirement V: The Cistern Model

2010-08-13T07:55:00.002-05:00

This is the final article in my series on retirement.

Essentially all strategies for financing retirement—even those as philosophically opposed as maximizing capital vs. maximizing income rights—use the same “plumbing.” I like to think of it in terms of cisterns, with pipes running in and out, and leaks. The idea comes from those old algebra questions where A could fill his cistern at a certain rate, B’s cistern filled more slowly and also had a leak in it, and poor C’s cistern was a veritable symphony of problems. As a 12-year-old, you had to create formulas to figure out how long the water in each cistern would last. See Stephen Leacock’s hilarious short story, “A, B, and C—The Human Element in Mathematics.” (For younger readers: A cistern is a big barrel to collect rainwater.)

Here’s the analogy: Your retirement assets are in the cistern. There are two goals:

          · The cistern must fund your retirement adequately.
          · The cistern must never go empty. In fact, it must never get even close enough to empty that you worry about it or lose sleep over the possibility. You want a nice, abundant cistern that inspires confidence.

There is continual change in your cistern. It is not a static thing, which is why I prefer this analogy to the more common “nest egg.” The cistern’s contents expand and contract throughout your life, both before you retire (the so-called accumulation years) and after you retire (the decumulation years).

What goes into your cistern? Mostly assets that you decide to put in there. Some inflows to your retirement cistern begin early in life, while others come along later. Typical inflows include savings, 401(k) contributions, dividends, royalties, Social Security, pensions, interest, inheritances, etc.

Note that I count as inflows some items (such as Social Security) that a retiree may just spend directly. I will explain why I do this in a minute. Note also that, with the exception of old-fashioned pensions and Social Security, inflows require a positive decision on your part. You must decide to put assets into your cistern (or not).

Besides expanding from the contributions that you make into your cistern, the level in your cistern also goes up when you experience increases in the market value of assets already there. Examples of assets that may enjoy value expansion include:

          · Stocks, ETFs, mutual funds, and the like
          · Your house
          · Increasing dividends from companies that raise dividends regularly
          · A small business you may own

What about declines? It is important to note that declines in the level of the assets in your retirement cistern take place not only after retirement via actual withdrawals, but earlier in life as well. Some people “raid” their cistern prior to retirement to cope with emergencies or to make large purchases. Taking out a home equity loan to buy a boat, for example, decreases the level of your cistern in two ways: First, the value of the loan lowers your equity in your home and thus decreases its value in your cistern. Second, the additional debt creates interest obligations that reduce the amount you can put into your cistern for some time into the future.

The level in your cistern also goes down if the value of the assets in it declines. Significant declines in the value of your stocks or your home obviously can have a major impact on the level in your cistern. During the recent financial crisis, some people have been forced to delay long-planned retirements, because the levels in their cisterns went down so far that the two major goals—seemingly within their grasp—suddenly were moved out of reach.

And everybody’s cistern has a leak: Inflation. That is a continuing outflow, sometimes rapid, sometimes slow, that insidiously reduces the value of the contents of your cistern. Only if we go into a period of deflation would the value-of-money dynamic actually cause the value of what’s in your cistern to expand. It would become like an inflow rather than a leak.

I said that I would explain why I count as inflows monies that go directly to spending, such as Social Security payments. The reason is that if we visualize that everything runs through the cistern, even if only briefly, it puts all assets on an equal footing for analysis. The value of income rights can be directly compared to the value of capital, for example.

Viewed this way, everyone makes withdrawals from their cisterns. Thus, someone who spends his Social Security check upon arrival must acknowledge that if he did not spend all of it, he could deposit the balance in his cistern for a future day. And the debate between income-maximizing strategies and capital-maximizing strategies can be seen for what it really is, which is an assessment of two strategies, both of whose goals are the goals stated at the beginning of this article. In both cases, the retirees are betting that their strategy will both provide sufficiently for retirement and that their cistern will never run dry.

Say someone maximizes income during their accumulation years by loading up on dividend-paying stocks, then lives off the income in retirement. We can picture the dividends as flowing into the cistern through a dividend pipe, but flowing right back out through a dividend-withdrawal pipe. Such a person might say that she is not making “withdrawals” if they just take the dividends directly, but she really is, because if not taken immediately as cash, the money would flow into the cistern. The same reasoning applies to pension or Social Security income. You may take it directly, but it is helpful to view it as flowing into and out of the cistern. It provides a better picture of the dynamics of retirement funding.

Similarly, someone who loads up on growth stocks during their accumulation years, then converts those assets into income by selling portions to fund retirement, is clearly making withdrawals. The “bet” is whether the unsold assets remaining in the cistern will simultaneously expand enough to make up for the assets sold. Similar reasoning applies to someone who buys an annuity: She makes a big withdrawal to buy the annuity, but the annuity itself then creates an inflow of income that lasts the rest of her life. The “bet” is whether the income will eventually exceed what it cost to purchase the annuity.

So the cistern analogy is strategy-neutral. I believe that viewing retirement funding in this way allows for more reasoned comparisons of strategies. It’s no secret that I believe in the efficacy of accumulating assets that bear rights to receive increasing dividends, and that I think that it is a superior retirement strategy to relying principally on accumulating assets that hopefully will expand in value via increasing prices to offset withdrawals. But I do not kid myself that when I spend those incoming dividends or Social Security checks, I am not really draining a little bit out of my cistern each time too.

July Rally Yanks Timing Outlook Into Positive Territory; Time to Wade Back In?

2010-08-05T18:58:00.001-05:00

1. Summary

The stock market rallied strongly in July, although not a straight-line fashion. The market’s volatility continues to have the Timing Outlook jumping around too. The last five readings have been negative-positive-negative-negative-positive. Today’s value is positive at 7.5, significantly better than 4.5 last time.

To repeat a message from the last several Timing Outlooks: The Timing Outlook is least useful when the market is gyrating, as it is pretty sensitive to short-term (2 to 3-week) market moves. Despite the strong (if choppy) July, we have been in a volatile market since mid-April. If U means up and D means down, the weekly market changes since mid-April have been D-U-D-D-U-D-U-D-U-D-D-U-U-U-D. This week is too soon to call.

(click on chart to enlarge it)

My Capital Appreciation Portfolio has remained 100% in cash since early May. With the July rally, let’s look at the criteria for re-entering the market. As noted in this article, I look for:

• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.

An astute reader has pointed out that I actually overlooked a “Buy” signal in early July. As of the close today (Thursday), we are just short of 3-week and 4-week “Buy” signals. The percentage increases are sufficient, but the number of positive trading days falls 1-2 short in each case. I will be watching the trading ranges more closely, and if a “Buy” signal comes along, I will re-enter the market with a portion of the portfolio’s cash, with any purchase protected by a sell stop.

Subjectively, this is a hard market to have confidence in. Q2 earnings reports are coming in strong, but economic factors and the general “feel” of things does not inspire confidence. Nevertheless, if the criteria generate another “Buy” signal, I will be buying. Gotta go with the system.

As usual, my Dividend Portfolio remains 100% invested. While its value has been dancing along with the market, its main goal—generating ever-increasing income streams—is still being met. None of the stocks in the portfolio has cut or frozen its dividend this year. Many have raised their dividends. The holdings are not protected by sell stops.

2. Market Performance Since Last Outlook
(“now” figures are as of close Thursday, August 5, 2010)

Last Outlook (7/19/10): 4.5 (negative)

S&P 500 last time (7/19/10): 1071
S&P 500 now: 1126 Change: +5%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1126 Change in 2010: +1%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1126 Change since 3/9/09: 66+%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report showed a decline in this index. The index has had a couple of declines in the past few months, rendering it ambiguous. I require three straight monthly increases or decreases to label this as positive or negative. Indicator remains neutral. +5

• Fed Funds Rate: No change. The Fed and people speaking for it continue to reinforce the idea that rates will not be raised anytime soon. With the Federal Funds rate near zero, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 15.2, up from 14.3 last time. This indicator stays in positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.98, up from 0.93 last time. That keeps this indicator in the neutral range, which is any value between 0.90 and 1.10. +5

• S&P 500 Short Term Technical Trend: The market has rallied, in fits and starts, since the beginning of July. It has now reclaimed the value it had in early June. This short-term technical indicator uses the two shorter SMAs. The configuration is Index > 20-day > 50-day. That is the best configuration to indicate a rising market. Positive. +10

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the two longer SMAs (50-day and 200-day). The lineup is Index > 200-day > 50-day. This is an ambiguous configuration. Neutral. +5

• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Positive. +10

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Positive. +10

• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5

TOTAL POINTS: 75
NEW READING: 75 / 10 = 7.5 = POSITIVE

Financing Retirement IV: Asset Allocation

2010-08-03T13:40:00.000-05:00

In the previous article in this series (immediately below this one), I stated that in conventional retirement planning, there are three critical steps:

Maximize your capital before you retire.
Make your capital a lot “safer” as you approach retirement.
In retirement, withdraw capital at a “safe” rate, typically figured to be 4% in the first year, then raised each year by 3% to account for inflation. That withdrawal converts what was capital into retirement income by the process of selling assets.

Coincidentally, AAII Journal ran two articles in their July, 2010 issue that address all three of those bullet points. Or I should say that it mentions them—they took all three bullet points above and used them as unquestioned truisms. From this foundation, they built two entirely contradictory models for asset allocation before, at, and after retirement.

Under Modern Portfolio Theory (MPT), it is said that proper asset allocation insulates your entire portfolio from the ups and downs of one single class of securities. It is commonly accepted that your selection of individual securities is secondary to the proportions in which you allocate your investments in stocks, bonds, and cash. I believe that the rule of thumb is that 70% of your investment results will come from asset allocation, not from what securities you pick.

Asset allocation for retirement is a hot topic. On June 18, The Department of Labor and SEC held a joint hearing related to target date funds, many of which underperformed the S&P 500 in 2008-09. Target date funds have rapidly gained popularity since they were introduced in 1996. At the moment there are nearly 300 of them, with $176 Billion in assets. Their attraction is that, once you designate your retirement date, they offer the automatic achievement of the first two bullet points above.

They maximize your capital via diversification and an ideal stock/bond ratio while you are in the accumulation years of your life. Investors with different risk profiles can select from among funds that are more or less aggressive. “Aggressiveness” is always equated with what percentage of stocks the fund contains. At a young age, the most aggressive fund may contain 90% or more stocks. Even at retirement, an aggressive fund may still contain 75% stocks.
They make your nest egg safer as retirement approaches by automatically shifting from equities to bonds as you grow older, theoretically arriving at a perfect mix just in time for your retirement. “Safety” is always equated with holding more bonds and fewer equities.

When the market crashed in 2008-09, some of these target-date funds looked very inept. Losses were more severe than they should have been, especially for “I’m nearly retired” funds with short-term horizons. Either many of them did not keep the promise of shifting to bonds, or they did not do it fast enough, or it just plain did not work. “Target date funds have produced some troubling investment results,” said SEC Chairman Mary Schapiro in a June 2 speech before the subcommittee on Financial Services. “[The] varying strategies among these funds produced widely varying results. Returns of 2010 target date funds ranged from minus 3.6 % to minus 41%.” Obviously, retirees who lost 41% of their nest eggs in 2008-09, when they were expecting to retire in 2010, were catastrophically affected--especially when the third step of conventional retirement practice, namely selling off some of your nest egg each year, came into play.

In MPT, the hypothesis is that stocks are riskier than bonds, but that they hold the promise of better long-term returns. As the AAII says in its beginning investor series, “Stocks are more volatile than bonds, but have historically provided higher long-term returns.” Historical data supports this. It is hard to find a 30-year period, ever, that stocks have not outperformed bonds. But at shorter timeframes, stocks are considered riskier because of their price volatility. Thus the conventional wisdom is that the way to make your portfolio safer as you approach (or are in) retirement is by switching from stocks to bonds in your overall allocation.

As I stated in the last article, the problem I have with that thinking is that (1) it presumes that all retirement income will come from selling off assets, and (2) it ignores the fact that some stocks generate income themselves.

In the two AAII articles, there is not a single mention of dividend stocks as a separate asset class that may have different risk characteristics from all stocks as a class or bonds as a class. There is not even a suggestion that they might form a different category of stocks. The omission is puzzling, because stocks are traditionally sliced and diced into so many categories that supposedly offer different risk/reward profiles within the broad classification of “stocks.” Thus you get categories like U.S. Large-cap, Mid-cap, Small-cap; Foreign stocks, often nowadays themselves divided by size, country or region of the globe; Emerging markets; Value vs. Growth; and so on. But the simplest, most obvious categorization of all—do they pay a dividend?—is ignored.

It’s an important distinction. Dividend-paying stocks tend to move less (in both directions) than the market, meaning that they have a different risk/reward profile. Their dividends yield positive income even when their prices are falling. The companies that raise their dividends regularly tend to keep doing so even when the market as a whole is falling. The dividends themselves, being always positive (there is no such thing as a negative dividend), change the risk/reward profile. And studies show that the best overall returns come from dividend-raising stocks.

So the question begs to be asked: If the goal of a retirement nest egg is to provide its owner with sufficient income in retirement, and some stocks provide rising income streams by their very nature without the necessity of selling them, then why are those facts ignored in conventional retirement planning? Why are they ignored in asset allocation discussions?

It is certainly a paradigm shift to think of dividend stocks as a separate asset class, but for purposes of this article, that’s just what I am going to do. Here’s why: Traditional methods of classifying assets divide them into three major realms: Stocks, bonds, and cash. Stocks are evaluated on their prices; and bonds are evaluated on their yields. But dividend stocks have both characteristics: Their prices vary (but in a more muted fashion) with stocks generally. And their yields provide income, but with a growth kicker that most bonds don’t have—dividend-growth stocks are rising income instruments rather than fixed income investments. (In some texts, you will see the phrase “fixed-income investment” used interchangeably with “bond.”)

It’s almost like MPT has a huge hole in it. It does not miss the obvious income-producing ability of bonds—after all, that’s what a bond is, a debt instrument. The income it produces is interest on the money lent. MPT does not miss the price-appreciation potential of stocks, nor the short-term volatility they have displayed over the years. So why does MPT miss the income-producing ability of dividend stocks, the rising income-producing ability of habitual dividend-raisers like the Dividend Champions, or the muted price volatility that is characteristic of dividend stocks?

I cannot answer that question. But my conclusion is that for those who get it, dividend stocks, especially dividend-growth stocks, should not be lumped in with all stocks when it comes to making asset allocation decisions. A retiree’s portfolio can safely contain a higher percentage of dividend stocks than is normally associated with the low level of risk tolerance of a retiree. And the reason that is true is precisely because the dividend stocks throw off a continuing income stream and do not have to be sold to produce retirement income. Thus, maintaining a fairly high percentage of your retirement portfolio in well-selected dividend stocks is not too aggressive or risky for a retiree. It is safer.

Financing Retirement III: Turning Capital Into Income

2010-07-27T08:03:00.000-05:00

This is the third article in a series on financing retirement as seen by someone who is retired (me). It’s a view from the front lines. It is pragmatic, not academic.

To recap the first two articles:

• In “Thoughts on Financing Retirement I--Beware Rules of Thumb,” I made the point that in retirement, you need to generate the income needed to cover your expenses. There are many ways to generate income—consulting, part-time work, Social Security, pensions—that may be overlooked in conventional retirement planning. Of course, income from your assets is an important ingredient in the recipe.

• In “Financing Retirement II: What’s Your Number?,” I criticized the “maximize capital” approach to retirement planning, noting that the “number” to focus on is not the capital value of your nest egg, but rather its annual income-generating ability. The two are often assumed to be proportional, but they are not. I used myself as an example, noting that according to conventional calculators, I was years and more than $1,000,000 from being able to retire, whereas in fact I have been retired for almost 9 years and live comfortably.

In this article, I want to focus on that disconnect. I believe that it comes down to how capital in a nest egg becomes income in retirement. I will be careful here in my use of the word “assets.” It is tempting to use “assets” and “capital” interchangeably. But to do so is misleading, because it assumes that the only value of an asset lies in its price if sold, and thus that the only measure of its value is its price. That notion is incorrect.

In conventional retirement planning, there are three critical steps:

• Maximize your capital before you retire.
• Make your capital a lot safer as you approach retirement.
• In retirement, withdraw capital at a “safe” rate, typically figured to be 4% in the first year, then raised each year by 3% to account for inflation. That withdrawal converts what was capital into retirement income by the process of selling assets.

The problem I have with that thinking is this: It ignores the fact that some assets generate income themselves. They do not have to be sold to produce income. A few examples of such assets are:

• Pensions
• Social Security
• Annuities
• Bonds
• Dividend stocks

That is why it is important to distinguish assets from capital. The first two items above are not capital at all, but they generate income. They are truly assets: They are rights that you have acquired to receive income. If you have a pension, you earned it over time from your employer. You earned your right to Social Security payments in the same way, by working and contributing (along with your employer) to the system.

