Timing Outlook Turns Negative Again

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)

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

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

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

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

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