Outlook: Good News After Bad

After a recent pullback, the NASDAQ Composite up 1.9% for the year to date, whereas the S&P 500 is up by 1.8%, and the DJIA is up by 2.1%. Smaller stocks have been doing better for a long time, but our indicators now suggest that that could be ready to change. As a result, we would look to buy bigger companies on any market dips. The three negative indicators that we are focusing on are investment advisory sentiment, insider trading, and buying and selling climaxes. All these are now even more bearish than they were prior to the top last April. There are great times to buy and great times to sell. 2007-2008 was a great time to sell, whereas the first six months of 2009 was a great time to buy. Most of the time, it is good to be doing some selling on rallies or doing some buying on dips. We think the present is a good time to be doing that.

Shortly after the start of every quarter, we begin what is called the earnings season. About the 10th of January, April, July, and October, companies start to report how they did during the previous three months. Obviously, it is also a reflection of the economy as a whole. Better earnings often lead to better dividends, while lower earnings or even losses reduce confidence and often bring about fears of dividend cuts. The 2007-2008 bear market was filled with lower earnings and dividend cuts. Things started to get better in 2009, and last year was really good. The first big company to report every quarter is always *Alcoa and the industrial giant came through with excellent results. During the first six days of the earnings season, 137 stocks reported higher earnings, 47 lower earnings. We are also off to a pretty good start in terms of dividend increases. Last week, we saw several stocks increase their dividends, including *McGraw-Hill, Family Dollar, and *Dominion Resources. Over time, dividends have contributed a large portion of the stock market's total gain.

Investment newsletter writers are people. Our organization has tracked them since 1963. The original premise was that it would be good if the experts were very bullish, bad if they were very bearish. The opposite turned out to be true. For a number of reasons, it is a bad sign when this group is leaning heavily to the bullish camp and a good sign when they are unusually pessimistic. At the all-time market high in October 2007, we saw 62.0% of them bullish and only 19.6% bearish. At THE major bottom in March 2009, there were 26.4% bulls and 47.2% bears. At the April top last year, 56.0% were bullish and only 18.0% bearish. The summer slump saw the figures move to 32.6% bulls and 34.8% bears in July and an even more dramatic 29.4% and 37.7%, respectively, at the final August lows. Now, the market has gone up nicely. Recent figures show 57.3% bulls and 19.1% bears. This is right in the ballpark of last year's readings. A little worse for the bulls, slightly better for the bears.

Corporate insiders have proven to be a savvy bunch over the years. They usually buy when their stocks are down and they see them as cheap. They sell when they think they are high or want to take some profits. This crowd was buying heavily at the 2009 market low. This turned to heavy selling at the April high last year. Currently, they are selling even more than they did back then, so this is not good. Insiders tend to be right, but they are usually early.

Buying climaxes come about when stocks make new highs but close down for the week. Large numbers of them are bad and often an indication that "smart money" is moving to the sidelines. Selling climaxes come about when stocks make new 12- month lows, but close the week with gains. Large numbers of them are often a good sign. In March 2009, there were over 1,000 selling climaxes and that marked the market low. The top last April saw over 1,000 buying climaxes and that was a great time to sell. Lately, we have seen large numbers of buying climaxes - over 600 nine weeks ago and 569 last week. We would stress dividend paying stocks here and not the techs.

Dollar-cost averaging and dividend reinvestment continue to be cornerstones of a sound long-term investment program. DRIPs pay off in good markets and bad. Right now, we are seeing shorter-term negatives, but still a very favorable outlook for the year as a whole. This is quite similar to what the market did last year.