The last three items, on the other hand, are investments purchased with capital. Once purchased, they confer an important right: The right to receive an income stream.

• Annuities allow you to purchase that right from an insurance company for a price and fees that depend on your age, gender, the payout system you choose, etc. You never get your capital back, you trade it for the right to receive income for the rest of your life. (There is a useful annuity calculator at Immediate Annuities.com.) Assuming that the insurance company remains solvent, your right to the income is totally safe, except from inflation. The price you paid is totally gone.

• Bonds are also purchased with capital. Let’s assume that you invest only in “investment grade” bonds and hold them for income. The income they generate is as safe as with annuities. Instead of being for life, your right has a term limit stated on the bond, which is a contract of debt (you loaned your money to the bond issuer). Being fixed, the income stream is not safe from inflation. The capital you purchased the bonds with is safe in the sense that you will get it back at the end of the bond’s term, but its value will also have been eroded by inflation. So with investment-grade bonds, the income is safe, except from inflation. The principal is also safe, except from inflation.

• Stocks are also purchased with capital. Conventional wisdom is that they are far less safe than bonds, because their prices are volatile. Retirees who invested throughout their lifetimes mainly in stocks to maximize capital, and who then unfortunately suffer a significant loss in the value of their portfolio just before they reduced their stock exposure—because of, say, a bear market—are screwed. The income available from selling a percentage of their assets each year falls proportionately with their stock portfolio’s total price. Even after the stock exposure reduction, that percentage of your nest egg still in stocks is subject to the usual risks of the market.

But what if the stocks were well-selected—“investment grade”—dividend-growth stocks? Does the same misfortune happen? No.

• Dividend stocks generate income. Their value does not lie in their ability to be periodically sold off. Their true value lies in their ability to generate income on their own. In that respect, they are like bonds.

• But unlike bonds, dividend growth stocks are not fixed-income investments. Their yield on cost—which is comparable to the yield on bonds—goes up each time that they raise their dividend payout. They are rising-income investments. In fact, the income from investment-grade dividend growth stocks generally keeps up with or surpasses inflation.

• Unlike bonds, there is no term. Ideally, dividend-growth stocks can be held “forever.” You do not have to worry about the impact of inflation on your principal. An investment-grade dividend-growth stock whose price goes down does not necessarily reduce its dividend nor even stop increasing it. Scores of stocks have been raising their dividends for 25 to 50 years or more. They have done this since the Eisenhower administration, through every kind of economic condition—wars, recessions, inflation, stagflation. See the Dividend Champions document here that lists them.

• Finally, unlike bonds, over long periods of time, investment-grade dividend-growth stocks are likely to increase in principal value too. Every study that I have seen shows that dividend-growth stocks have the best total returns of all categories of stock.

Conventional wisdom is that a retiree’s stock-to-bond ratio should go way down as one approaches retirement age. The reason, of course, is that bonds are considered to be much safer than stocks. But are they? How do you weigh the safety of bonds’ principal and interest payments—both fixed and subject to the ravages of inflation—against dividend-growth stocks’ ability to raise their rate of return and potentially increase their principal value too? We are conditioned to think, when talking about safety, only of the principal (or capital) side of the equation. Subliminally, we fall into the “capital is everything” mind-set very easily.

But let’s raise that up to a conscious level and actually think about it. If you believe, as I do, that “it’s all about income” in retirement, then the safety we should be focused on is the safety of the income stream, including its safety from inflation.

Looking at dividend-growth stocks in this way is a paradigm shift. We are brought up and taught as investors to maximize that nest egg. But in retirement, it’s all about income. In a well-chosen ‘investment grade” dividend stock portfolio, very few stocks will fail to consistently increase their dividends each year. So the income stream goes up, in most years easily surpassing inflation. Even in bad dividend years for stocks generally (like 2009, when the total dividends paid out by the S&P 500 declined by billions), a portfolio of stocks chosen specifically for their dividend-raising prowess will throw off more dividends. I maintain a demonstration portfolio about this (see it at my Web site, Sensible Stocks.com), and in 2009, I received 19% more dividend dollars than in 2008.

Am I suggesting that conventional approaches to asset allocation in retirement—heavy on bonds, light on stocks—might be improved upon if the stocks in question are investment-grade dividend-growth stocks? Yes. And I am also suggesting that the income available for retirement from a portfolio that includes a heavy dose of excellent dividend stocks may exceed the income created by slicing off and selling a portion each year of a maximum-capital portfolio—even if the max-cap portfolio is significantly larger in size.

That may be why the retirement calculators tell me that I can’t retire until I accumulate $1,000,000 more—they don’t know about my dividend stocks. They didn’t ask.

In the real world, most retirees gather their income from a variety of sources. While the goal for dividend investors may be to live off of the dividends without selling off any of the base, the dividend stream may not be large enough. So some of the base—but far less than the “4% + inflation” standard—may be sold off to close gaps. There is an excellent recent article by Morningstar author Christine Benz that addresses how real retirees achieve the right balance: “Income or Total Return? Retired Investors Weigh In.” I highly recommend it.

Timing Outlook Remains Negative

2010-07-19T20:03:00.001-05:00

1. Summary

The market’s volatility has the Timing Outlook jumping around too. The last four readings have been negative-positive-negative-negative. Today’s value is 4.5, which is the same as last time, the second negative reading in a row, and the third negative reading out of the last four.

As mentioned last time, the Timing Outlook is least useful when the market is gyrating. My studies of the Timing Outlook’s performance show that it is least useful when the market is going back and forth every week or every other week. That’s the kind of market we have been in for almost threee months. If U means up and D means down, the last 10 weeks of market action have been U-D-D-U-D-U-D-U-U-D-U-D.

My Capital Appreciation Portfolio remains 100% cash. The market’s rally two weeks ago gave some hope that my criteria for re-entering the market might be close at hand, but last week’s drop pushed that prospect off for a while.

As usual, my Dividend Portfolio remains 100% invested. While its value has been dancing along with the market (but in a more muted fashion), its main goal—generating ever-increasing income streams—is still being met. None of the stocks in the portfolio has cut or frozen its dividend this year. Many have raised their dividends. The holdings are not protected by sell stops.

If you want to learn more about these two portfolios, use these links:
• To see the long-term total performance results of the two portfolios, click here.
• To see the strategy of the Dividend Portfolio, click here.
• To read a complete description of my e-book, THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks, click here.

Finally, as many of you know, I post articles on another investing site called Seeking Alpha. I recently posted two articles on Dividend Champions, which are stocks that have raised their dividends for 25 consecutive years or more. Here are links to those two articles:

• The Fourteen Highest Yielding Dividend Champions (July 2, 2010)--click here
• Nine Dividend Champions with the Fastest Rates of Growth (July 12, 2010)--click here

2. Market Performance Since Last Outlook
(“now” figures are as of close Monday July 19, 2010)

Last Outlook (6/27/10): 4.5 (negative)

S&P 500 last time (6/27/10): 1077
S&P 500 now: 1071 Change: -1%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1071 Change in 2010: -4%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1071 Change since 3/9/09: +58%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since the June 17 report discussed last time. Last week, Bart van Ark, Chief Economist for The Conference Board, stated in a press release that the rebound effects from the recession have almost entirely dissipated, and that a growth slowdown starting this summer is becoming increasingly apparent. The press release stated that GDP growth for the second quarter might turn out to be the highest for the year. The Conference Board is not predicting a double-dip recession, but rather continued slow growth for the rest of the year. Indicator remains neutral. +5

• Fed Funds Rate: No change. The Fed, through the release of notes from a previous meeting, also seems to be lowering its expectations for the speed of recovery. With near-zero Federal Funds rate, this indicator remains positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 14.3, down from 15.7 last time. That keeps this indicator in positive territory. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.93, down a couple more ticks from 0.95 last time. That keeps this indicator in the neutral range. +5

• S&P 500 Short Term Technical Trend: The market rallied July 6 through 13, pulling it above both its 20-day and 50-day simple moving averages (SMA). Then a sharp drop on Friday pulled it back. It finished today (Monday) below its 50-day and barely above its 20-day. So this indicator, which has been yo-yoing (just like the market) inches up from negative to neutral. +5

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its two longer SMAs (50-day and 200-day). The market action since last time has finally turned this indicator negative, as the 50-day SMA fell below the 200-day SMA 11 sessions ago. In many circles, this is known as a “death cross.” The configuration is thus: 200-day SMA > 50-day SMA > Index, the exact opposite of what you would like to see. +0

• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Neutral. +5

• DJIA Medium Term Technical Trend: Same as the S&P 500. The death cross occurred 11 sessions ago. Negative. +0

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: The death cross occurred four sessions ago. Negative. +0

TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE

Financing Retirement II: What's Your Number?

2010-07-15T09:40:00.001-05:00

This is the second article in a series on financing retirement that I'm planning to put together. My first post, "Thoughts on Financing Retirement, can be found just below this one. The idea of the series is to provide one person’s view of retirement from the front lines.

You have probably seen one of the cute ING commercials where everybody is carrying their “number” around. One person will be carrying $1,305,622. Someone else will be carrying $2,201,588.” One poor guy’s number is “$Gazillion.” It turns out that he really didn’t have a plan.

“The Number” has become the holy grail in retirement planning. ING says that “Every person has one,” and defines it as “The amount you will need to have saved to retire the way you want.” On their home page, they show an example that changes each time the page is accessed. When I went there, the number was $1,280,385. It was festooned with little notes like, “Sally found her number,” “Now that I’ve found my number, I’m one step closer to retirement,” and “Bringing my lunch to work will save me $222,158 over 40 years.”

The implication is obvious. If you haven’t saved “your number” by the time you retire, you’re screwed. You can’t have the retirement you want. Or you just can’t retire. ING provides a little calculator for you to find YOUR number. Just fill in your age, current income, how long you want the money to last, etc., and your number pops up (cleverly in the same font and orange color as in the commercials). I did it, and discovered two things:

I need more than twice as much as I’ve got; and
I can’t retire unless I accumulate well over $1,000,000 in one year.

But the facts are these: I have BEEN retired for almost ten years, and my wife and I live extremely comfortably. Lack of money will not stop me from doing anything on my bucket list. There’s obviously a disconnect. ING is clearly wrong, at least in my case, because I am already living the life they say I can’t have.

I don’t know how their calculator works, but I’ll bet they are making some of the assumptions that I criticized in my first article. Assumptions that lead to a distorted view of how retirement really works.

In that first article, I said, “It’s all about income.” Meaning that, in retirement, you need to generate the income needed to cover your expenses. And that, I think, is the disconnect: Calculators and general rules of thumb focus on the sum total they think you’ll need to generate the income you require. But there are so many ways to generate income that they overlook some, and in many cases they also make the mistake of over-estimating how much you will need. So they might say you need $2,380,507, when in fact you only need half that much.

In short, they’re focusing on the wrong number. They’re focusing on an amount of capital to fund “the retirement you want.” But they should be focusing on the annual income needed to live the retirement you want. So the characters in the ads should be carrying around numbers like $80,000, or $120,000. Not numbers in the millions or a gazillion.

In the first article in this series, I made reference to an article, “Why I Love Dividends, that appeared on another financial site, and to the comments it generated. One thread of the comments revolved around the capital versus income distinction. What I will call the pro-dividend crowd argued that dividends themselves can fund or help fund retirement. The pro-capital-retention crowd argued that one should aim to let his/her capital grow as much as possible, then sell some assets each year to fund retirement.

In the context of the current question—are you looking at the right number?—I think that this debate mirrors the disconnect between the ING ads and my point that it all comes down to income. The ING approach must assume that capital will be converted to income by selling off some assets each year. After all, your grocer will not accept a framed “$2,380,507” in payment for your tomatoes. He/she wants money, not a printout of your assets.

In my earlier article, I suggested that each person should create a retirement budget, showing the annual income needed to “retire as they want.” Then list the sources of income—a part-time job, pension, social security, dividends, interest, and the like. Only when a gap needs to be bridged—when the various sources of income don’t meet your retirement budget—do you need to sell off part of your assets. And—gasp—if you have been purchasing dividend growth stocks for many years, it is entirely possible that the yield of those stocks may have reached doouble-digits based on what you originally paid, and that they alone may be generating so much income that there is no gap that needs to be bridged.

I am no fan of annuities, but an annuity is a vehicle that converts capital to an income stream. Using the simple calculator at Immediate Annuities, one can see that you could generate $2000 per month by making a one-time payment of $326,428 (for a 64-year-old male in New York) to an insurance company. The fine print: This buys a “Single Life Income with No Payments to Beneficiaries….You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries.”

Let’s say you have a pension that pays you $2000 per month. Many boomers have pensions from private companies. So do cops, firemen, teachers, and other former public employees. Using the same calculation, you can see that the pension is the equivalent of having $326,428 more capital than you actually have. Social Security is another income stream with a capital equivalent. It is by figuring things like this into your retirement planning that the gap is bridged between ING’s huge, scary number needed for retirement and the more commonsense annual retirement budget that actually funds “the retirement you want.”

Thoughts on Financing Retirement I--Beware Rules of Thumb

2010-07-07T09:39:00.002-05:00

It is natural that many readers of investment sites are shooting for a retirement goal. You want to achieve a comfortable, secure retirement, with confidence that they can live at a lifestyle of your choosing without running out of money.

I have been retired for nine years. I was fortunate to be able to retire early (age 55) and turn more of my attention to one of my passions, which is helping other people through my writing about stock investing. Other passions include my wife and activities with her, golf, gaming (poker and blackjack), and the Buffalo Bills (don’t ask).

When I was planning to retire—or more correctly, exploring whether I would be able to retire—the first step was to learn more about financing retirement. One thing that I decided quickly was that in retirement, it’s all about income. I mean that when you are retired, you need income—money coming in—that covers your expenses. You will need that income for the rest of your life, which may be a long time, potentially longer than you worked at your principal career. So when you are exploring retirement, the first two questions become, how much will you need, and where will it come from?

On the first question, I quickly decided that conventional rules of thumb, like “You will need 70% of your final year’s income,” are worthless. That particular canard fails on at least two levels. First, it presumes that you were spending all of your income in your last year of work. But more likely, you were saving a good portion of your income as you came into the home stretch prior to retirement. So the amount you were making in that final year probably bears little relationship to what you will actually need. Second, your expenses can change significantly the day you retire. I had a position that required formal business clothing. Since the day I retired, I have not worn a suit, and I only wear ties to weddings and funerals. That entire expense category disappeared. The “savings” category disappeared. On the other hand, I spend more now on golf equipment and greens fees.

So instead of scaring yourself silly with the 70% rule, create a retirement budget. We like to travel, so that’s part of the budget. I don’t care about having a new car every few years, so that’s gone, along with the business clothing. We paid off our house, that expense is gone. Senior discounts make a little dent. You may be surprised that your retirement budget comes in at far less than the 70% rule would have led you to believe. The point is, everyone’s circumstances are different. You cannot rely on a crude rule of thumb to estimate your expenses. You’ve got to sit down and work them out yourself.

The second question is, Where will it come from? Here, you need to list all the sources at your disposal:

• A pension. Many baby boomers, who are just starting to retire, have traditional pensions. The percentage goes down as you move back to younger people.

• Social Security. There are lots of options on when to begin taking SS, and there are tradeoffs between waiting longer versus taking a smaller amount sooner. Remember that SS is indexed to inflation these days.

• Part-time work. Many retirees don’t fully retire. They make some money through consulting, contract work, part-time jobs, or by converting a hobby into an income-producing little business.

• Your investments.

I wrote an article in February, “Why I Love Dividends,” that appeared on an investment Web site called Seeking Alpha. There, it spawned a lively discussion (over 110 comments to date), and one of the branches of the discussion is directly on point here. The debate was whether it is better to derive your retirement income from income-producing investments, or to create it by selling off part of your investments each year.

The rule of thumb on selling part of your investments to finance retirement is that the “safe” thing to do is to calculate 4% of your investments when you retire, and that’s the amount you can sell each year with confidence that you will never run out of money. You are supposed to increment that amount each year to account for inflation—commonly by increasing it 3% each year. The rule of thumb presumes that you have a well-diversified portfolio under the standards of Modern Portfolio Theory, and I believe the 4% “safe” figure has been validated by millions of Monte Carlo tests to about a 95% confidence level that your money will never run out.

Once again, I find the rule of thumb wanting. For one thing, you may not need 4% per year to round out your retirement budget. That doesn’t create a problem. But you may need more, in which case the experts I’ve read disagree on what you should do (delay retirement, lower your budget, get part-time work, withdraw 5% or 6% per year, etc.). But something must be done. I just heard of a study that found that many retirees blow through their 401(k)'s in five years or less. Clearly that is unacceptable.

