Timing Outlook Hanging in There, Barely Positive

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

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

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

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