Tuesday, November 13, 2007

My investment results so far

I do not immediately post my buy and sell signals on this blog, since I'm in a competition with other ETF investors on Fool.com, and I don't wish to give away my strategy to them.

My timing method, which I officially started using this summer, has significantly outperformed the market. I cashed out of the S&P 500 on July 13, (S&P 1552) bought back in on July 26 (S&P 1482) using the 2x leveraged ETF SSO, and cashed out again on October 8. (S&P 1552) Today the market is down 7% from the July 13 close, while I'm up 10% thanks to the July 26-October 8 gain in SSO. In total, I've pulled 17% ahead of the S&P 500 in about 4 months.

I am now committed to investing in the stock market's cycles in this manner. I don't see any reason to remain invested in long stock positions during a decline if I can see the correction coming.

Tuesday, November 06, 2007

1500 is key for the S&P 500

Since May of this year, a strong resistance/support line has been in place for the S&P 500 in the 1490-1500 price range.

In May and June the index never closed below 1490, but came within 10 points of doing so on 4 separate occasions. After plunging below 1490 on July 26 to start the most recent correction, the S&P 500 never closed above 1500 until the correction ended on September 18. Since the end of that correction, the index has bounced off of the 1500 level several times without closing below it.

So I think the S&P 500 index level of 1500 is key for the next couple of months. If the market closes below that level then I think it will have room to fall through the 1400's before recovering. But if the market can remain above 1500 though the winter, then I doubt we will see 1400 again.


Update - November 7: Just one day after this post, the S&P 500 obliged and fell below 1500 on its way to a correction. I now expect 1500 to be an upper resistance line until the correction is over.


Update - January 22: For the record, now that we're in the next "crash of the decade," I don't think S&P 1500 will have any relevance for quite a while.

Sunday, November 04, 2007

The Value/Dividend Bubble is Deflating

For the past few years the stock market has been suffering from a strange imbalance. On the one hand, value stocks and dividend-paying stocks are more popular than ever. This popularity is made obvious by (1) the relatively high P/E ratios of value stocks relative to growth stocks, (2) the amount of money invested in value and dividend funds relative to growth funds, and (3) the amazing run-up in prices of value and dividend stocks relative to growth stocks between late 2003 and early 2007. REITs and other real-estate related stocks were among the favorites due to their dividend payments, and they experienced a correspondingly large run-up in price.


But this value and dividend rally has occurred at a very strange time, because dividend payments - the very things that make dividend and value stocks valuable - have been disappearing. Since the peak of the tech bubble in 2000, corporations have been phasing out dividends in favor of stock buybacks. As a result, the yield of the S&P 500 index today is a near-record low 1.7%, well below the historic minimum of 3%. Even dividend-paying stocks are barely paying dividends today; the Dow Jones Select Dividend Index (ETF: DVY) only sports a 3.2% yield.

So why have value and dividend stocks outperformed growth stocks during the very time when they are producing the least income for investors? The only answer can be that we are in the middle of a value bubble, and I suspect that corporate buy-back money (which normally would have been paying dividends) has helped to drive up prices of cash-producing companies. Recent events have me convinced that this bubble is - if not bursting - at least deflating.


Stocks known for their dividend-paying advantages have been gradually veering south of the S&P 500's performance this year. In February REITs and financial stocks began to underperform, and they are now down more than 20% relative to the S&P 500. In May, the bulk of dividend-paying stocks followed as a group, and they are now down 12% relative to the market. Finally the entire value half of the market started slipping in June, and today it is already 10% behind the growth half.

I can't predict how long or how far this dividend "peel-off" will go, but I'm betting that growth stocks will be mostly unaffected since (1) growth investors aren't looking for dividends and (2) growth companies have less extra cash relative to their stock price to use for price-inflating buybacks.


Update January 22, 2008:

Duh! Growth stocks eventually succumbed along with every other group of stocks around the planet. I should have realized this might happen ... even though the bubble of 2000 was mostly growth and tech stocks, value stocks also participated in the subsequent bear market decline.