A second disconnect for me is the 3%-per-year inflation adjustment. As discussed earlier, your retirement budget is unique to you. Your personal “basket of goods and services” probably bears little relationship to the government’s basket when they are figuring inflation. The costs of travel have gone down, not up, since I have been retired. Furthermore, the automatic adjustment ignores the performance of your investments. I think that’s a big flaw. What I have been doing is adjusting the 4% base amount not by inflation, but by how our investments have actually performed. I withdraw 1% per quarter of what’s actually there. If the total value of our investments has gone up, the withdrawal amount goes up a little. If the investments have declined, the withdrawal amount goes down. The change is at the margin and has been no trouble to absorb. But over time, I think it makes the 4% rule a lot safer to adjust it by how your investments are actually doing than to just automatically bump the withdrawal amount up each year and ignore what’s happening in the real world.

Frequent readers who know my appreciation for dividend investing may be wondering why I just don’t take my dividend money directly. I see this article as the first of an occasional series on retirement realities. In a future article, I will explore my reasons for using a quarterly-withdrawal system. Hint: The dividends help fuel it.

Timing Outlook Turns Negative Again

2010-06-28T08:45:00.001-05:00

1. Summary

The market’s gyrations have the Timing Outlook gyrating too. The last three readings have been negative-positive-negative. Today’s value is 4.5, which is negative.

(Click on chart to enlarge it.)

As shown in this year-to-date chart of the S&P 500, the market has continued its volatile behavior. “Big” moves (more than 10 points, up or down, on the S&P 500) have characterized the market’s daily performance for almost two months. Look at all the “long” candlesticks, each one of which represents a single day’s trading. Contrast them with the smooth upward glide from February 8 to April 12.

Some things to note from the chart, none of them good.

• There have been several crosses of lines in the past two months. First, we see the index itself cross downward through its 20-day, 50-day, and 200-day simple moving averages (SMA). Then the 20-day SMA crosses downward through the 50-day and 200-day SMAs. The only remaining “death cross” would be to see the 50-day SMA cross downward through the 200-day SMA.

• Focusing on the latter, the 50-day SMA (now at 1128) is rapidly falling toward the 200-day SMA (now at 1112). In mid-May, the 50-day was 7% above the 200-day. That difference has shrunk to 1%.

• The red line (200-day SMA) has gone nearly flat from a clearly ascending mode not that long ago.

The Timing Outlook is least useful when the market is gyrating. As noted earlier, the last three readings have been negative-positive-negative. The Timing Outlook attempts to answer the question, In what direction will the market or individual stock go over the next 2-4 weeks? My studies of the Timing Outlook’s performance show that it is least useful when the market is going back and forth every week or two. That’s the kind of market we have been in for more than two months. If U means up and D means down, the last 10 weeks of market action have been U-D-D-U-D-U-D-U-U-D.

As frequent readers know, I use an additional set of criteria to help determine when to re-enter the market when one is in cash. These criteria require a general up-trend in the market over the past 2-3-4 weeks and also require that 2/3 of the trading days be positive rather than negative. As you can see just from glancing at the chart, there has not been a time since late April when either requirement was satisfied. (For a full discussion of the criteria for re-entering the market, see the article here.)

My Capital Appreciation Portfolio remains 100% cash. It will remain that way until the entire market—or an individual stock—displays charts, fundamentals, and valuations that suggest a positive outcome.

As usual, my Dividend Portfolio remains 100% invested. While its value has gone down over the last couple of months, its main goal—generating ever-increasing income streams—is still being met. None of the stocks in the portfolio has cut or frozen its dividend this year. Many have raised their dividends. That's the goal of this portfolio. As long as a stock continues to foster success of the Dividend Portfolio's central mission of increasing dividends, it will not be sold. As dividends accumulate, I will re-invest them.

If you want to learn more about these two portfolios, use these links:

• To see the long-term total performance results of the two portfolios, click here.

• To see the strategy of the Dividend Portfolio, click here.

• To read a complete description of my e-book, THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks, click here.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday June 25, 2010)

Last Outlook (6/12/10): 6.0 (positive)
S&P 500 last time (6/12/10): 1092
S&P 500 now: 1077 Change: -1%%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1077 Change in 2010: -3%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1077 Change since 3/9/09: +59%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: A new report on June 17 showed an increases in this index, following a drop (later revised to flat) the prior month. That keeps this indicator at neutral, as I require three consecutive months of either increases or decreases to rate it as positive or negative. "The index points to continued, though slower, U.S. growth for the rest of this year," said Bart van Ark, chief economist of The Conference Board. "Public debt and deficits weigh heavily on growth prospects on both sides of the Atlantic." Neutral. +5

• Fed Funds Rate: At its meeting last week, the Fed has left rates near zero again. I have been saying for several months that the Fed will not change rates as long as the economic recovery remains slow and inflation remains low. In its statement last week, the Federal Open Market Committee (FOMC) maintained its "extended period" language (referring to how long it expects to keep interest rates low). The tone of the Fed's statement was not very upbeat: "Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months." The FOMC also noted that "underlying inflation has trended lower." Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 15.7, unchanged from last time. That keeps this indicator in positive territory. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 0.95, down a tick from 0.96 last time. That keeps it in the “fairly valued” band of plus or minus 10% of 1.00. Neutral. +5

• S&P 500 Short Term Technical Trend: Last week’s 4% fall in the S&P 500 pulled the index below its 20-day SMA. Looking at the two shorter SMAs that I use for this indicator (20-day and 50-day), the chart is the exact opposite of what one would like to see: 50-day SMA > 20-day SMA > Index. That renders this indicator negative. +0

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its two longer SMAs (50-day and 200-day). This indicator remains ambiguous and therefore neutral: 50-day SMA > 200-day SMA > Index. It should be noted that the 50-day SMA is no longer very far above the 200-day SMA. If the index continues generally downward, the configuration will become totally negative, as a “death cross” will occur if the 50-day passes downward through the 200-day. As mentioned in prior posts, for many technical analysts, this chart already is quite negative by the simple fact that the index itself is below its 200-day SMA. +5

• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Negative. +0

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart, while tighter than the other two, nevertheless has the same configuration. Negative. +0

• NASDAQ Medium Term Technical Trend: Looks like the other two. Neutral. +5

TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE

Timing Outlook Returns to Positive Value (Corrected)

2010-06-12T19:04:00.003-05:00

1. Summary

(Note: The original version of this article incorrectly stated the Timing Outlook's value as 5.0. It is 6.0.)

The Timing Outlook increases from its last reading (4.5 or "negative") to 6.0. That is a “positive” reading.

The market has recently continued its volatile, hair-trigger behavior. “Big” moves (more than 10 points on the S&P 500) have characterized the market’s daily behavior for well over a month. They have occurred on the majority of trading days.

That has been well documented, so for a change of pace, let’s step back to see the long-term forest instead of the daily trees. The accompanying chart shows the S&P 500 weekly (instead of daily) for the past two years. The simple moving average (SMA) lines are for 10 weeks (about equal to 50 trading days, shown in blue) and 40 weeks (about 200 trading days, shown in red). This kind of chart provides an extreme smoothing of the market’s activity.

(Note to subscribers: If you are having trouble reading this chart in your email, simply click on the title at the top to go to the actual Newsletter. There, you can click the chart to enlarge it.)
Three things jump out at me from this chart.

• First, the blue line (10 weeks or 50 days) has just logged its longest period of descent (about 6 weeks) since the 2009 bull market began in March, 2009.

• Second, the red line (40 weeks or 200 days) has flattened from a clearly ascending mode. It looks like it may be at an inflection point, about to turn downward.

• Third, the past 6 weeks look qualitatively different from any other time-period since the rally began. The market has turned in a downward performance for a fairly significant length of time.

One conclusion might be that the rally that began in 2009 is exhausted, and that it may be turning over to a flat or down market. That said, no one can predict the future, and what looks like an inflection point may be no more than a pause. We won’t know until after it happens.

The Timing Outlook uses a blend of technical and fundamental information. The two forms of analysis really cannot be separated for me; each has its place. The goal, of course, is simple: To own stocks when they are going up, and to not own them when they are going down.

The word “when” in the preceding sentence is what makes things tricky. It is impossible to separate the simple own-or-don’t-own goal from what might be called a “prediction time-frame.” My prediction time-frame is 2 to 4 weeks. That is, the Timing Outlook attempts to answer the question, In what direction will the market or individual stock go over the next 2-4 weeks? Everybody’s prediction time-frame differs. For a day trader, it is shorter than a day. For a long-term holder, it is measured in years. Anything that happens in a shorter period than your prediction time-frame can be regarded as noise, meaning that it can be regarded as a mere fluctuation rather than an investable trend.

In real life, of course, everybody’s total investing time-frame covers many years. You chain together your prediction time-frames and/or your holding periods to get to your total results over your investing lifetime.

My Capital Appreciation Portfolio remains 100% cash at this point. It will remain in cash until the entire market—or an individual stock—displays charts, fundamentals, and valuations that suggest a positive outcome. I take this binary approach—in or out, invested or in cash—because it strikes me as the easiest way to manage the risk inherent in stock ownership when the goal is to buy low and sell high. It is neither a bullish nor bearish approach—it is simply pragmatic.

On the other hand, my Dividend Portfolio remains 100% invested. This seemingly contradictory position compared to the Capital Appreciation Portfolio is not contradictory at all. It is the result of utterly different strategies. In the Dividend Portfolio, the main goal is not to buy low and sell high. Rather, it is to generate an ever-increasing stream of dividend income. The holdings are not protected by sell stops. If you want to learn more, use the following links:

• To see the long-term total performance results of the two portfolios, click here.

• To see the strategy of the Dividend Portfolio, click here.

• To read a complete description of my e-book, THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks, click here.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday June 11, 2010)

Last Outlook (5/21/10): 4.5 (negative)
S&P 500 last time (5/21/10): 1088
S&P 500 now: 1092 Change: +0%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1092 Change in 2010: -2%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1092 Change since 3/9/09: +61%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed a drop from the prior month, the first decline in a year. That lowered this indicator to neutral, where it will stay until there are three consecutive months of either increases or decreases. Neutral. +5

• Fed Funds Rate: The Fed has left rates near zero for many months. It seems clear that the Fed will not change rates as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 is 15.7, practically unchanged from last time. That keeps this indicator in positive territory. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph (which it calculates by comparing the prices of the stocks in its universe of about 2000 stocks to its analysts' "fair alue" for each stock) is at 0.96, also practically unchanged from last time. That keeps it in the “fairly valued” band of plus or minus 10% of 1.00. Neutral. +5

• S&P 500 Short Term Technical Trend: All three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) had a snapback rally last week, causing each index to rise just slightly above its 20-day SMA, while remaining below its 50-day and 200-day SMAs (simple moving averages). Looking just at the two shorter SMAs, the charts are in an ambiguous configuration: 50-day SMA > Index > 20-day SMA. That makes this indicator neutral. +5

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its two longer SMAs. This indicator remains ambiguous and therefore neutral: 50-day SMA > 200-day SMA > Index. As mentioned last time, many technical analysts use only the 200-day SMA, and they would interpret the index being below it as a huge negative sign. +5

• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Neutral. +5

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart is the closest to turning positive using the two shorter-term SMAs. The index is at 2243.6, while the 20-day SMA is just above it at 2244.8. The lines not having crossed (and there is no guarantee that they will), this indicator is like the other two, neutral. +5

• NASDAQ Medium Term Technical Trend: Looking at the two longer SMAs, the index has passed back above its 200-day SMA (just barely). The configuration is 50-day SMA > Index > 200-day SMA. It’s still neutral here, but some technical analysts would say it has turned positive because of the clearance of the 200-day SMA. +5

TOTAL POINTS: 60
NEW READING: 60 / 10 = 6.0 = POSITIVE

Timing Outlook Turns Negative

2010-05-23T14:22:00.001-05:00

1. Summary

Normally I prepare these reports every other week, but last week’s action pulled The Timing Outlook below 5.0 into negative territory. It now is 4.5. So consider this to be a special report.

Last week, the market continued its “basically haywire” activity from the preceding two weeks, with two big down days and one big up day, netting out to a weekly loss of 4%. In the last four weeks, the S&P 500 has lost 11%. Volatility continues to be very high, with “big” moves (more than 10 points on the S&P 500) in 14 of the last 18 trading sessions. In 12 of those 18 sessions, the market declined. Average daily trading volume has remained elevated, as it tends to be when the market is unstable. Average daily volume has generally been higher on down days than on up days, which most technical analysts consider to be a negative sign.

The market is now underwater for the year, down 3%. The 11% loss over the past four weeks qualifies as an official “correction” in Wall Street parlance, being larger than -10%.

There is no change in the status of my Capital Gains portfolio: It is 100% in cash. Everything sold off during the swan dive on May 6. The portfolio will stay in cash unless and until the market clearly shows a reversal. My criteria for re-entering the market are explained in this article. In a nutshell, it will take 2-3-4 weeks of a rising market to lure me back in.

What’s going on? For one thing, the Conference Board’s Index of Leading Economic Indicators fell last week for the first time in 12 months. That may be a one-month statistical aberration, or it may portend a double-dip recession. For another, worries about the financial situation in Europe seem to be overwhelming the generally good news from earnings season, which is winding down. Many market participants may feel the market had become overvalued and needed a correction. The employment situation remains stubbornly unsatisfactory, the housing market is not recovering very fast (if indeed it is recovering at all), and the uncontained oil spill in the Gulf has everybody in a bad mood.

Unlike the 100% cash position in my Capital Gains Portfolio, my Dividend Portfolio is fully invested. That is because the focus there is on rising dividend streams, not on the prices of the stocks. Of the 40 stocks in my e-book, THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks, 23 have already raised their dividend in 2010 (two have done it twice), and none has dropped its dividend. So the Dividend Portfolio is doing what I ask it to do, which is to generate rising streams of income.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday May 21, 2010)

Last Outlook (5/14/10): 5.0 (barely positive)

S&P 500 last time (5/14/10): 1136
S&P 500 now: 1088 Change: -4%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1088 Change in 2010: -3%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1088 Change since 3/9/09: +68%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: For the first time in a year, the LEI dropped from the prior month. That lowers this indicator from positive to neutral. (I require three consecutive increases or decreases to rate this as positive or negative.) Neutral. +5

• Fed Funds Rate: The Fed has left rates near zero for months, and it seems clear that the Fed will not change rates as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): As the market continues to fall, its valuation continues to improve, especially with the favorable earnings season. Prices down and earnings up equals an improving market valuation. Morningstar shows the current P/E of the S&P 500 is 15.6, down from 16.6 just a week ago. This keeps it in positive territory. +10

• Morningstar’s Market Valuation Graph. Similar to the valuation of the market based on its P/E ratio, Morningstar’s proprietary market valuation graph has been improving. It falls from 1.00 last time to 0.95 this time. That keeps it within the “fairly valued” band that I use, which is plus or minus 10% of 1.00. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) continued to deteriorate since the last report a week ago. Each index is now well below its 20-day SMA and each has also fallen below its 50-day SMA. So just looking at the two shorter SMAs, the charts are in their least favorable configuration: 50-day SMA > 20-day SMA > Index. Negative. +0

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its 50-day and 200-day SMAs. This indicator remains neutral: 50-day SMA > 200-day SMA > Index. However, note that many technical analysts use only the 200-day SMA, and they would interpret the index falling below it as a huge negative sign. Under the Timing Outlook’s approach, this indicator remains neutral, and it will remain so unless the 50-day SMA falls below the 200-day SMA. +5

• DJIA Short Term Technical Trend: This chart looks basically like the S&P 500 chart. Negative. +0

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart looks like the other two. Negative. +0

• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5

TOTAL POINTS: 45
NEW READING: 45 / 10 = 4.5 = NEGATIVE

Timing Outlook Declines Again

2010-05-15T15:10:00.001-05:00

1. Summary

The Timing Outlook declines to 5.0 from 7.5. This is the lowest possible positive reading; if it were 4.9, it would be negative.

The last two weeks, the market basically went haywire, down 9% the week before last and up 2% this past week (ending on Friday, May 14). Volatility has increased sharply, with “big” moves in 11 of the last 14 trading sessions. In 9 of those 14 sessions, the market declined. Average daily trading volume has increased quite a bit, as it tends to do when the market gets unsteady, especially on “down” days.

On this 6-month chart, a red bar indicates a down day and a white bar indicates an up day. The 20-day SMA (simple moving average) is in green; the 50-day SMA is in blue; and the 200-day SMA is in red. Daily volume is shown in the bar charts along the bottom. (Click on the chart to enlarge it.)

