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
Sunday, April 18, 2010
Wednesday, April 7, 2010
Timing Outlook Stays Positive at 9.0
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
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
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
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
Thursday, April 1, 2010
Why I Don't Day-Trade
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).
Here's what caught my eye in the above quote:
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.
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
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.
Tuesday, March 30, 2010
Dividends Rising
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.
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.
Tuesday, March 23, 2010
Is a Calm VIX Good News or Bad News?
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.
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.
Monday, March 22, 2010
Timing Outlook Advances to 9.0
(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
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
Subscribe to:
Posts (Atom)