For the year, the market has registered 11 up weeks, 6 down weeks, and 2 with negligible change. In the past two weeks, the market lost 9%, then gained 2%. Since the report two weeks ago, the market’s gain for the year dropped from +6% to +2%, and its gain from March 2009’s lowest point dropped from +75% to + 68%.

The sell-stops in my Capital Gains portfolio were hit, everything sold off, and the portfolio is now 100% in cash. Despite the barely “positive” reading of this Timing Outlook, I will not venture Capital Gains money back into the market while it is acting as it has the past couple of weeks. My criteria for re-entering the market include having two-thirds of recent trading sessions be positive, and the market’s back-and-forth daily swings do not come close to satisfying that criteria. See this article for an explanation of my entry criteria and further comments on recent market action.

The earnings season has been a very good one in terms of companies beating expectations and registering positive earnings and revenue gains compared to the same quarter a year ago. But that positive news has been overwhelmed by the negative news from Europe. Greece got saved from probable default by a massive rescue plan, but the positive effect on the markets lasted just a day. Two other countries—Spain and Italy—are teetering on financial crises of their own. The fear is that there will be a European repeat of the financial crisis that engulfed the U.S. in 2007-2008. One might think that Europe’s problems would not affect American markets, but “The World Is Flat” now, everything is interconnected, and Europe’s problems most definitely affect our markets.

My Dividend Portfolio does not depend on the direction of the market. Rather, it focuses on collecting and re-investing rising dividends. Use this link to view the holdings and performance of both portfolios. For a description of the book on which the Dividend Portfolio is based, see THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Timing Outlook
(“now” figures are as of close Friday May 14, 2010)

Last Outlook (4/30/10): 7.5 (positive)
S&P 500 last time (4/30/10): 1187
S&P 500 now: 1136 Change: -4%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1136 Change in 2010: +2%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1136 Change since 3/9/09: +68%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time, when the 12th consecutive monthly increase was recorded. Positive. +10

• Fed Funds Rate: The Fed has left rates near zero for months, and I believe that the Fed will not change rates as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 has been dropping for the past few weeks. As of Friday’s close, it is 16.6, down from 19.1 last time. This takes it below 17.1, which is my dividing line between neutral and positive. This indicator becomes positive for the first time in many months; it had been stuck in neutral. +10

• Morningstar’s Market Valuation Graph. This indicator had been slowly climbing along with the market since mid-February. But the market’s drop over the past four weeks, along with increased earnings being reported, have combined to bring the level down to 1.00, which is exactly “fairly valued” under the Morningstar system. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) continued to deteriorate since the last report. Each index is now well below its 20-day SMA and each has also fallen below its 50-day SMA. That pulls the short-term trend indicators down from neutral to negative, because each index is now below their respective 20-day and 50-day SMAs. +0

• S&P 500 Medium Term Technical Trend: The mid-term indicator uses the index plus its 50-day and 200-day SMAs. This indicator falls from positive to neutral with the drop of the index below its 50-day SMA. +5

• DJIA Short Term Technical Trend: As stated above, the DJIA’s chart looks like the S&P 500’s chart. Negative. +0

• DJIA Medium Term Technical Trend: Same as the S&P 500. Neutral. +5

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart looks like the other two. Negative. +0

• NASDAQ Medium Term Technical Trend: Same as the other two. Neutral. +5

TOTAL POINTS: 50
NEW READING: 50 / 10 = 5.0 = POSITIVE (BARELY)

Thoughts on the Market

2010-05-11T12:50:00.006-05:00

Last Thursday's bizarre decline in the stock market--the source of which has still not been found, to my knowledge--comes in the midst of a period when the stock market has been showing increasing volatility. "Volatility" means the characteristic of a security or market to rise or fall sharply in price in a short time period. These periods usually come in bunches, so you get an up-down, see-saw effect. Volatility is usually the result of fear, or more accurately fear and greed fighting each other--between investors, or even within the mind of a single investor. These days, with so many trades generated by computer, it can be the result of programs designed to kick off massive selling or buying when certain trigger points are reached. Often (but not always), when the volatile period ends, you find that the price is lower than when it started, meaning that fear must have predominated overall.

This chart of the S&P 500 since mid-November shows what I am talking about. Notice the volatility and overall drop that took place between early January and early February. (Click on the chart to enlarge it; use the back button to come back to the article.)

Then, notice the relatively smooth climb starting on February 9 to about mid-April. Since then, it's been very volatile. On the chart, red indicates a day that the market fell, white a day that the market rose. Counting back the last 18 sessions and using "U" for up and "D" for down, we have D-U-U-D-U-U-D-D-U-U-D-U-D-D-D-D-U-D. That's volatility, folks, and during its course, the market has fallen. In fact, it crashed through its 20-day (green line) and 50-day (blue line) simple moving averages.

In my Capital Appreciation Portfolio, my 6% sell stops got taken out, of course. The portfolio is 100% cash right now.

Back in March, I wrote about what kind of pattern I look for to consider investing back into the market after going to cash. (You can see the full article here.) In summary, here are the qualifications for an "investable uptrend" in my book:

>>9% rise over two weeks, with at least 7/10 days positive
>>3% rise over 3 weeks, with at least 10/15 days positive
>>4% rise over 4 weeks, with at least 14/20 days positive
>>5% rise over 5 weeks, with at least 17/25 days positive
>>Etc.

So you can see that a highly volatile period such as we are in right now does not qualify for re-investment. Yesterday's quick snapback was followed by a small drop today. In my book, there is no current trend; if anything, it is down.

My approach does cause me to miss some upside coming out of a decline that takes out my sell-stops. It takes at least two weeks, usually three or four, before I will begin re-investing, and I will miss the gains that occur while I am waiting for those parameters to be established. But that is a risk I am willing to take in order to miss severe downslopes that, over long periods of time, tend to do more damage to a portfolio than the missed upslopes tend to help it.

Timing Outlook Declines Along With Market, But Remains Positive

2010-05-01T10:54:00.001-05:00

1. Summary

The Timing Outlook declines to 7.5 from 9.0. This is a mid-range positive reading.

This past week, the market registered its first real “down” week since February, dropping more than 2%, with two very bad days and one very good day. With P meaning a positive week, N a negative week, and 0 = no change (less than ½ of 1%), here is what the market has done in 2010: P-N-N-N-N-P-P-0-P-P-P-P-P-P-0-P-N. That’s 10 up weeks, 5 down weeks, and 2 with negligible change. The market is up 6% in 2010 and 75% since March 2009’s lowest point.

Market action over the past couple of weeks has gotten more volatile and shaky. There have been three large “down” days (declines of more than 1%) in the past 11 trading sessions, including two this past week (on Friday, the market dropped 1.7%). Average daily trading volume has increased, as it tends to do when the market gets unsteady. Friday’s declines pulled all three major indices below their 20-day moving averages (SMA), which is the reason for the decline in the Timing Outlook reading from 9.0 last time to 7.5 today.

Because I am not a day-trader, I don’t feast on volatility, so I am less comfortable with this kind of market than with a “boring” steady one. (If the market went up 1/8 percentage point per session for the rest of my life, I would be very happy.)

The earnings season is in full swing, and it is again a good one, with about 80% of companies beating expectations so far. On the negative side, news about Goldman Sachs continues to be bad and ubiquitous: Congressional hearings; word of possible criminal charges; and the SEC civil fraud charges from a couple weeks ago. Greece’s financial situation—and its potential “contagion” to other countries in Europe—also seems to be worrying investors quite a bit. BP’s oil spill in the Gulf of Mexico has affected certain stocks individually as well as placing an overall negative cast on the daily news.

My Capital Gains Portfolio remains fully invested. Its 6% sell-stops have been eroded by about 2-3%, but they have not been hit. The portfolio’s holdings and performance will be updated for May on my Web site by the end of the weekend. Click here to check it out. Be sure you have your own sell-stops (or other exit strategies) in place.

My Dividend Portfolio’s management does not depend on the direction of the market. Rather it focuses on collecting and re-investing rising dividends. Use this link to view its holdings and performance. For a description of the book on which the Dividend Portfolio is based, see THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday April 30, 2010)

Last Outlook (4/16/10): 9.0 (positive)
S&P 500 last time (4/16/10): 1192
S&P 500 now: 1187 Change: -0%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1187 Change in 2010: +6%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1187 Change since 3/9/09: +75%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: Report two weeks ago indicated the 12th consecutive monthly increase. Positive. +10

• Fed Funds Rate: The Fed met this week and left the Fed Funds rate near zero, so this indicator stays positive. There was no important change in the accompanying statement, and Chairman Ben Bernanke has made copious statements suggesting that the Fed will keep interest rates at rock-bottom levels for a while longer. My interpretation: The Fed will not change rates as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 based on operating earnings as 19.1, down from 20.0 last time, and well within the “fairly valued” neutral zone. +5

• Morningstar’s Market Valuation Graph. This indicator had been slowly climbing along with the market since mid-February. The market’s flattening over the past two weeks, along with increased earnings being reported, have brought the level down from 1.07 to 1.05, still within the “fairly valued” band of 0.9 to 1.1. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) deteriorated since the last report, with each index dropping below its 20-day SMA. That dropped all three of the short-term trend indicators to neutral from positive. Each index lines up the same way: 20-day SMA > Index > 50-day SMA > 200-day SMA. So this short-term technical indicator is now neutral, as are the two others. +5

• S&P 500 Medium Term Technical Trend: This mid-term indicator uses the index plus the 50-day and 200-day SMAs. All three medium-term indicators remain positive, with each index above its 50-day SMA, which in turn is above the 200-day SMA. +10

• DJIA Short Term Technical Trend: As stated above, the DJIA’s chart looks like the S&P 500’s chart. Neutral. +5

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart looks like the other two. Positive. +5

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 75
NEW READING: 75 / 10 = 7.5 = POSITIVE

Positive Timing Outlook Remains at 9.0

2010-04-18T12:05:00.004-05:00

1. Summary

The Timing Outlook remains at 9.0, which is a strong positive reading.

As regular readers know, I have been tracking weekly movements in the market this way: P = positive week, N = negative week, and 0 = no change (less than ½ of 1%).

Here is what the market has done in 2010: P-N-N-N-N-P-P-0-P-P-P-P-P-P-0. That’s 9 up weeks, 4 down weeks, and 2 with negligible change. Netted out, the market is up 7% in 2010 and 76% since March 2009’s lowest point. In other words, we have had a 13-month bull market with a nearly uninterrupted 76% rise. This has been one of the best stock investment opportunities in a generation.

The new earnings season kicked off last week. Thirty-seven US companies reported earnings; 73% of them beat consensus earnings expectations and 79% beat revenue expectations. The big star was Intel (INTC), which beat on both earnings and revenue and also raised its guidance for the yearr.

The earnings season will hit full stride next week, with more than 100 of the S&P 500’s companies reporting. Financial companies will be in the spotlight with Citigroup (C), Goldman Sachs (GS), Wells Fargo (WFC), Capital One (COF), American Express (AXP), Travelers (TRV), and many others reporting.

Goldman Sachs, of course, hit the newswires in a major way at the end of last week, charged by the SEC with fraudulent marketing of mortgage-backed securities. That helped lead to a 13% drop in GS on Friday. It also fueled a selling binge that brought the major indices down more than 1% each on Friday, knocking out what would have been the 7th consecutive positive week for the indices.

The AP had an article on Saturday that the SEC’s action could “unleash a torrent of lawsuits.” That may not be good news for stock investors, as traditionally, Wall St. hates uncertainty, and lawsuits create uncertainty. Perhaps the damage will be confined to the large banks, but it spread across all sectors on Friday.

In addition to the financials, other notable companies scheduled to report this coming week include IBM (IBM), Apple (AAPL), Coca-Cola (KO), Johnson & Johnson (JNJ), United Technologies (UTX), Microsoft (MSFT), Amazon.com (AMZN), and Verizon (VZ).

As reported last time, my Capital Gains Portfolio is fully invested, protected to the downside with 6% sell-stops. Check out its holdings and performance by clicking here.

My Dividend Portfolio does not utilize timing or sell-stops. It has a long-term strategy, contains only dividend-paying stocks, and employs a buy-and-monitor approach for risk control. Use this link to view its holdings and performance. For a description of the book on which the Dividend Portfolio is based, go to this page to read about THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday April 16, 2010)

Last Outlook (4/7/10): 9.0 (positive)

S&P 500 last time (4/7/10): 1182
S&P 500 now: 1192 Change: +1%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1192 Change in 2010: +7%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1192 Change since 3/9/09: +76%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. The next report is due on Monday. The previous report registered this index’s 11th consecutive monthly increase. I give full credit for three positive reports in a row. +10

• Fed Funds Rate: The Fed Funds rate remains unchanged, near zero, so this indicator stays positive. The next Fed meeting is at the end of the month. From the public statements of Chairman Ben Bernanke, the Fed is expected to keep interest rates at rock-bottom levels for awhile. I expect the Fed will adhere to this position as long as the economic recovery remains slow and inflation remains low. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 based on operating earnings as 20.0, up from 19.6 last time, but still in the fairly valued, neutral zone. +5

• Morningstar’s Market Valuation Graph. This indicator has been slowly climbing along with the market since mid-February, while staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.07, unchanged from last time. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three major indices (S&P 500, Dow Jones Industrial, and NASDAQ) have stayed in the same favorable configuration since early March. That favorable picture shows, for each index, Index > 20-day SMA > 50-day SMA > 200-day SMA, where SMA stands for Simple Moving Average. This short-term technical indicator uses the S&P’s relationship with its 20-day and 50-day SMAs. The relationship is positive, with the index above the 20-day SMA, which is above the 50-day SMA. +10

• S&P 500 Medium Term Technical Trend: This mid-term indicator uses the index plus the 50-day and 200-day SMAs. It remains positive, with the index above the 50-day SMA, which is above the 200-day SMA. +10

• DJIA Short Term Technical Trend: As stated above, the DJIA’s chart looks like the S&P 500’s chart. Positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart looks like the other two. Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE

Timing Outlook Stays Positive at 9.0

2010-04-07T15:29:00.002-05:00

1. Summary

After falling a single time to a negative value eight weeks ago, the Timing Outlook rose steadily, along with the market, to 9.0 last time, where it remains today. On the scale of 0-10, 9.0 is a very positive reading.

At the beginning of the year, I began noting weekly movements in the market, using this system of nomenclature: P = positive week, N = negative week, and 0 = no change. Here is what the market has done in 2010: P-N-N-N-N-P-P-0-P-P-P-P-P. That’s 5 consecutive up weeks (as of last Friday, April 1), and 7 of the last 8 weeks have been up. Overall, the year shows 8 P’s, 4 N’s, and a 0. The market went up 3% in the first week of the year, then fell 7% over the next 4 weeks. Since then (starting in early February), it has rallied 11%. Netted out for the year, the market is up 6% in 2010 and 75% since last March’s lowest point.

A new earnings season kicks off next week. This will be referred to as the Q2 earnings season, with companies reporting on Q1 results for the quarter that just ended on March 31. As discussed last time, the Q1 earnings season (with companies reporting on their final-quarter results from 2009) was excellent, with about 80% of companies beating earnings and revenue expectations, and year-over-year earnings and revenue changes for many companies turning positive.

In my own Capital Gains Portfolio, I have fully re-invested all of its cash after the 4-week down-trend (N-N-N-N) of January and early February caused my sell-stops to be hit. I just updated my Web site for April, so you can go here if you want to see the Portfolio’s performance through the end of March. As always, holdings in the Capital Gains portfolio are protected to the downside by sell stops, currently set at 6%. Since its inception, the Capital Gains Portfolio is far ahead of the S&P 500.

For a portfolio that does not utilize timing or sell-stops, but rather uses dividend-paying stocks and a buy-and-monitor approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks. The e-book has been on a record sales pace since its release in January, with some readers reporting that they have purchased it all three years, and that it has helped them initiate or improve a dividend portfolio of their own.

2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday 4/7/10)

Last Outlook (3/21/10): 9.0 (positive)

S&P 500 last time (3/21/10): 1160
S&P 500 now: 1182 Change: +2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1182 Change in 2010: +6%

S&P 500 at close 3/9/09: 677 (bottom of bear market and beginning of bull market)
S&P 500 now: 1182 Change since 3/9/09: +75%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since last time. That report showed the 11th consecutive monthly increase. The string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change. The Fed Funds rate remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation (P/E): Morningstar shows the current P/E of the S&P 500 based on operating earnings as 19.6, up slightly from 19.3 last time, still in the fairly valued, neutral zone. +5

• Morningstar’s Market Valuation Graph: This indicator has been slowly climbing along with the market since mid-February, while staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.07, up from 1.05 last time and 1.04 the time before that. Neutral. +5

• S&P 500 Short Term Technical Trend: The charts of all three indexes that I use (S&P 500, Dow Jones Industrial, and NASDAQ) have stayed in the same favorable configuration since last time: Index > 20-day SMA > 50-day SMA > 200-day SMA. This short-term technical indicator uses the index’s relationship with the 20-day and 50-day simple moving averages (SMA). The relationship is positive, with the index above the 20-day SMA, which is above the 50-day SMA. +10

• S&P 500 Medium Term Technical Trend: This medium-term indicator compares the index to its 50-day and 200-day SMAs. It remains positive, with the index above the 50-day SMA, which is above the 200-day SMA. +10

• DJIA Short Term Technical Trend: Positive. +10

• 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

Why I Don't Day-Trade

2010-04-01T09:24:00.004-05:00

Day traders think in time-frames of seconds, minutes, hours. They often close out all their positions each night and start over again the next day. Day trading requires constant attention, because every short time span is significant. Miss a minute, you may miss the chance of a lifetime.

I read lots of newsletters and blogs just to keep up with the stock investing field. One of them is called Daily Trader's Alert, written by Sam Collins, a technical expert at OptionsZone.com. The following is from his column yesterday (Wednesday, March 31).

As our readers know, I've remained cautiously bullish even as the major indices broke to new highs and our internal and sentiment indicators hovered at dangerous levels.

I've warned again and again of the "overbought" condition of the market and its need for a correction, and here is the tough part, while still riding the "long equities" train. Even though it's been a profitable ride for us, the resilience of the trend higher has provided this daily writer with some anxious moments.

Now one of the highest profile analysts and a renowned technician has publicly expressed his frustration with the market. I share with you part of what Mark Arbeter, chief technician of Standard and Poor's told subscribers yesterday:

"Quite frankly, we're tired of calling for a pullback that never comes, and this week, we turned our quote machine off on two different days, as we couldn't take it anymore. Many times when the monitor goes off and my mind wants to throw in the towel, we are close to an inflection point. It's just the opposite of the movie "Trading Places," when Mortimer Duke screamed, 'Turn those machines back on.'"

Here's what caught my eye in the above quote:

Dangerous
Need for a correction
Anxious moments
Frustration
Tired
Couldn't take it anymore
Throw in the towel

I just can't imagine living a life where those are the kinds of things that you feel every day. That's personal with me, I know a lot of people that crave adrenaline rushes a lot more than I do.

But the other thing about that list is, it's all emotional. Stock investing should be emotion-less, a business. I instinctively resist treating the market as if it were a person, or a wayward child, or a bad dog that "needs a correction," gives you "anxious moments," and brings you to a point that you can't "take it anymore" and want to "throw in the towel." I resist the common metaphor of "Mr. Market," an OCD, ADHD, manic-depressive whose purpose in life is to fake you out and screw you over.

The market is just that, a market. It is a place for buying and selling, with thousands of individual stocks being traded (bought and sold) whenever the market is open. Every stock has its own set of buyers and sellers. The prices of individual stocks change all the time. The market sets a price for each stock through the process of trading. Each party to each transaction is trying to gain the greater return over whatever time-frame they are targeting.

No one can predict, with any consistency, the market's moment-to-moment or day-to-day movements. Those result from the interactions of thousands of people, some acting alone and some acting on behalf of institutions, all using different approaches, pursuing different agendas. Anyone who's ever sold a piece of furniture on Craigslist knows what I mean. Some buyers and sellers are rational people, some are not. Some make decisions based on incomprehensible logic. Some have their facts all wrong. In the stock market, some trades are made by computers which may have been programmed wrong.

If you widen out your time frame, market movements generally follow more predictable patterns...prices follow earnings, trends tend to continue (until they stop), that sort of thing.

Investing should be fun. Some of the decisions you make will be "wrong" in the sense that they don't work out, even though logic (your logic) says they "should."

Protect yourself against bad calls by not going all-in, hedging, using sell-stops, or conducting periodic Portfolio Reviews (the latter two are my preferred methods). But I won't put myself through the daily emotional wringer of the sort described above. It's not worth it, and more to the point, the emotions probably lead to more bad calls.

As they said in The Godfather, it's not personal, it's business.

Dividends Rising

2010-03-30T09:15:00.002-05:00

As frequent readers know, I believe that dividend investing is best done surgically, one stock at a time, with the stocks selected not only for yield, but also for dividend safety and company stability, with extra points for a proven culture and history of raising dividends regularly. Rising dividend investing is a long-term strategy, not one designed to skyrocket one month and plunge the next. It’s the tortoise of stock strategies.

That said, the most recent across-the-board information from S&P provides a background against which dividend strategies can be measured. And the news is good.

This table shows the S&P 500’s cash dividends paid out over the last 10 years.

Year  Yield   Companies   Dividends Paid      Change from
                       Paying             (Billions)              Prior Year

2009   2.0%      363                $195.61                  -20.9%
2008   3.1%      372                $247.29                     0.2%
2007   1.9%      390                $246.58                     9.7%
2006   1.8%      383                $224.76                   11.3%
2005   1.8%      386                $201.84                   11.5%
2004   1.6%      377                $181.02                   12.7%
2003   1.6%      370                $160.65                     8.9%
2002   1.8%      351                $147.81                     3.9%
2001   1.4%      351                $142.22                     0.8%
2000   1.2%      372                $141.08                     2.6%

As you can see, dividends crashed in 2009, falling almost 21%. Payments in Q1 2010 continued to decline, and they are expected to finish the quarter down 8% from Q1 2009. But those payments are mostly based on dividend rates set in place in 2009.

Going forward, S&P sees the indicated dividend rate for 2010 rising significantly. “Indicated rate” means the rate based on the most recent dividend declarations. Increases and initiations already announced in 2010 point to a significant increase in total dividend payments in 2010 compared to 2009. Through March 19, 68 of the 500 stocks have increased their payout rates and 7 more have initiated dividends, with just 1 decrease and 1 suspension. Compare that to Q1 last year, when there were 54 increases, 1 initiation, 40 decreases, and 6 suspensions.

Howard Silverblatt, Senior Index Analyst at S&P Indices, states that increases and initiations indicate confidence in future earnings abilities. S&P considers Q1 2009 to have been the worst quarter for dividends in history, so the year-over-year comparisons are not very challenging. Nevertheless, the early news this year is very positive. In my own Top 40 Dividend Stocks for 2010, 19 of the 40 stocks have already announced dividend increases for 2010, with no decreases.

Silverblatt goes on to note that April is usually a big month for dividend announcements. Four of the biggest payers--Exxon Mobil (XOM), IBM (IBM), Johnson & Johnson (JNJ), and Procter & Gamble (PG) are “up for renewal.” These four stocks, by themselves, account for about 11% of the S&P 500’s total payments. Interestingly, these stocks did not do badly at all in 2009 with respect to dividend increases. Respectively, they increased their indicated rates by 5%, 10%, 6.5%, and 10% last year. That illustrates why it’s a good idea to select your dividend stocks one by one. Even in an overall bad year like 2009, when total dividends fell 21%, these four posted average increases of 7.9%.

In 2009, 363 of the 500 stocks in the index paid dividends. To this point in 2010, 367 are dividend payers.

Is a Calm VIX Good News or Bad News?

2010-03-23T16:41:00.001-05:00

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market. It is often referred to as the fear index. It represents one measure of the market's expectation of volatility over the next 30 day period.

A common interpretation of the VIX's value is that if it is above 30 or so, market participants are displaying fear of the market, and a market drop is likely in the making. Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability. But another interpretation is that a low reading indicates complacency, low interest in the market, and therefore that the market might be ready for a fall, because there is little conviction on investors' parts.

Earlier today, I read the following from a well-respected analyst/pundit concerning the VIX: "The CBOE Volatility Index (VIX) fell to a low of 16.17 on Friday. The last time we saw a number on the VIX that low was in May of 2008, just prior to the fall from 13,000-plus to 10,970."

The implication was that the market is complacent, rolling over, and in his words, it’s time to “raise cash [sell stocks in anticipation of a decline] and be defensive.”

Is that quoted statement accurate? Yes. Is it misleading? Also yes.

It is true that the last time the VIX was at current levels was in 2008, just before the steepest part of the market crash that had begun in October, 2007. However, if you widen out the VIX chart to a 10-year look, you see a totally different pattern from the one implied by the statement above.

When the VIX hit 16 in 2008, it was rising, with increasing volatility. That presaged the market fall that the analyst referred to. But that moment in time had been preceded by a 3½-year period in which the VIX spent practically its entire time in the 10-20 range with low volatility. That period—from late 2003 to early 2007—coincided with a steady uptrend in the market. The Dow rose from about 9600 to about 13,000—about 35%--during that timeframe.

Currently, the VIX is falling, with decreasing volatility. It has dropped from a high of about 80 at the beginning of 2009 to its current level of about 16. The correct comparison is not between the VIX’s current level of 16 to the last time it was 16. The correct comparison is to the last time the VIX looked something like it does now. That would be mid-2002 to mid-2003, the last time the VIX was descending, with decreasing volatility, from a multi-year high to a level of 20 or below. The post-dot-com bear market, of course, ended in October, 2002, ushering in 5 years of a rising market that did not peak until October, 2007.

Disraeli said, “There are lies, damned lies, and statistics,” a saying that was popularized in the United States by Mark Twain. The statistic quoted at the beginning of this piece is the sort of thing they were talking about.

Timing Outlook Advances to 9.0

2010-03-22T09:50:00.001-05:00

(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic touches that make reading easier. Links are also harder to see in the subscription e-mail. If you want to view this post in its most pleasing format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 six weeks ago, after 4 straight down weeks in the S&P 500 resulted in a market loss of 8%. But the market has rallied 9% since then, restoring positive configurations to all three indexes that I use here (S&P 500, Dow Jones Industrial, and NASDAQ). The Timing Outlook has risen steadily since the single negative reading, up to 9.0 today, which is positive.

A few reports ago, I began describing the weekly movements in the market, using this simple system of nomenclature: P stands for a positive week, N stands for a negative week, and 0 stands for no change. Here is what the market has done since the beginning of the new year: P-N-N-N-N-P-P-0-P-P-P. That’s 6 P’s, 4 N’s, and a 0.

The market went up 3% in the first week of the year; then fell 7% over the next 4 weeks; and since then has rallied almost 9%. Netted out for the year, the market is up 4% in 2010. It is up 71% since last March’s lowest point. Note that the one-year anniversary of the rally came and went on March 10.

The first earnings season of the year is almost over, with companies reporting on their Q4 2009 and full-year 2009 results. About 80% of companies have beaten earnings expectations, about the same number beat revenue expectations, and year-over-year earnings for many companies have become positive. Note that the year-over-year hurdle was easy to clear, as Q4 2008 had some of the worst earnings on record. Nevertheless, positive year-over-year comparisons are always good news, and the market’s slow, steady climb has reflected that.

As you know, the 8% sell-stops in my Capital Gains portfolio were hit during the 4-week down-trend (N-N-N-N) of January and early February. Those sales put the portfolio more than 80% in cash. But when the market reversed itself and started back up, I began slowly to move cash back into the market. The portfolio is now about 75% invested, and I will probably make 1-2 more purchases this week. As always, holdings in the Capital Gains portfolio are protected to the downside by sell stops. I am currently using rather tight 6% stops, as I have not gained complete confidence in this rally yet.

If you want to check the performance of the Capital Gains Portfolio portfolio since its creation in 2001, check out this page on my Web site. The portfolio is way ahead of the S&P 500 since its inception.

For a portfolio that does not utilize timing or sell-stops, but rather uses a dividend-growth approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 3/19/10)

Last Outlook (3/7/10): 7.8 (positive)

S&P 500 last time (3/7/10): 1139
S&P 500 now: 1160 Change: +2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1160 Change in 2010: +4%

S&P 500 at close 3/9/09: 677 (beginning of 2009-10's bull market)
S&P 500 now: 1160 Change since 3/9/09: +71%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: A new report last week showed the 11th consecutive monthly increase. The string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change.The Fed Funds rate remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: Correspondence with Morningstar paid off, they have corrected their display of the index’s P/E based on operating earnings. The current reading is 19.3, which is in the fairly valued, neutral zone. +5

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It has been going up for the past several weeks, along with the market itself, but staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.05, up from 1.04 last time. Neutral. +5

• S&P 500 Short Term Technical Trend: The rise in the market since early February (P-P-0-P-P) has pulled the S&P 500’s chart back into its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. This short-term technical indicator uses the index’s relationship with the two shorter simple moving averages (SMA). The relationship is positive: The index has pulled the 20-day SMA above the 50-day SMA. Positive. +10

• S&P 500 Medium Term Technical Trend: This trend uses the two longer SMAs. It remains positive. +10

• DJIA Short Term Technical Trend: The Dow has the same configuration as the S&P 500, so this indicator and the Dow's medium-term indicator are both positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ chart has the same configuration as the other two. Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE

How I Tell If the Market Is "Going Up"

2010-03-17T23:20:00.002-05:00

Over the past couple of years, I have written articles about whether the stock market has bottomed out or topped out, meaning has it hit an inflection point for awhile? I also wrote several articles about why I thought last year's rally was sustainable, which turned out to be accurate. I wrote an article a few weeks ago that opined that I thought the market had probably topped out for awhile after it hit 1150 and then fell backward. I was wrong: After dropping more than 8% and hitting my sell stops, the market reversed back and resumed a slow upward trend. It passed through 1150 a couple of days ago, and it finished at 1166 today (Wednesday).

And I continue to write the bi-weekly Timing Outlook articles that use a formulaic system to project the market's likely direction for 2-4 weeks. Those, while of course not infallible, have had a high batting average.

One point I have not nailed down: If my sell-stops get hit, and therefore my Capital Gains portfolio has cash rather than being 100% invested, how do I know whether and when to start re-investing the money? I have been vague about this, simply stating that I like to see the market "going up" for 2-3-4 weeks before I conclude that it may be in an "investable uptrend."

In this article, I want to get more specific about that. What follows is still a hypothesis, not a prescription. But here is what I have been doing.

1. I start with Ned Davis’ definitions of a bull market. (Ned Davis Research is a respected, fact-based research outfit.) Their two definitions of a bull market are:

A: Market rises 30% over 50 calendar days (which equals about 36 trading days or about 7 weeks)
B: Market rises 13% over 155 calendar days (about 110 trading days or 22 weeks)

Clearly, the first definition is for a fast-rising, sudden upturn, while the second defines a slow-but-steady rise.
To my eyes, the second definition is a little lenient. So I toughened it up by requiring a 20% rise rather than a 13% rise over the same time period. I chose 20% because it matches the common definition of bull market (a 20% rise in the market). So my modified "B" bull market is defined like this:

B: Market rises 20% over 155 calendar days (about 110 trading days or 22 weeks)

2. We must make investing decisions in real time, without the luxury of waiting 22 weeks. I refer to these shorter decision-making periods as "investable" markets. The question becomes, at what point will I decide that the market is in an "investable uptrend"?

I answer this by taking the bull market definitions (A and B) and slicing them into shorter time periods. I also add a requirement: that 2/3 of the trading days have to be “up” days. This prevents one gargantuan "up" day from creating an "investable" market all by itself. What results is this:

2 weeks: A: 9% rise with at least 7 positive days (out of 10 trading days). "B" produces no signal, because the rise required would be less than 2%, which seems meaningless.
3 weeks: A: 12% rise with at least 10 positive days (out of 15). B: 3% rise with at least 10 positive days (out of 15). Since B is more lenient than A, it makes A moot.
4 weeks: A remains moot. B: 4% rise with at least 14 positive days (out of 20).
5 weeks: A remains moot. B: 5% rise with at least 18 positive days (out of 25)

3. So, to summarize, here are the qualifications for an "investable uptrend":

9% rise over two weeks, with at least 7/10 days positive
3% rise over 3 weeks, with at least 10/15 days positive
4% rise over 4 weeks, with at least 14/20 days positive
5% rise over 5 weeks, with at least 17/25 days positive
Etc.

These are the standards I have used to get back into the market after my sell stops got hit in late January and early February. The market reversed itself and started going back up, and I made my first purchase on March 4, after it had been going up for about 3 weeks. Ever since then, I have been making one or two purchases per week, so long as the "investable trend," as defined above, has remained intact, which it has through today. I'm buying back in 10% chunks of the portfolio's total value. As of today, the portfolio is about 67% invested, and I have an order for execution tomorrow that will take that up to about 75%.

For risk management, I am using pretty tight sell stops, around 6% on all holdings. As you probably know by now, I use sell stops on all holdings in my Capital Gains portfolio. I do not use them in my Dividend Portfolio, preferring other approaches to risk management in a dividend growth strategy.

Timing Outlook Advances

2010-03-07T18:22:00.003-06:00

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 four weeks ago after 4 straight down weeks in the S&P 500 resulted in a loss of 8%. But a 7% rally in the markets since then has pulled the Timing Outlook up to 7.8, which is positive.

Last time, I noted that the market had basically moved sideways since October. Now let’s just focus in on the past 9 weeks. If P stands for a positive week, N stands for a negative week, and 0 stands for no change, here is what the market has done since the beginning of the new year: P-N-N-N-N-P-P-0-P. That’s 4 P’s, 4 N’s, and a 0. The S&P 500 has gone up 2% over that timespan, but the last 4 weeks have seen a 7% rise.

Last time, I asked the question, what kind of market are we in?

1. A continuing bull market that began last March, went through an 8% “correction,” and is now going up again? Or…

2. A new bear that began with the 4-week decline? Or…

3. A range-bound, trend-less market that might just go up and down in relatively small amounts for an indeterminate period of time?

After the 4 consecutive down weeks, during which investor sentiment seemed sullen, investor sentiment seemed to turn more positive. Perhaps it was the almost-consistently good news from earnings season. About 80% of companies that have reported have beaten earnings expectations, about the same number beat revenue expectations, and year-over-year earnings for many companies have actually been positive. Please note, on the latter point, that the year-ago comparisons are a low hurdle to clear, as Q4 2008 had negative earnings for one of the few times ever. That’s the quarter when many banks took massive write-downs in the midst of the credit crisis. Nevertheless, positive year-over-year comparisons are always good news.

It is still too soon to tell whether #1, 2, or 3 will answer “what kind of market are we in?” The positive action of the past 4 weeks seems to render choice #2 (new bear market) less likely than the others. If the markets keep reacting positively to positive news, and not too negatively to negative news, I’d say that the likely choice is #1—still in the bull market that began last March. But overall, as I said, it’s too early to tell.

I reported several weeks ago that the 8% sell-stops in my Capital Gains portfolio had been hit, putting the portfolio more than 80% in cash. But with two straight positive Timing Outlooks and a solid 4-week rise in all the major indexes, I have decided to cautiously put some money back into the market. I made two purchases last week that put about 20% of the portfolio’s cash back into the market, and I will make one or two more purchases this coming week if things continue to trend positively. As always, these purchases are protected to the downside by sell stops.

If you want to check the performance of the Capital Gains Portfolio portfolio since its creation in 2001, check out this page on my Web site. The portfolio is well ahead of the S&P 500 since its inception.

For a portfolio that does not utilize timing or sell-stops, but rather uses dividend-paying stocks and basically a buy-and-monitor approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about The Top 40 Dividend Stocks for 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 3/5/10)

Last Outlook (2/21/10): 6.1 (positive)

S&P 500 last time (2/21/10): 1109
S&P 500 now: 1139      Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1139      Change in 2010: +2%

S&P 500 at close 3/9/09: 677 (beginning of 2009's bull market)
S&P 500 now: 1139      Change since 3/9/09: +68%

S&P 500 at peak 1/19/10: 1150 (possible beginning of bear market)
S&P 500 now: 1139      Change since 1/19/10: -1%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The report issued 2/18/10 showed the 10th consecutive monthly increase. Because this index tracks data that tend to lean in advance of the business cycle, a string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change. Two weeks ago, the Fed’s raising of the “discount rate” from 0.5% to 0.75% seemed to be absorbed by the market with little concern. The market has risen 3% since then. The Fed Funds rate itself remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: I have been corresponding with Morningstar about this number, and they have acknowledged an error in their display of the data that I had been using. I still do not have a satisfactory substitute. On their page for the S&P 500 index itself, Morningstar reports the index’s P/E based on “prospective earnings,” but to use that, I would have to recalibrate what the bands are for the index being undervalued, overvalued, or fairly valued. So again for this report, I will drop this factor from the calculation. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It has been going up for the past several weeks, along with the market itself, but staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.04. Neutral. +5

• S&P 500 Short Term Technical Trend: This indicator looks at the index’s relationship with two key moving averages, the 20-day and 50-day simple moving averages (SMA). During the 4 down weeks in January, the S&P 500 lost about 8% of its value, fell through both its 20-day and 50-day SMAs), and pulled the 20-day SMA down through the 50-day SMA. Then the market reversed itself. After a four-week recovery, the index has risen 7% and gone back up through both SMAs, although it has not yet pulled the 20-day SMA obove the 50-day. So we have Index > 50-day SMA > 20-day SMA. The back-and-forth movement of the index renders this short-term indicator ambiguous and neutral. +5

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, turns positive. The index has moved well above its 50-day SMA, which in turn has remained above the 200-day SMA through these back-and-forth weeks. Positive. +10

• DJIA Short Term Technical Trend: Has the same configuration as the S&P 500 short-term trend. Neutral. +5

• DJIA Medium Term Technical Trend: Same pattern as the S&P 500. Positive. +10

• NASDAQ Short Term Technical Trend: Same as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 70 NEW READING: 70 / 9 = 7.8 = POSITIVE

Why I Love Dividends

2010-02-24T18:40:00.003-06:00

Recently, I wrote an article for another investing site in defense of dividend investing. It was in response to several articles with titles like “Why I Hate Dividends” and “The Dumbness of Dividends.” I have modified my article for this site.

The Case Against Dividends: The anti-dividend articles, when combined, made the following case against dividends:

1. Retained earnings produce growth. Money sent out as dividends cannot contribute to growth.

2. Retained earnings, if not re-invested for growth, are better spent in share repurchases than in dividends.

3. Share repurchases and reinvestments in the business should fuel future price appreciation. Dividends do not. In fact, dividends reduce price appreciation.

4. Dividends reduce the value of the underlying shares by the amount of the dividend.

5. Studies do not find that dividend stocks “do better” than non-dividend-paying stocks.

6. It is more tax efficient to generate income from selling shares than from dividends.

7. Dividends’ appeal lies largely with uneducated shareholders. Companies use dividends to bribe shareholders and to exploit shareholder ignorance.

8. Would you want Warren Buffett to distribute dividends rather than keep doing what he’s been doing for decades (Berkshire Hathaway does not issue dividends)?

The Case for Dividends: Here, I am not trying to show that dividend stocks are always the best investment. But I am trying to show that dividend stocks can be the basis of a very intelligent and successful investment strategy. Dividend stocks are not just for retirees or clueless investors.

The Dual Nature of Dividend Stocks: Many investors think of stocks as assets that you trade with a focus on price: Buy low, sell high. If you mention income production, they think of bonds. But dividend-paying stocks are instruments with the power both to produce income and to rise in price. A good dividend stock is an equity security like all others, but with unique income characteristics.

What I call the Sensible Dividend Investor is not stupid or ignorant. But he or she often comes to see stocks differently from growth investors. Stocks become like cash machines that generate streams of income. Dividend investors do not lose all interest in the price of their shares, but price doesn’t matter as much. If prices fall, the dividends keep coming. Price declines often present attractive buying opportunities for those who are still in the wealth-accumulating stage of their lives.

The idea that dividends are the principal reason for owning a stock is not a new concept. In 1934, Benjamin Graham and David Dodd wrote in their classic Security Analysis, "The prime purpose of a business corporation is to pay dividends to its owners [emphasis added].” This statement is more than a quaint reflection of its time. It is a fundamental view of what owning shares in a company is all about, as valid today as 75 years ago.

Stock Prices Tell Only Half the Story: The total return from stocks is comprised of two elements: price appreciation and dividends. Studies show that dividends have accounted for half or more of the total return of the stock market over very long terms. Despite this, there is no widely publicized “dividend index” that gets the coverage given every day ro the Dow, S&P 500, and NASDAQ indexes, even though those reflect price changes only.

As to price appreciation: A company creates value by generating profits. It ingests investors’ capital and/or borrowed money to get started, and then it utilizes the skills of its people, research, development, manufacturing, marketing, and other functions to bring in more money than it spends. The net pileup of profits and assets, and the company’s ability to utilize those to bring in ever-larger earnings, increase the enterprise’s value over time.

In turn, the company’s stock price goes up if the market recognizes the increased value of the company. Historically, through a wisdom-of-crowds “price discovery” process, investors have tended to recognize and pay for increased earnings capabilities. They do this by placing an appropriate multiple on a company’s earnings per share. Over long periods of time, the multiple has averaged out around 15-16. That is, if a company makes $1 per share profit, its price will hang around $15 or $16. Sometimes, prices rise or fall because the market places a higher or lower multiple on the shares. The multiple thus reflects investor sentiment toward the stock, or toward the entire stock market.

The Dividend Half of the Story: First of all, note the obvious: Dividends are always positive—there is no such thing as a negative dividend. As to the long-term record of dividend stocks, I will focus on just two studies to save space.

• Wharton Professor Jeremy Siegel’s research attributes 97% of the stock market’s total return from 1871 to 2003 to re-invested dividends, and he also states that from 1926 to 2004, reinvestment of dividends accounted for 46% of all stock market return after inflation.

• In a February, 2009 article, “Follow the Juicy Dividends,” BusinessWeek cited Ned Davis research showing that stocks with at least five years of dividend growth outperformed the S&P 500 every year from 1972 to 2008. The study showed these annual total returns:
          o Dividend Cutters or Eliminators: 0.5%
          o Non-Dividend Payers: 0.7%
          o S&P 500: 6.2%
          o Dividend Payers with No Change in Dividends: 6.2%
          o Dividend Growers and Initiators: 8.7%

The Share-Buyback Red Herring: One of the most-cited reasons against dividends is that shareholders are better off if the company uses that money to buy back shares of itself. Share repurchase programs are not regular programs. They are not predictable as to size or frequency. Some share repurchases are not completed after their announcement. In hard times, most companies will suspend a share buyback program before they touch the dividend.

Often companies pay top dollar for their shares. They don’t “buy low.” Figures from S&P show that few companies repurchased their shares in 2002, the bottom of the post-internet-bubble bear market. But when stock prices were increasing from 2003 to 2007, buybacks became rampant, peaking in Q3 2007, simultaneously with the market’s peak. Then in 2008-2009, when the next bear market hit, buybacks slowed dramatically. This phenomenon appears in every market cycle. USA Today ran a recent article in which it reported that S&P analysts studied stock repurchases from Jan. 1, 2006, through June 2007. They found that a third of all companies took losses from their purchases; three-quarters of the companies that bought back shares lagged behind the S&P 500 for the period; and the most aggressive buyers of their own stock were some of the worst performers.

The Taxation Issue: You must pay taxes on dividends. However, the Federal dividend tax rate of 15 percent makes it one of the least-taxed forms of income available. (Note: The 15 percent tax rate on dividends is due to expire at the end of 2010. Note also that dividends from REITs and certain other special corporate forms are taxed at your marginal tax rate, because their profits are not taxed at the corporate level.) Of course, if you hold your dividend stocks in a tax-deferred account, the normal tax benefits of such accounts apply to the dividends.

It is true that share repurchases are not taxed. But if you want to get the money from share price growth, you must sell some of the shares to get it. Your gain will be taxed at either the long-term or short-term capital gains rate. The Federal long-term rate is 15 percent, the same as with dividends.

Sometimes, investors become too focused on tax considerations. The primary appeal of dividends has never been based on a tax break; that is of recent origin anyway. The chief appeal of dividends is the opportunity to receive cash returns from stocks that are always positive, keep increasing, and are independent of price fluctuations.

Characteristics of the Best Dividend Companies: The best dividend companies have a strong culture of increasing the dividend annually if at all possible. Many have been increasing their dividends for decades. The top dividend-paying companies tend to have strong balance sheets and to handle cash conservatively. Most of them have rock-solid business models and are veritable cash machines. The best dividend-paying companies generate enough cash to fund both growth and dividends.

Dividends cannot be faked, unlike earnings. Paying dividends takes cash out of the hands of management and forces management to handle the remaining cash more carefully. As noted in the November 24, 2008 edition of Fortune, “Companies that retain most or all of their earnings frequently squander those profits. CEOs waste those retained earnings on ‘empire building’ via overpriced acquisitions. Amazingly, companies that pay big dividends actually grow their earnings far faster than those that reinvest most or all of their profits. Paying dividends imposes discipline; it makes the top brass far more careful in deploying scarce cash.”

Dividend stocks tend to attract a different constituency from growth companies. Many shareholders prefer a steady return and a predictable, reliable dividend flow. Investors following a dividend-growth strategy are less likely to sell their shares in response to short-term difficulties. The dividend stream is generally independent of price changes in the stock itself. Shareholders are, in a sense, set free from constant concern about the stock’s price. Dividend investing is a strategy for the long haul. The major attraction is not to make money from price increases, although that is delightful. The major attraction is the dividend itself.

The Power of Rising Dividends: Well-chosen dividend stocks increase their dividends every year, and those can be re-invested to accelerate the process of building wealth. Even if not re-invested, rising dividends obviously deliver increasing income. In contrast to growth stocks, dividend stocks do not have to be traded to realize these benefits.

The best dividend stocks usually grow their dividends at a higher rate than inflation, unlike the fixed dividend payment from most bonds. If you own shares in a dividend-paying company that increases its dividends, your yield on cost (that is, the yield on your original investment) goes up. This happens even though the current yield stays the same. It’s simple math. No matter how the stock’s price changes over the coming years, your personal yield (= yield on cost) will always be based on what you paid originally.

Over time, your personal yield will surpass the 10%-11% long term total average return of the stock market itself, just from the dividends alone. This is the most powerful aspect of dividend stocks. The process can be accelerated, of course, by re-investing the dividends and letting them compound.

This contrasts sharply with bonds. Bonds are fixed income investments. We can easily see the ways that they are “fixed”: Their term is fixed; their “coupon,” or rate of return, is fixed; and their nominal worth at the end of the term is fixed. You get back what you originally paid—in dollars that have been eroded by inflation.

Take a look at this table of returns for a terrific dividend company, Automatic Data Processing (ADP):

Year                         2005     2006     2007     2008     2009
Price Return         +5%      +9%      +3%     -9%      +9%
Dividend            $0.65      0.79      0.98     1.20      1.33
Div. Increase                  +22%    +24% +22%    +11%

Note how the price return varies each year, including going negative in 2008. Also note how the dividend just keeps marching up each year. ADP has been raising its dividend for 35 straight years now, yields about 3.5% to new purchasers (much more than that to investors who have owned it for years), and is one of only four US non-financial companies with an AAA credit rating. Another of the four AAA-rated companies is Johnson & Johnson (JNJ), also a top dividend stock.

Of course, there is risk to any company’s dividend. If a company suffers dramatic financial misfortune, and its profits fall or disappear, so can its dividends. Financial calamity will trump any company’s desire and ability to keep sending out dividends. Dividends are not guaranteed. But for well-selected dividend payers, that risk is usually small.

What About Buffett? Do I want Berkshire Hathaway to pay dividends? Personally, I could not care less. I believe that every company has an optimum level of dividend payout that the company discovers over time, as it matures. For new companies, the optimum rate is almost always zero. They need all the cash they can get to grow from corporate infancy through adolescence and into adulthood. For some mature companies, this level is still zero, because of its business model. Berkshire Hathaway certainly has enough cash to pay a dividend, and who knows, they may choose to do so some day, just as Microsoft did a few years ago. But Buffett does OK with a zero dividend, and that’s fine with me.

Summary: Simply stated, the case for dividend stocks goes like this:
• Dividends are always positive.
• The best dividend-paying companies raise their dividends regularly, usually at a pace that exceeds inflation. Their growth is not curtailed by the dividend payouts.
• Dividends are not just for current income. They can be re-invested to accelerate the wealth-building process. Over time, a very high yield on cost can be achieved.
• Dividend stocks offer the potential for price appreciation in addition to the dividends they pay.

Timing Outlook Snaps Back to Positive

2010-02-20T20:39:00.001-06:00

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 reading just a week ago. But a 3% rally in the markets this past week has brought the reading back up to 6.1, which is positive.

The market has basically moved sideways since October. If P stands for a positive week, N for a negative week, and 0 for no change, here is what the market has done since the second week in October: P-P-N-0-P-P-N-0-P-0-N-P-P-N-N-N-N-P-P. That’s 9 P’s, 7 N’s, and 3 0’s. The net change in the S&P 500 index over all that time, until last week, was less than 1%.

The question, obviously, is what kind of market are we in?

1. A continuing bull market that began last March, leveled off, went through an 8% “correction,” and is now starting up again? Or…
2. A new bear that began with the 4-week decline? Or…
3. A range-bound, trend-less market that might end up about where it is now in several weeks or even several months?

After 4 down weeks with seemingly dour sentiment, in the past 2 weeks investor sentiment seemed to become more buoyant and optimistic. It was telling that when the Fed raised its overnight lending rate after the close on Thursday—the first “tightening” of any kind from the Fed in more than a year—the market shrugged it off, ending Friday with a slight gain for the day and a 3% gain for the week.

The news from earnings season continues to be positive, with about 70% of companies beating earnings expectations and nearly as many beating revenue expectations. The other economic news continues mixed overall.

A range-bound, trend-less market would render the Timing Outlook least useful. The Timing Outlook is designed to detect trends, so a range-bound market simply means that the Timing Outlook would spend most of its time just above or just below 5.0, throwing off meaningless weak positive or negative signals. That’s what last week’s 4.4 may have been, a meaningless weak negative signal. Or this week’s reversal to positive may be that. It’s too soon to tell.

I reported a couple of weeks ago that my 8% sell-stops in the Capital Appreciation portfolio had been hit. Last week’s negative Timing Outlook seemed to confirm that choice #2—a new bear market—was most likely what we have. Now the 2-week rally, plus the switchback in the Timing Outlook, have called that conclusion into question.

In late 2008 and 2009, during the bear market, I wrote several articles entitled “Are We There Yet?” meaning was the long bear market over, had the bottom been hit, and was it time to venture back into the market? In those articles, I successfully avoided being faked out by two potential bottoms (11/10/08 and 11/20/08) by being patient and insisting on 3+ weeks of what I called a “clear upward trend” combined with a positive Timing Outlook. Those finally came in March, 2009.

Here, of course, we are not dealing with an 18-month bear market, just a 4-week pullback. That makes me think that the standards for venturing back in can be a little looser. If my sell stops had been 9% rather than 8%, they would not have been hit at all.

To me, it is impossible at this time to conclude whether #1, #2, or #3 is the most likely choice. We have a 2-week clear positive trend underway and now a positive Timing Outlook again. If the markets keep reacting positively to positive news, and not too negatively to negative news, I’d say that the likely choice is #1—still in the bull market that began last March. Otherwise, the most likely choice is either #2 or #3.

If it looks like it’s #1, I will probably cautiously put some (but not all) of the money in the Capital Appreciation portfolio back into the market. Obviously, I am hedging my bets for now with caution. As usual, any money in the market is protected by sell stops, except for shares owned specifically for their dividends.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 2/19/10)

Last Outlook (2/14/10): 4.4 (negative)

S&P 500 last time (2/14/10): 1076
S&P 500 now: 1109      Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1109      Change in 2010: -1%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1109      Change since 3/9/09: +64%

S&P 500 at peak 1/19/10: 1150
S&P 500 now: 1109      Change since 1/19/10: -4%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since January’s showed the ninth consecutive monthly increase. Positive. +10

• Fed Funds Rate: No change. However, the big news this week was the Fed’s raising of the “discount rate” from 0.5% to 0.75%, announced Thursday after the close. The stock market, interestingly, seemed to absorb this news with little concern, dropping modestly at the start of Friday’s session, then recovering to a slight gain for the day and a 3% gain for the week. The Fed Funds rate itself remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: (Usual source: Morningstar’s calculation of P/E based on operating earnings.) Morningstar’s value still looks fishy at 11.7. I have found a potential alternative source at USA Today Money that appears to calculate the P/E ratio based on operating earnings the way that Morningstar does. Based on prior readings, the value should be around 20; USA Today shows it at 20.5. I have an inquiry in to Morningstar to see what's up with their calculation. In the meantime, I am going to delete this indicator, since its likely value is neutral anyway. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It now stands at 1.01, up from 0.98 last time. That suggests the market is fairly valued right now. Neutral. +5

• S&P 500 Short Term Technical Trend: The market had 4 straight down weeks beginning with the week of 1/10/10, followed by 2 consecutive up weeks. During the down weeks, the S&P 500 lost about 8% of its value, then gained back 4% during the two up weeks. The index fell through its 20-day and 50-day simple moving averages (SMA), and the 20-day SMA fell through the 50-day SMA. But after the two-week recovery, the index is back above its 50-day SMA. So the relationship of the index to its key SMAs is now: Index > 50-day SMA > 20-day SMA > 200-day SMA. That renders this short-term indicator ambiguous and neutral. +5

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, remains neutral, with the index lying between the two SMAs. +5

• DJIA Short Term Technical Trend: Has the same configuration as the S&P 500. Neutral. +5

• DJIA Medium Term Technical Trend: Neutral. +5

• NASDAQ Short Term Technical Trend: Neutral. +5

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 55 NEW READING: 55 / 9 = 6.1 = POSITIVE

Timing Outlook Turns Negative for the First Time Since Last March

2010-02-14T15:49:00.000-06:00

1. Summary

After getting off to a good start in 2010, the S&P 500 has dropped fairly rapidly from a close of 1150 on Tuesday, January 19 to 1076 on Friday, February 12. That is a fall of 6% from the peak of the rally that began last March 10.

The Timing Outlook falls from 6.0 last time (barely positive) to 4.4 this time or negative. It’s the first negative reading since last March 5, 2009, just days before the Great Rally of 2009 began. As I stated in my last post (below this one), I have had a growing feeling that the rally may be over. This negative Timing Outlook is more evidence that may be true.

Regular readers are familiar with my belief that the market rally was news-driven, with the “net news flow” seeming to herald what the stock market would do. We are in the midst of the Q1 earnings season, and the news from there has been generally good. About 65% of companies that have reported so far have beaten their consensus estimates. But other general economic news has been mixed to negative, and the market seems to be paying more attention to the general news than to earnings reports. I refer here to data such as consumer confidence readings, employment/unemployment statistics, the problems with Greece, and the like. Another source of news is the market itself: What the indexes do is not only the result of news, it is news. The falling market over the past few weeks seems to have put investors in a more pessimistic and demanding mood. News about “less bad green shoots” right now no longer seem to have the positive impact that it had during most of the rally.

Most of my own sell stops in my Capital Appreciation portfolio got hit at the end of January and in early February, when the market briefly dipped to a loss of more than 8% from the peak. That portfolio has gone from 100% invested to 86% cash. The stops got triggered while I was on vacation. That illustrates one of the great attributes of sell stops—they work when you are not paying complete attention. They automatically execute an exit strategy that you developed when you were thinking clearly. You do not have to decide what to do in the heat of a fast-moving market.

What would it take to get me to re-invest that money again? I will talk about that next time.

If you are still invested, the usual risk-management advice applies: Protect yourself on the downside. I generally exclude from this advice stocks held for their dividends rather than for price appreciation. I evaluate dividend stocks on the basis of their dividend stream and the apparent reliability of that stream, not on what the stocks are selling for at any given time. On the dividend front, things are looking OK. Several companies have already raised their dividends for 2010, and the general dividend outlook for 2010 looks quite healthy compared to 2009.

2. Market Performance Since Last Outlook

(“now” figures are as of close Friday 2/12/10)

Last Outlook (1/22/10): 6.0 (positive)

S&P 500 last time (1/22/10): 1092
S&P 500 now: 1076 Change: -1%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1076 Change in 2010: -3%

S&P 500 at trough 3/9/09: 677
S&P 500 now: 1076 Change since 3/9/09: +59%

S&P 500 at peak 1/19/10: 1150
S&P 500 now: 1076 Change since 1/19/10: -6%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: No new report since January’s showed the ninth consecutive monthly increase. Positive. +10

• Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

• S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) Morningstar’s value looks fishy at 12. (You may recall that last time, they had a blank value, and the time before that, it was 21.3) The Wall Street Journal’s number is 26, but that is based on as-reported earnings as distinguished from Morningstar’s use of operating earnings. The P/E based on operating earnings would normally be the smaller of the two, but the difference would not usually be this dramatic. For this cycle, I am going to drop this indicator and see if I can get a better value next time. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It now stands at 0.98, down from 1.00 last time. That suggests the market is fairly valued right now, although it should be noted that this indicator has been declining steadily for several weeks along with the market. Neutral. +5

• S&P 500 Short Term Technical Trend: After peaking at a close of 1150 on 1/19/10, the S&P 500 experienced three straight double-digit drop sessions. Since then it has wandered up and down, with one more dramatic down day on 2/4/10. The index has fallen through its 20-day AND 50-day simple moving averages (SMA), and the 20-day SMA has now fallen through the 50-day SMA. So the relationship of the index to its key SMAs is: 50-day SMA > 20-day SMA > Index > 200-day SMA. With the 20-day SMA now below the 50-day, this short-term indicator has turned negative. +0

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, remains neutral, with the index lying between the two SMAs. +5

• DJIA Short Term Technical Trend: Same configuration as the S&P 500. Negative. +0

• DJIA Medium Term Technical Trend: Neutral. +5

• NASDAQ Short Term Technical Trend: Same pattern as the other two. Negative. +0

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 40 NEW READING: 40 / 9 = 4.4 = NEGATIVE

Topped Out? Number 3 in a Series

2010-01-31T00:27:00.001-06:00

This is the third "Topped Out?" article. The last one was in October.

The key questions are, Has the market rally ended for awhile? Is it time to take profits off the table, go to cash, or go short? Should we go into the woods where the bears hang out? Last time, I concluded that the rally probably had a while longer to run. I promised to write another article if the market experienced a decline of a couple of weeks, or if any of my sell-stops got hit.

After that article, the market--as measured by the S&P 500--advanced an additional 10%, for a total 70% gain since the rally began on March 10, 2009.

But this past week, one of my sell-stops got hit. So I am back with a new article.

As frequent readers know, I have used simple 8% trailing sell-stops to protect my gains during the rally. Last week, for the first time, one of the stops--on QQQQ, the Nasdaq-tracking ETF--got hit, and those shares sold off. They were just a small part of my Capital Gains portfolio. The stop on SPY--the S&P 500 tracking ETF--sits at $105.40 compared to Friday's closing price of $107.39. In other words, that stop will get hit if SPY's price falls about 2% more. SPY represents the majority of my holdings. I also hold a minor position in IBM, and its stop is similarly close to being hit. If all three are hit, my Capital Gains portfolio will be 100% cash for the first time since last April 2, when I began buying into the rally on a determination that the upward trend that began on March 10 could be sustained for awhile.

That determination turned out to be true, as the rally lasted about 10 months and gained about 70%. It has been one of the best investment opportunities since I have been investing in stocks.

However, in just the last 8 trading sessions, the S&P 500 has dropped from 1150 to Friday's close of 1074. That's a decline of more than 7%. Furthermore, Friday's close was about the same as the close on November 6--almost three months ago. So the market has basically gone sideways for 3 months.

Is the rally over? I think there is a high probability that it is.

As I have stated many times, this has been a news-driven bull market. It is not unusual for the stock market to stage a strong advance during a recession. Of the previous 9 recessions before the current one, the stock market bottomed out and started back up several months in advance of the end of the recession. That's exactly what happened here, starting last March. Why? Because investors were looking forward with hope to the end of the recession and the return of an expanding economy.

What gave them such hope? Positive news. A rally such as the one we have had requires investors to receive what I call positive "net news flow," plus a collective sentiment to back up their beliefs with dollars. Investing those dollars in the market causes prices to rise.

Last March, most any piece of economic data that was "less bad" could be interpreted positively, indicating that the downward economic cycle was losing steam and bottoming out--a necessary precondition to the economy turning back upward. Over the following few months, most indicators slowed their descent significantly, and some turned upwards. Many investors were convinced that the recession was indeed over.

However, in the past few weeks, both the news and the sentiment have changed. Some of the news has remained good. For example, the companies that have reported so far in the current earnings season are beating Wall Street's consensus estimates at about the same rate that they did in the last earnings season. At the end of last week, the government reported a preliminary estimate that GDP rose at an extremely healthy annual rate of 5.7% in Q4 2009, far exceeding expectations of 4.6%.

But a lot of the news has either been lackluster or has indicated that economic growth may be stagnating, despite the positive GDP report. For example, unemployment seems to have become an intractable problem, not responding very much to numerous governmental measures--including the original TARP stimulus package, now over a year old. Tellingly, the Fed itself, in its policy statement accompanying its decision last week to keep short-term interest rates at record lows, stated once again that the reason it was holding rates so low was that it anticipated a slow economic recovery. Statisitics about bank lending continue to be uninspiring. Various economic indicators seem to have flattened out rather than turning decisively up.

In the last article in this series, I concluded that the net news flow was a 6 on a scale of 10. Now, despite the strong earnings reports coming in and the GDP number, I would say that the net news flow is no better than a 4 or 5 on a scale of 10.

In addition to the news itself, there is the issue of sentiment--how are investors reacting to the news? That seems to have taken a turn from hopeful and optimist to doubtful and pessimistic. For example, on Friday, when the 5.7% GDP number was announced, the market fell more than 1%. Normally, you would expect the opposite reaction. Many investors are connecting the dots to conclude that the economy--which in the USA is comprised 65% to 70% of consumer spending--cannot improve significantly unless and until the unemployment rate makes notable improvements. Same as to the housing market. Many are also simply sick of all the government involvement. They want to see more signs of privately driven economic improvements. At the end of the day, many investors seem to have become skeptical that the economy is turning the corner. On message boards and blogs, some investors are expressing disbelief in government numbers themselves, preferring to believe the anecdotal evidence they see with their own eyes, such as neighbors (or themselves) being outof work. Undoubtedly, a lot of investors are just tired of the rally and think it is time to take profits by selling their stocks. Just this past week, I saw a blog commenter put the folowing odds on a continuation of the bull market:
--Probablity of bull market intact: 15%
--Probability of range-bound market: 45%
--Probabilty of bear market: 40%

That about matches my own feelings. So whereas last time, I concluded that the rally probably had more oomph left in it, this time my conclusion is that it probably does not. If my SPY sell-stops get hit in the coming week or two, I will remain in cash waiting for the market to issue a clear sign that it has resumed a definite upward trend.

Timing Outlook Remains Positive, But Falls Significantly

2010-01-23T14:48:00.002-06:00

1. Summary

After rising out of its tight December trading range and getting off to a good start in 2010, three straight days of double-digit losses this past week pulled the S&P 500 from a close of 1150 on Tuesday, January 19 (its highest close in the 10-month rally) all the way down to 1092 by Friday, January 22. In other words, the S&P 500 lost 5% in three trading sessions. Ouch.

The Timing Outlook falls from 8.5 last time to 6.0. While still positive by definition, the sudden drop over the last three trading days had the look of the index falling through a trap door. Recall that last time, for the first time since the rally began, a single component of the Timing Outlook turned negative: The P/E of the S&P 500 (as computed by Morningstar) hit 21.3, just above the neutral-range cutoff of 21.2. I asked then if that was the canary in the coal mine? Maybe it was.

I have been saying for months that the market rally was news-driven, with the “net news flow” seeming to herald what the stock market would do. This past week, the net news flow turned decidedly negative. Within just a few days:

• The major indexes suffered large losses for three straight days--what the indexes do is not only the result of news, it is news itself, as it affects investor sentiment and can stoke optimism or greed on the one hand, or fear and pessimism on the other;

• President Obama attacked the big banks twice, first by suggesting a tax on their trading profits, then again by announcing plans to regulate their size and risky trading practices;

• Some opposition surfaced in the Senate to the re-appointment of Ben Bernanke as head of the Federal Reserve;

• Word of a possible economic slowdown in China seemed to make some investors nervous, especially over the possibility that it might spread;

• Some earnings reports disappointed investors—-Kimberly-Clark surprised to the downside, annual revenue at McDonalds fell for the first time in at least 25 years (although the company’s profits rose), and Google’s results seemed to disappoint even though they reported record profits;

• Unemployment rose to the top of the heap among disappointing economic news.

To quote from the Timing Outlook last time, “As regular readers know, I think this whole rally has been news-driven, and I think it will continue to be that way. If we get positive news, on balance, I believe that the market will respond positively. If the news is overall negative—particularly if it suggests that the fledgling economic recovery is stalling out—then I think the market will fall back and the rally will be over.” I still believe that. While one week’s worth of bad news is not enough to make the overall news flow become negative from a longer-term perspective, another week or two could do so.

What I’ve been calling the fine print now turns into bold-face type: The market can turn on a dime, as last week proved. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this advice stocks held for their dividends rather than for price appreciation. My own practice is to evaluate dividend stocks on the basis of their dividend stream and apparent reliability, not on what the stocks are selling for at any given time.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 1/22/10)

Last Outlook (1/4/10): 8.5 (positive)

S&P 500 last time (1/4/10): 1115
S&P 500 now: 1092   Change: -2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1092   Change in 2010: -2%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1091   Change since 3/9/09: +65%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The latest report issued in January showed the ninth consecutive monthly increase. Positive. +10

• Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

• S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is not shown today on Morningstar, not sure why. Last time, it had jumped into the overvalued range, so with this week’s market drop, I will assume it has fallen back to neutral territory. +5

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It now stands at 1.00, down from 1.02 last time. That suggests the market is fairly valued right now. +5

• S&P 500 Short Term Technical Trend: This past week, after peaking at a close of 1150 on Tuesday 1/19, the S&P 500 experienced three straight double-digit drops, closing at 1092 on Friday 1/22. That pulled the index down through its 20-day AND 50-day simple moving averages (SMA), although it happened so fast that the 20-day SMA is still above the 50-day SMA. So the relationship of the index to its key SMAs is: 20-day SMA > 50-day SMA > Index > 200-day SMA. This is considered neutral, although if the market drops continue, the 20-day SMA will fall through the 50-day SMA soon and make this indicator negative. Neutral. +5

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, falls from positive to neutral. +5

• DJIA Short Term Technical Trend: Same configuration as with the S&P 500. Neutral. +5

• DJIA Medium Term Technical Trend: Neutral. +5

• NASDAQ Short Term Technical Trend: Same pattern as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Neutral. +5

TOTAL POINTS: 60    NEW READING: 60 / 10 = 6.0 = POSITIVE

Just Launched! THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks

2010-01-17T20:24:00.004-06:00

I am happy to announce that this year's dividend e-book has just been launched. It's title is THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

The book follows a similar format to last year's. It has grown by about eight pages to allow for updated discussions, new examples, and several new features. The new features include:

--A glossary of dividend terms. Not sure what "ex dividend" really means? Now you'll know.

--A more complete discussion of my own Dividend Portfolio. This portfolio, which is tracked monthly on my Web site, is based on the investment strategies and stocks in the annual TOP 40 series. It does not invest in all 40 stocks. Rather, it is a "demonstration portfolio" designed to illustrate the use and application of the principles and stock picks in the TOP 40 series. It is a real-money portfolio, with real costs, funded with my own money. It is not a hypothetical or model portfolio, nor a phonied-up "backtest." The money has been and will continue to be invested in real time.

--A modification to the scoring system. The changes this year place a little more emphasis on higher-yielding stocks without adding appreciably to risk.

--A discussion of what to do with stocks purchased from 2009's list that did not make 2010's list. This is the most important new feature. There are many reasons that a stock on 2009's list did not make 2010's list. For example, a couple of good stocks fell off the list because price run-ups caused their yields to drop below minimum requirements. But if you bought them in the past, you have already locked in better yields, and as long as the stock keeps raising its dividend, there's no reason to sell it. It is doing exactly what you want it to do.

For a complete description of the new TOP 40 DIVIDEND STOCKS FOR 2010, just click on the cover image in the right-hand column.

As always, whatever your investing philosophy--from fast trading to slow-but-steady growth through dividend investing--best of luck in 2010 and always.

Dave

Rally Continues; Timing Outlook Remains Positive

2010-01-04T08:46:00.003-06:00

(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its most pleasing format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)

1. Summary

The market finally rose out of its tight trading range in the second half of December, with the S&P 500 piercing 1120 last week (actually getting over 1125) before falling back on Thursday (the last trading day) to finish at 1115. The 1120 mark had been viewed by market technicians as “resistance” on the rally, and the extended sideways market—with the failure for several weeks to exceed 1120—had led some to suggest the 10-month rally was over. Now that 1120 has been exceeded, we’ll see whether the rally will continue.

The Timing Outlook suggests that it will, remaining positive at 8.5, same as last time. This is the 19th consecutive positive reading, essentially coinciding with the market rally that began on March 10, 2009. The rally has lasted almost 10 months and risen 65% without so much as an 8% correction along the way. One note: For the first time since the rally began, a single component of the Timing Outlook turned negative: The P/E of the S&P 500 (as computed by Morningstar) hit 21.3, just above the neutral-range cutoff of 21.2. This will be worth watching over the next few weeks. Is it the canary in the coal mine?

With the turn of the new year, the next earnings season is right around the corner. Last earnings season brought mostly positive news, with about 75% of companies beating earnings expectations and around 60% beating revenue expectations. Forward-looking statements were mixed, but it would be fair to call them slightly positive on average. As regular readers know, I think this whole rally has been news-driven, and I think it will continue to be that way. If we get positive news, on balance, I believe that the market will respond positively. If the news is overall negative—particularly if it suggests that the fledgling economic recovery is stalling out—then I think the market will fall back and the rally will be over.

The fine print: The market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this advice stocks held for their dividends rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Thursday 12/30/09)

Last Outlook (12/13/09): 8.5 (positive)
S&P 500 last time (12/13/09): 1106
S&P 500 now: 1115 Change: +1%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1115 Change in 2009: +23%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1115 Change since 3/9/09: +65%

3. Indicators in Detail

· Conference Board Index of Leading Economic Indicators: The report issued in December showed the eighth consecutive monthly increase. Positive. +10

· Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

· S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is 21.3, up from 20.0 last time, and the first time in quite a while that this indicator has exceeded the neutral range of 17.4 to 21.2. Negative. +0

· Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It now stands at 1.02. Thus the market is “fairly valued” by this indicator. (Interesting historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5

· S&P 500 Short Term Technical Trend: Although the S&P 500’s chart wandered back and forth through its 20-day simple moving average (SMA) a couple of times during its sideways period in November and December, it currently is in its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. It may also be worth noting that the sideways action tightened up the 20-day and 50-day SMAs, which are now just about 8 points apart. Positive. +10

· S&P 500 Medium Term Technical Trend: Positive. +10

· DJIA Short Term Technical Trend: Same story as the S&P 500. Positive. +10

· DJIA Medium Term Technical Trend: Positive. +10

· NASDAQ Short Term Technical Trend: Same pattern as the other two. Positive. +10

· NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE

Timing Outlook Positive for 18th Consecutive Time Since Rally Began in March

2009-12-13T11:20:00.003-06:00

1. Summary

The Timing Outlook remains positive at 8.5. This is the 18th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally has lasted nine months. In that time, the S&P 500 has risen 62% without so much as an 8% correction along the way.

As I’ve said many times in the past, this market is news-driven. News comes mainly from two sources: (1) Government statistics and other reports about the economy (such as unemployment figures or the default last month by Dubai World on its loans). (2) Earnings and revenue reports from companies, with a focus on how figures compare to expectations and the companies’ own forward-looking statements. I call this “net news flow.” When the news is, on balance, good, the market tends to go up. When it is not good (such as the Dubai default), the market tends to go down. When it is net neutral, the market makes little moves up and down.

The Q3 earnings season just ended. The news was generally good. Around 75% of companies beat earnings expectations, and around 60% beat revenue expectations. Forward-looking statements were mixed, but overall sounded more positive than a quarter ago and much more positive than a year ago. In Q3, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year—encouraging rates of increase considering how bad things looked just a year ago.

Economic news in the past week was generally positive. Examples:
· The Conference Board’s consumer confidence report Monday took everyone by surprise, rising to a level not forecast by even the most optimistic. Most forecasters had expected a downturn.
· Retail sales improved 1.3% from October to November, almost double the gain that had been expected. On a year-over-year basis, retail sales were up 1.9%.
· And consumers did this without taking on additional debt. For the 9th consecutive month, the level of outstanding consumer debt (excluding real estate loans) decreased.
· For the first time in more than a year, the level of inventories held by businesses increased. While modest, October's 0.2% gain was a welcome surprise, given the expectation of another decrease. Furniture and accessories, electronics, and appliance stores led the way. Analysts cautiously interpret the rise in inventories as positive: Retailers are building depleted stocks in anticipation that they will be sold.

The fine print: The market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/11/09)

Last Outlook (11/29/09): 8.5 (positive)
S&P 500 last time (11/29/09): 1091
S&P 500 now: 1106 Change: +1%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1106 Change YTD: +22%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1106 Change since 3/9/09: +63%

3. Indicators in Detail

· Conference Board Index of Leading Economic Indicators: Unchanged, no new report since last time. Index has had seven consecutive monthly increases. Positive. +10

· Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

· S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is 20.0. This is in the neutral territory of 17.4 to 21.2. +5

· Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at exactly 1.00 Thus the market is “fairly valued” by this indicator. (Interesting historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5

· S&P 500 Short Term Technical Trend: The S&P 500 chart is currently in its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. For a couple of days last week, the index did drop below its 20-day SMA, but rose back above it on Thursday and Friday. Positive. +10

· S&P 500 Medium Term Technical Trend: Positive. +10

· DJIA Short Term Technical Trend: Exactly the same situation as with the S&P 500, including the two-day drop below the 20-day SMA. Positive. +10

· DJIA Medium Term Technical Trend: Positive. +10

· NASDAQ Short Term Technical Trend: The NASDAQ chart displays essentially the same pattern as the other two. Positive. +5

· NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE

The Top 40 Dividend Stocks for 2010--Getting Closer to Publication

2009-12-08T18:30:00.004-06:00

Preparing the new edition of THE TOP 40 DIVIDEND STOCKS is a little like the NCAA basketball tournament. First, the Selection Committee--that would be me--must decide who is even eligible. Theoretically, all stocks, worldwide, are eligible. But because this is a book on dividend investing, the very first step is to select a starting universe of dividend-paying companies with half-decent records. I did that a couple months ago, ending up with about 700 companies. That's my starting universe.

Next, I put those companies through what I call "Stage 1" testing. I applied five ground-rule requirements. Each stock must have:

--Increased its dividend distribution in each of past 5 years.
--Current yield of at least 3% (2.5% is allowed for stocks that have raised their dividends at least 20 years in a row).
--Positive return in 3 of past 5 years.
--Total return over past 5 years of at least even.
--3-year percentage increase in dividend payout of at least 16% total (12% is allowed for members of the 20-year club).

Those five simple tests (eased a little bit so as not to lose borderline candidates) reduced the starting universe of 700 down to 169 stocks. Then in November came Stage 2. I appplied the same five tests to those 169 stocks, with no easing this time. The tests were applied rigorously. That got the number down to 108. These are the Semi-Finalists, sort of like the Sweet 16 round of the basketball tournament.

The December task for the Selection Committee (me) is to reduce that list again to what I call the Finalists. I am working on that right now. What I do is "score" those stocks using a partial version of the complete Easy-Rate system. This allows me to eliminate those stocks that, while they may be very good investments, are not the championship calibre of the Top 40. I try to identify 50 to 60 Finalists. I do this by recording the score for each of the stocks, then sorting the list by score. The stocks sort themselves out, from obvious winners to stocks that may now even fall short of the original tests from the first stage. For example, a stock's rising price may have driven its yield below the acceptable minimum.

I will take a first shot at identifying the Top 40 by the end of December. But the final selection will take place in the first week of January, when I have complete 2009 data to work with. By then, I will have written all of the Finalists' Stories and prepared their Easy-Rate sheets that will appear in the book. One final pass through the latest data will allow me to make any necessary changes to my first crack at the Top 40. When I know exactly who the winners are, I will update all their Easy-Rate sheets and combine them with the text.

Ah, the text. Throughout the year, I have been collecting information and tidbits to update the text. I start with last year's text, of course, but a good portion of it--more than 25%--gets changed for the new edition. New statistics and charts are added. The scoring system has been further refined this year, to place a little more emphasis on high-yielding stocks. I completed a first draft of the new text in November. Later this month, after I have identified the Finalists as explained above, I will go through the text again and complete the second draft.

Just as with the Top 40 stocks themselves, I will make one final pass through the text in January, with complete 2009 information available. Tables will be prepared showing how 2009's Top 40 stocks did and presenting the 2010 Top 40 in a variety of ways for easy access and use.

Finally, when they are merged, the text, the Top 40 list and its tables, plus an Easy-Rate sheet for each stock, will form the complete e-book. I hope to launch it on or about January 20. And then, I'm going on vacation!

Timing Outlook Remains Positive

2009-11-29T19:22:00.002-06:00

1. Summary

After a sharp rise in early November, the market has been going sideways, driven as usual by the news of the day. Last Friday, the biggest news—that Dubai has asked for a moratorium on its debt payments—took the market down significantly. But on other days, positive news has pulled the market up. The Timing Outlook remains positive at 8.5. This is the 17th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally is now well into its ninth month. In that time, the S&P 500 has risen 61% without so much as an 8% correction along the way.

The Dubai news spooked investors, as Dubai has about $80 billion in loans outstanding. It turns out that Dubai has little oil, unlike most of its neighbors, so it has been borrowing to fund its incredible building spree. You have probably seen pictures of the world’s tallest building, the series of man-made islands, and other wonders. As I said last time, the Dubai story, which came out of nowhere, is exactly the kind of news that seems to have been moving the market the entire time.

Some other recent news has been more positive.

--In the third quarter, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year, rather startling rates of increase considering how bad things looked just a year ago.

-- The Conference Board’s consumer confidence report on Monday took everyone by surprise, rising to a level not forecast by even the most optimistic forecasters. Most had expected a downturn in confidence.

--The early reports on Black Friday's shopping have been generally positive. Hard numbers will be released later in the week.

--As of the end of last week, 480 of the S&P 500's companies had reported their results. Per Thomson Reuters, 80% of them exceeded Wall Street’s consensus profit expectations. (Historically, the rate is about 60%.)

--And the earnings recovery is now accompanied by good news on the revenue front. Nearly 60% of companies beat analysts’ revenue expectations for the quarter.

I always feel the need to repeat the fine print: The market can turn on a dime. Sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/27/09)

Last Outlook (11/13/09): 9.0 (positive)

S&P 500 last time (11/13/09): 1093
S&P 500 now: 1091 Change: -0%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1091 Change YTD: +21%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1091 Change since 3/9/09: +61%

3. Indicators in Detail

--Conference Board Index of Leading Economic Indicators: Last monthly report showed seventh consecutive monthly increase. Positive. +10

--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

--S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E is not available on the Morningstar site nor several other sites I have checked. Will presume that it has not changed significantly since last time. Neutral. +5

--Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at 0.98, compared to 1.0 last time. Being within 10% of 1.0, the market is “fairly valued” by this indicator. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5

--S&P 500 Short Term Technical Trend: Two of the three charts (S&P 500 and Dow) remain in their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. The market’s sideways movement since last time has tightened up the four values, but given the configuration, the technical indicators for these two indexes remain positive. +10

--S&P 500 Medium Term Technical Trend: Positive. +10

--DJIA Short Term Technical Trend: Positive. +10

--DJIA Medium Term Technical Trend: Positive. +10

--NASDAQ Short Term Technical Trend: The NASDAQ chart has tightened up enough that the index’s value, its 20-day SMA, and its 50-day SMA are practically identical. That drops this indicator to neutral. +5

--NASDAQ Medium Term Technical Trend: This longer-term indicator remains positive, as the index and the two shorter moving averages all remain well above the 200-day SMA. +10

TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE

Market's Up, So Is Timing Outlook

2009-11-16T10:07:00.002-06:00

(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic niceties. Links are also harder to see. If you want to view this post in its best format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)

1. Summary

As soon as November started, the market turned upward, and it has gone up on 8 of 11 trading days this month through last Friday. The backwards slide in the second half of October didn’t amount to much after all.

The Timing Outlook returns to a very positive 9.0. This is the 16th consecutive positive reading, essentially coinciding with the market rally that began on March 10 and continues now into its ninth month without so much as a 10% correction along the way. I hope you have been enjoying the ride.

As I write this on Monday morning, the market is rallying today, apparently based on good news from Japan concerning their economy’s growth rate. This is exactly the kind of news that, under my “net news flow” theory, seems to have been moving the market the entire time. The fact that about 80% of companies that have reported earnings so far have beaten their estimates has helped immensely.

That said, the market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on your long stock positions. Excluded from this, perhaps, might be those stocks you hold for their dividend distributions rather than for price appreciation.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/13/09)

Last Outlook (10/28/09): 6.0 (positive)

S&P 500 last time (11/13/09): 1043
S&P 500 now: 1093 Change: +5%

S&P 500 at beginning of 2009: 903
S&P 500 now: 1093 Change YTD: +21%

S&P 500 at close 3/9/09: 677
S&P 500 now: 1093 Change since 3/9/09: +61%

3. Indicators in Detail

--Conference Board Index of Leading Economic Indicators: Next report is due Thursday. Last report showed sixth consecutive monthly increase. Positive. +10

--Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10

--S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The S&P 500’s P/E rose since last time from 19.3 to 20.6, remaining in neutral territory. As an interesting side note, the P/E’s rise in percentage terms is 7%, compared to the S&P 500’s rise of 5%. This suggests that the market’s rise is mostly based on improving earnings, but also partly based on more positive sentiment toward the market, what some these days are calling “appetite for risk.” Neutral. +5

--Morningstar’s Market Valuation Graph. Since late July, this indicator has been meandering small distances around 1.0. Today, it is exactly 1.0, meaning “fairly valued.” (Historical data: All-time low = 0.55 on 11/20/08 during the last bear market. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low. All-time high = 1.14 at the end of 2004.) Neutral. +5

--S&P 500 Short Term Technical Trend: The steady trend up in November has returned all three charts to their most positive configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. All the technical indicators are therefore positive. +10

--S&P 500 Medium Term Technical Trend: Positive. +10

--DJIA Short Term Technical Trend: Positive. +10

--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